THE HOWARD HUGHES CORPORATION REPORTS

SECOND QUARTER 2015 RESULTS

 

Second Quarter Earnings Highlights

 

 

The Howard Hughes Corporation Property and Financing Highlights

 

---

 

The Howard Hughes Corporation Property and Financing Highlights (continued)

 

_____________________________________
* Non-recourse debt means that the debt is non-recourse to The Howard Hughes Corporation, but is recourse to the asset securing such debt and/or the subsidiary entity owning such asset.

 

DALLAS, August 10, 2015 - The Howard Hughes Corporation (NYSE: HHC) or (the “Company”) today announced its results for the second quarter of 2015.

For the three months ended June 30, 2015, net income attributable to common stockholders was $50.6 million, or $0.18 per diluted common share, compared with net loss attributable to common stockholders of $(14.8) million, or $(0.37) per diluted common share, for the three months ended June 30, 2014.  Second quarter 2015 net income attributable to common stockholders includes a non-cash $42.6 million warrant gain and $(25.1) million of non-cash depreciation and amortization expense. Excluding these non-cash items, net income attributable to common stockholders, was $33.0 million, or $0.76 per diluted common share.  Excluding the $(67.4) million non-cash warrant loss, $(10.9) million non-cash reduction in tax indemnity receivable and $(11.5) million of non-cash depreciation and amortization expense, net income attributable to common stockholders was $75.0 million, or $1.74 per diluted common share for the second quarter 2014.

As we complete and place our developments into service, non-cash depreciation and amortization expense associated with these cash-flowing commercial real estate properties is becoming a more material and growing component of our net income. Adjusted net income is a non-GAAP measure that excludes depreciation and amortization and non-cash warrant liability and tax indemnity receivable gains and losses.  The tax indemnity receivable was settled in the fourth quarter 2014 and is not a component of our net income beginning in 2015.  The presentation of net income excluding depreciation and amortization is consistent with other companies in the property ownership business, who also typically report an earnings measure that excludes non-cash depreciation and amortization.  For a reconciliation of adjusted net income to net income (loss) attributable to common stockholders, please refer to the Supplemental Information contained in this earnings release.

David R. Weinreb, Chief Executive Officer of The Howard Hughes Corporation, stated, “I am pleased with the momentum we are achieving at our larger developments.  The launch of pre-sales in July of two new condominium towers totaling 591 units, and the 413 units under contract at the Anaha and Waiea towers under construction at Ward Village are indicative of the strong demand we are seeing for high quality residential housing in our thoughtfully designed urban master planned community in Hawaii. Summerlin in Las Vegas also continues to deliver strong residential sales volume and pricing as this MPC benefits from the recently opened Downtown Summerlin mixed-use project and resurgence of the Las Vegas economy. At the South Street Seaport, we look forward to making some exciting tenant announcements later this year regarding the under construction Pier 17 project and historic area renovation. Homebuilders are continuing to be cautious on the Houston residential market and remain conservative on lot takedown commitments, yet pricing remains high compared to historical levels.”

---

 

Business Segment Operating Results

For comparative purposes, MPC land sales and Operating Assets NOI are presented in our Supplemental Information.  For a reconciliation of Operating Assets NOI to Operating Assets real estate property earnings before taxes (“REP EBT”), Operating Assets REP EBT to GAAP-basis income (loss), and segment-basis MPC land sales revenue to GAAP-basis land sales revenue, please refer to the Supplemental Information contained in this earnings release. Non-recourse debt means that the debt is non-recourse to The Howard Hughes Corporation, but is recourse to the asset securing such debt and/or the subsidiary entity owning such asset.  All construction cost estimates presented herein are exclusive of land costs.

Operating Assets Highlights

NOI from our combined retail, office, multi-family and resort and conference center properties increased $10.3 million, or 56.4%, to $28.5 million for the second quarter 2015, compared to NOI of $18.2 million for the second quarter 2014.  These properties are referred to as our “income-producing Operating Assets.” These amounts include our share of NOI from our non-consolidated equity-method ventures and exclude NOI for all periods from properties that are substantially closed for redevelopment and/or were sold during the period. 

The $10.3 million increase in NOI in the second quarter 2015 compared to the second quarter 2014 is primarily attributable to the acquisition of the 10-60 Columbia Corporate Center office properties in December 2014, which contributed $2.7 million to the increase, and completion of Downtown Summerlin and The Outlet Collection at Riverwalk, both of which opened in 2014 and contributed a combined $5.6 million to the increase. Two Hughes Landing and 3831 Technology Forest Drive contributed a combined $1.2 million to the increase as they continue to stabilize, and The Woodlands Resort & Conference Center, which completed its renovation in the fourth quarter 2014, contributed $0.6 million to the increase. The remaining $0.2 million of the increase is due to smaller changes in NOI at our other operating assets.

South Street Seaport remains substantially closed while redevelopment of Pier 17 and the renovation of the historic area continue. 

