The Howard Hughes Corporation® Reports Third Quarter 2018 Results

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DALLAS, Nov. 5, 2018 /PRNewswire/ -- The Howard Hughes Corporation ® HHC (the "Company") announced today operating results for the third quarter ended September 30, 2018. The financial statements, exhibits and reconciliations of non-GAAP measures in the attached Appendix and the Supplemental Information, as available through the Investors section of our website, provide further details of these results.

(PRNewsfoto/The Howard Hughes Corporation)

Third Quarter 2018 Highlights

  • Net income attributable to common stockholders increased to $23.4 million, or $0.54 per diluted share, for the three months ended September 30, 2018, as compared to $10.5 million, or $0.24 per diluted share, for the three months ended September 30, 2017. This increase was primarily driven by increased land sales in our Master Planned Communities ("MPC") segment, as further discussed below. This increase was partially offset by the required adoption of new revenue recognition guidance on January 1, 2018, which mandated a change in revenue recognition for our condominiums as further discussed in the Financial Results section below.
  • MPC segment earnings before tax ("EBT") was $88.9 million for the three months ended September 30, 2018, an increase of $48.5 million, or 119.7%, compared to the three months ended September 30, 2017. The increase was mainly a result of superpad sales at Summerlin and increased lot sales at Bridgeland. Lots sold at Summerlin and Bridgeland during the quarter achieved an average price per acre of $572,000 and $378,000, respectively, increases of $26,000 and $9,000, respectively, over the prior year period. MPC residential land sales during the quarter were the highest in the Company's history.
  • Total net operating income ("NOI") from operating assets, including our share of NOI from equity investments, was $38.7 million for the three months ended September 30, 2018, an increase of $1.3 million, or 3.6%, compared to $37.3 million for the three months ended September 30, 2017. As discussed further in the Operating Assets section, NOI growth for the three months ended September 30, 2018 compared to the same period in 2017 would have been $4.6 million, or approximately 12.4%, when excluding the Seaport District.
  • Estimated stabilized NOI increased by $9.0 million to $317.6 million as of the third quarter of 2018 (which excludes the redevelopment of the Seaport District) due to the addition of two floors at 110 North Wacker and the Lakefront North acquisition discussed below.
  • Contracted to sell 220 condominiums at Ward Village in the third quarter of 2018, including 216 at 'A'ali'i, our newest building that began public sales in January 2018. 'A'ali'i, which broke ground on October 15, 2018, was 75.1% presold as of September 30, 2018. Including 'A'ali'i, 1,905 homes, or 89.4% of the residences available for sale at our five residential buildings that are either delivered or under construction, were closed or under contract as of September 30, 2018.
  • Celebrated the openings of 10 Corso Como, SJP by Sarah Jessica Parker, Roberto Cavalli, Cynthia Rowley, By Chloe, Cobble & Co. and Big Gay Ice Cream in the Seaport District.
  • Signed an agreement with Nike to lease approximately 23,000 square feet of office space at Pier 17.
  • Sold out 18 of 23 concerts held at The Rooftop at Pier 17 and hosted approximately 2,100 diners during the Seaport Food Lab summer pop-up series.
  • Closed on a secured, non-recourse corporate credit facility with loan proceeds of up to $700.0 million, comprised of a $615.0 million term loan and an $85.0 million revolver. The loans under the facility bear interest at one-month LIBOR plus 1.65% and mature September 18, 2023. Concurrent with the funding of the term loan on September 21, 2018, the Company entered into a swap agreement to fix 100.0% of the outstanding principal of the term loan to a total rate equal to 4.61%.
  • Acquired Lakefront North, two vacant, Class-A office buildings immediately adjacent to our Hughes Landing development in The Woodlands. We purchased the four- and six-story buildings, totaling 257,025 rentable square feet, as well as 12.9 acres of land for $53.0 million. We purchased these buildings below replacement cost, and the acquisition strengthens our control over the supply of office space and undeveloped land in The Woodlands.
  • Broke ground on Two Lakes Edge, an eight-story 386-unit, multi-family property with retail and a restaurant on the ground level. This is our second multi-family residential development in Hughes Landing. On October 11, 2018, we closed on a $74.0 million construction loan for the project, bearing interest at one-month LIBOR plus 2.15% with an initial maturity date of October 11, 2022 and a one-year extension option.

"Our third quarter results illustrate the strong fundamentals of our business across our core markets and three key segments. Highlighted by the sale of two superpads in our Summerlin MPC with combined revenue of $91.1 million, our MPC results were particularly noteworthy for the quarter. The strong land sales were accompanied by continued NOI growth in our office and multi-family properties as more of our operating assets continue to stabilize," said David R. Weinreb, Chief Executive Officer. "In Honolulu, the extraordinary pace of sales in Ward Village continued in the third quarter, where we pre-sold an additional 220 homes that bring 'A'ali'i, on which we recently began construction, to 75.1% pre-sold as of September 30, 2018. Finally, on the heels of successful openings for key fashion tenants in the Historic District, such as 10 Corso Como and SJP by Sarah Jessica Parker, we are pleased to announce that Nike has leased approximately 23,000 square feet at Pier 17. Our vision for the Seaport District continues to come alive as it transforms into one of New York City's newest and most vibrant fashion and entertainment destinations."

Financial Results

Our total revenues were $257.2 million and $599.8 million for the three and nine months ended September 30, 2018, decreases of $1.6 million and $199.3 million, respectively, compared to the same periods in 2017, primarily due to a required change in accounting method as to how we recognize revenue on our condominium projects in our Strategic Developments segment. We adopted the new revenue recognition standard on January 1, 2018, as mandated by the Financial Accounting Standards Board for all public companies. The adoption mandated a change in revenue recognition for our condominium sales from percentage of completion to recognizing revenue and cost of sales for condominiums only after construction is complete and sales to buyers have closed. This change relates only to the timing of revenue recognition and will more closely match the actual cash flows from the sale of units. As a result of this accounting change, condominium revenue will be recognized later than it previously had been and will be lumpier, as revenue will only be recognized as unit sales close. The substantial majority of our closings have occurred at the time of building completion as a result of presales and units sold while construction is underway. See the Strategic Developments section below for additional information regarding the strong condominium sales this quarter. The reduction in revenue from this accounting change was partially offset by higher MPC revenues in the quarter, mainly as a result of superpad sales at Summerlin and increased lot sales at Bridgeland and The Woodlands Hills. These two factors had similar impacts on our FFO, Core FFO and Adjusted FFO ("AFFO") discussed below.





Three Months Ended September 30,



Nine Months Ended September 30,

(In thousands, except per share amounts)



2018



2017



2018



2017

Net income attributable to common stockholders



$

23,365





$

10,504





$

19,751





$

19,283



Basic income per share



$

0.54





$

0.25





$

0.46





$

0.47



Diluted income per share



$

0.54





$

0.24





$

0.46





$

0.45





















Funds from operations ("FFO")



$

53,913





$

45,304





$

105,758





$

92,245



FFO per weighted average diluted share



$

1.24





$

1.05





$

2.44





$

2.14





















Core FFO



$

72,525





$

60,129





$

151,068





$

218,581



Core FFO per weighted average diluted share



$

1.67





$

1.39





$

3.49





$

5.07





















AFFO



$

70,762





$

55,850





$

138,690





$

206,398



AFFO per weighted average diluted share



$

1.63





$

1.29





$

3.20





$

4.79



FFO for the three months ended September 30, 2018 increased $8.6 million, or $0.19 per diluted share, compared to the same period in 2017. The increase was primarily due to higher land sales in the MPC segment, partially offset by decreased revenues recognized in condominium sales, as discussed above. FFO for the nine months ended September 30, 2018 increased $13.5 million, or $0.3 per diluted share, compared to the same period in 2017. In addition to the factors impacting the three month period, the increase for the nine months ended September 30, 2018 was also attributable to the absence of the 2017 loss on both the redemption of senior notes due in 2021 and warrant liability and a decrease in the provision for income taxes provided by the Tax Cuts and Jobs Act of 2017, offset by the $32.2 million gain in 2017 on the sale of 36 acres of undeveloped land at The Elk Grove Collection.

Core FFO for the three and nine months ended September 30, 2018 increased $12.4 million and decreased $67.5 million, or $0.28 and $1.58 per diluted share, respectively, compared to the same periods in 2017. The increase for the three months ended September 30, 2018 is primarily attributable to the factors discussed in the FFO section above. The decrease for the nine months ended September 30, 2018 is also impacted by the 2017 losses on redemption of senior notes due in 2021 and warrant liability, both of which are added to FFO in the calculation of Core FFO. AFFO, our Core FFO adjusted to exclude recurring capital improvements and leasing commissions, increased $14.9 million and decreased $67.7 million, or $0.34 and $1.59 per diluted share, for the three and nine months ended September 30, 2018 compared to the same periods in 2017 primarily due to the items mentioned in the FFO and Core FFO discussions above. Please reference FFO, Core FFO and AFFO as defined and reconciled to the closest GAAP measure in the Appendix to this release and the reasons why we believe these non-GAAP measures are meaningful to investors and a better indication of our overall performance.

Business Segment Operating Results

Master Planned Communities

Our MPC revenues fluctuate each quarter given the nature of development and sale of land in these large scale, long-term communities. As a result of this fluctuation, we believe full year results are a better measurement of performance than quarterly results.

During the three and nine months ended September 30, 2018, our MPC segment earnings before tax were $88.9 million and $172.3 million compared to $40.5 million and $137.7 million during the same periods of 2017, increases of 119.7% and 25.1%, respectively. The primary drivers of these changes are discussed below.