During the second quarter 2015, we completed construction and placed into service One Lake’s Edge, an eight-story, Class A, multi-family project within Hughes Landing. The building is comprised of 390 units, 22,289 square feet of retail and a 750-space parking garage. As of July 24, 2015, 39.0% of the units have been leased. We expect to reach stabilized annual NOI of $7.6 million by the end of the second quarter 2017.

 

Master Planned Communities Highlights

Land sales in our MPC segment, excluding deferred land sales and other revenue, decreased by $(104.4) million, or (69.1%), to $46.8 million for the three months ended June 30, 2014, as compared to $151.2 million for the same period in 2014. Excluding the commercial land sale at The Woodlands to the Houston Methodist Hospital System for $70.6 million in the second quarter 2014, described below, land sales decreased by $(33.8) million, or (41.9%), during the same periods.

 

Summerlin land sales decreased by $(1.7) million, or (4.5%), to $36.2 million on slightly lower acreage sold. For the second quarter 2015, Summerlin sold a mix of superpad sites and custom lots. Demand remains high for new home developments due to a shortage of resale homes and strong local economic conditions. Price per acre for superpads, Summerlin’s primary residential land product, increased by $44,000, or 8.5%, to $563,000 for the second quarter 2015 compared to the second quarter 2014. The increase in land pricing at Summerlin is due to the scarcity of attractive developable residential land in the Las Vegas market.

---

 

Bridgeland land sales decreased to $1.5 million for the second quarter 2015 compared to $6.7 million for the second quarter 2014. Homebuilders are taking a more cautious approach to acquiring finished lots at Bridgeland and The Woodlands due to uncertainty regarding the impact on new home demand resulting from lower oil prices. Consequently, we are receiving bids to acquire lots via future quarterly takedown schedules rather than in large bulk one-time purchases as in the prior year. This approach will likely result in lower lot purchases over the next few quarters than in 2014 when homebuilders were more comfortable making larger commitments. Also, record rainfall in the Houston area in the second quarter 2015 caused construction delays, which negatively impacted new home development and sales, especially at Bridgeland due to the close proximity of large wetlands areas to residential developments within that MPC. Homebuilders are currently developing single-family homes for sale on the significant volume of lots purchased during the second half of 2014, and we expect demand for new lots at Bridgeland to be modest until a portion of these homes are completed and sold later in 2015.

Land sales revenues at The Woodlands decreased by $(97.5) million to $9.1 million in the second quarter 2015 compared to the second quarter 2014 primarily due to fewer residential lot sales and $88.0 million of commercial land sales in the second quarter 2014, including a 59-acre sale to the Houston Methodist Hospital System for $70.6 million, compared to $2.1 million in the second quarter 2015. The range of residential lot types/sizes available for sale is decreasing as The Woodlands’ inventory of residential land for sale diminishes. This factor, combined with a more uncertain economic climate in the greater Houston area due to lower oil prices and a more conservative lot acquisition strategy by homebuilders, is contributing to lower sales velocity.

 

Strategic Developments Highlights

Pre-sales for the first two market-rate residential condominium towers at Ward Village, Waiea and Anaha, launched in the beginning of 2014, and construction on both towers began later in the year. From April 30, 2015, the last reported sales date, through July 24, 2015, we had strong sales at these towers, entering into 15 sales contracts for Anaha and Waiea, combined, representing 17.9% of the then available units for sale. Sales contracts require a minimum deposit from the buyer equal to 20% of the contracted price and are subject to a 30-day rescission period, after which time the deposit becomes non-refundable. Substantially all of the contracted units at both towers are past their rescission periods.

 

Waiea will have 174 total units, of which 88.5% have been contracted as of July 24, 2015. Total development costs are expected to be approximately $403 million (excluding land value). We expect to complete the project by the end of 2016. As of June 30, 2015, we have incurred $116.5 million of development costs.

 

Anaha, will have 317 total units, of which 81.7% have been contracted as of July 24, 2015. Total development costs are expected to be approximately $401 million (excluding land value). We expect to complete the project by mid-2017. As of June 30, 2015, we have incurred $57.7 million of development costs.

 

In connection with Phase Two of the Ward Village master plan, during July 2015 we launched pre-sales of two new condominium towers: Ae‘o, designed by Bohlin Cywinski Jackson, and one of two Gateway Towers designed by Richard Meier & Partners. As of July 24, 2015, none of the contracted sales have passed their 30-day rescission period.

 

Ae‘o, the name for the Hawaiian stilt bird, will be a 466 unit condominium tower that will sit on top of a flagship 50,000 square foot Whole Foods Market. We expect to begin construction of the Whole Foods Market space in early 2016 with completion scheduled in 2018. The average condominium unit size at Ae‘o will be approximately 836 square feet. We are finalizing project budgets for the Whole Foods Market and condominium tower.  Construction of the condominium units will be subject to obtaining an acceptable level of pre-sales and financing for the project. We have incurred $11.7 million of pre-development costs on this project as of June 30, 2015.

---

 

 

The first of two Gateway Towers will consist of 125 luxury residential condominium units averaging approximately 1,874 square feet per unit and approximately 8,500 square feet of retail. Gateway Towers will include a one-acre park that will serve as the start of a four-acre Village Green that will open up a pedestrian connection from the heart of Ward Village to the center of Kewalo Harbor.  We are finalizing the project budget. Construction of the property will be subject to obtaining an acceptable level of pre-sales and financing for the project. We have incurred $24.0 million of pre-development costs as of June 30, 2015.

We began construction of two self-storage facilities in Alden Bridge, a neighborhood within The Woodlands, in the third quarter 2015. One facility located on 4.0 acres will be an approximate 82,000 square foot building and consist of 670 units with an estimated total cost of $8.4 million. The other facility located on 3.1 acres will be an approximate 79,000 square foot building and consist of 650 units with an estimated total cost of $8.4 million. We expect to complete both projects during the second quarter 2016, and are currently seeking financing for these projects.

In May 2015, we closed on a $14.0 million non-recourse financing for Lakeland Village Center. The loan bears interest at LIBOR plus 2.35% and has an initial maturity of May 2018 with two, one-year extension options. During the second quarter 2015, we also extended the final maturity date of the $30.0 million Bridgeland credit facility to July 15, 2016.

For a more complete description of all of our Strategic Developments please refer to “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Strategic Developments” in our Quarterly Report on Form 10-Q for the three months ended June 30, 2015.

 

 

 

---

 

About The Howard Hughes Corporation®

The Howard Hughes Corporation owns, manages and develops commercial, residential and mixed-use real estate throughout the U.S. Our properties include master planned communities, operating properties, development opportunities and other unique assets spanning 16 states from New York to Hawai‘i. The Howard Hughes Corporation is traded on the New York Stock Exchange as HHC and is headquartered in Dallas, TX. For additional information about HHC, visit www.howardhughes.com.

Safe Harbor Statement

Statements made in this press release that are not historical facts, including statements accompanied by words such as “will,” “believe,” “expect,” “enables,” “realize,” “plan,” “intend,” “assume,” “transform” and other words of similar expression, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s expectations, estimates, assumptions and projections as of the date of this release and are not guarantees of future performance. Actual results may differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ materially are set forth as risk factors in The Howard Hughes Corporation’s filings with the Securities and Exchange Commission, including its Quarterly and Annual Reports.  The Howard Hughes Corporation cautions you not to place undue reliance on the forward-looking statements contained in this release. The Howard Hughes Corporation does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this release, except as required by law.

For more information, contact:

The Howard Hughes Corporation

Caryn Kboudi, 214-741-7744

caryn.kboudi@howardhughes.com 

---

 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

---

 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

---

 

Supplemental Information

 

June 30, 2015

 

 

As our three segments, Master Planned Communities, Operating Assets and Strategic Developments, are managed separately, we use different operating measures to assess operating results and allocate resources among these three segments. The one common operating measure used to assess operating results for our business segments is real estate property earnings before taxes (“REP EBT”), which represents the operating revenues of the properties less property operating expenses. REP EBT, as it relates to our business, is defined as net income (loss) excluding general and administrative expenses, corporate interest income and depreciation expense, provision for income taxes, warrant liability gain  (loss), increase (reduction) in the tax indemnity receivable and corporate other income. We present REP EBT because we use this measure, among others, internally to assess the core operating performance of our assets. However, REP EBT should not be considered as an alternative to GAAP net income (loss).

 

 

 

 

 

 

---

 

MPC Land Sales Summary

Three Months Ended June 30, 2015

 

 

 

* Applicable exclusively to Summerlin.

 NM – Not Meaningful

 

---

 

MPC Land Sales Summary

Six Months Ended June 30, 2015

 

 

 

* Applicable exclusively to Summerlin.

 

 

---

 

Operating Assets Net Operating Income

 

The Company believes that NOI is a useful supplemental measure of the performance of our Operating Assets because it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in occupancy rates, rental rates, and operating costs. We define NOI as revenues (rental income, tenant recoveries and other income) less expenses (real estate taxes, repairs and maintenance, marketing and other property expenses). NOI also excludes straight line rents and tenant incentives amortization, net interest expense, ground rent amortization, demolition costs, amortization, depreciation, development-related marketing costs and equity in earnings from Real Estate and Other Affiliates.

 

We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results, gross margins and investment returns.

 

Although we believe that NOI provides useful information to the investors about the performance of our Operating Assets due to the exclusions noted above, NOI should only be used as an alternative measure of the financial performance of such assets and not as an alternative to GAAP net income (loss).

 

 

---

 

Operating Assets NOI and REP EBT

 

 

 

---

 

 

 

 

 

 

 

 

 

 

 

 

---

Commercial Properties NOI

 

 

 

---

 

 

---

For properties not stabilized or under construction, Projected Annual Stabilized NOI is shown based upon the most recent estimates disclosed in our periodic filings and CEO Letter dated March 13, 2015. We do not necessarily update these projections on a regular basis and such projections may vary based upon many factors, more fully described under “Forward Looking Statements” and “Risk Factors” in our Exchange Act filings.  There can be no assurance as to when or if these properties will achieve Projected Annual Stabilized NOI.

 

---