For the three months ended September 30, 2018, the increase was driven by the timing of land sales in Summerlin and Bridgeland. At Summerlin, superpad sales totaled 160 acres, as compared to sales of 57 acres in the prior year period, and we achieved a residential price per acre of $572,000, an increase of $26,000 per acre over the prior year. There were 210 single-family lot sales at Bridgeland, which is 130 more lots sold compared to the same period last year. In Bridgeland, we achieved a residential price per acre of $378,000 during the quarter, an increase of $9,000 per acre over the prior year. Also contributing to the increase was a commercial land sale in The Woodlands for $1.4 million and 29 single-family lot sales in The Woodlands Hills with no comparable sales in the prior period. The Woodlands achieved a residential price per acre of $542,000, a decrease of $133,000 per acre from the prior year due to the mix of lots sold. The Woodlands achieved a commercial price per acre of $851,000, and The Woodlands Hills achieved a residential price per acre of $301,000, each without comparable prior year data.

The increase in EBT for the nine months ended September 30, 2018 was primarily attributable to superpad sales at Summerlin and increased single-family lot sales at Bridgeland and The Woodlands Hills. Summerlin sold superpad sites totaling 241 acres in 2018, compared to sales of 144 acres in the same period last year. We achieved a residential price per acre of $589,000 in 2018, which is consistent with the prior year. In addition, there were 380 single-family lot sales in Bridgeland compared to 299 single-family lot sales in the same period last year, and we achieved a price per acre of $382,000, consistent with the prior year. There were 115 single-family lot sales in The Woodlands Hills compared to none in the same period last year, and we achieved a price per acre of $273,000. These increases were offset in part by two commercial sales and an easement sale in the prior period with no comparable sales in the current period at The Woodlands and Bridgeland, respectively.

Operating Assets

In our Operating Assets segment, we increased NOI, including our share of NOI from equity investees and excluding properties sold or in redevelopment, by $1.3 million and $11.7 million, or 3.6% and 9.7%, to $38.7 million and $132.4 million in the three and nine months ended September 30, 2018, respectively, compared to the same periods of 2017. For the three months ended September 30, 2018, the increase is primarily driven by NOI increases of $2.5 million and $0.8 million in NOI at our office and multi-family properties, respectively, primarily as a result of continued stabilization and increased occupancy at several of our office and multi-family assets. This increase was partially offset by a decrease of $1.0 million in NOI at our retail properties, driven primarily by NOI loss of $3.3 million at our Seaport District properties. NOI at the Seaport District was negatively impacted by costs associated with opening new businesses such as our concert series, summer activations and restaurants. This loss is consistent with our expectations and included in our development budget for the project. Excluding the Seaport District, NOI for the three months ended September 30, 2018 would have increased $4.6 million, or approximately 12.4%, over the prior year period. The increase in NOI for the nine months ended September 30, 2018 is primarily driven by increases of $3.6 million, $3.5 million and $3.7 million in NOI at our retail, office and multi-family properties, respectively, all mainly as a result of continued stabilization at several of these assets. These increases were compounded by a $4.7 million increase in Hospitality NOI, mainly as a result of increased hotel room rates and conference and food and beverage revenue.

In the Seaport District, we celebrated the openings of several new businesses, including 10 Corso Como on September 7th in conjunction with New York Fashion Week. The store is the only U.S. location for the iconic Milan-based fashion destination. We also celebrated the opening of SJP by Sarah Jessica Parker's first standalone shoe store on September 13th. Finally, we signed an agreement with Nike to lease approximately 23,000 square feet of office space at Pier 17.

Strategic Developments

In our Strategic Developments segment, we experienced another strong quarter, including robust sales of condominium units at Ward Village. Our newest tower to launch sales, 'A'ali'i, was approximately 75.1% presold as of September 30, 2018 and 77.1% presold as of October 31, 2018. 'A'ali'i launched public sales in January 2018 and demonstrates the continued strong demand for condominiums at Ward Village. We celebrated the groundbreaking of this new tower on October 15, 2018.

We also increased our estimated stabilized NOI by $9.0 million to $317.6 million as of the third quarter of 2018, excluding the redevelopment of the Seaport District. Of this increase, $2.5 million is attributable to two floors added to our 110 North Wacker development, which were incorporated into our plans as a result of strong leasing demand.  An additional $6.5 million in estimated stabilized NOI is attributable to the acquisition of the Lakefront North property in the Operating Assets segment.

Despite strong sales activity, segment EBT decreased $34.4 million and $128.1 million for the three and nine months ended September 30, 2018, respectively, compared to the same periods in prior year. A change in accounting methods discussed previously contributed to the decreases and makes the periods not comparable. A $13.4 million charge for future window repairs at our Waiea condominium tower also contributed to the decrease in EBT for the nine months ended September 30, 2018. This charge represents the Company's estimate of total costs to complete the repairs. While we expect to recover these costs in future periods, we will not recognize any recovery until the amount can be estimated and is considered probable for financial reporting purposes.

Due to the change in accounting methods for revenue recognition of condominium sales previously discussed, for the current quarter, we reported revenues of $8.0 million from condominium rights and unit sales only for homes that actually closed escrow at the two delivered buildings (Waiea and Anaha) in Ward Village. Had we continued to account for them under the previous guidance, we would have reported condominium rights and unit sales of $51.8 million. For the comparable period in 2017, we reported revenue on a percentage of completion basis at Ward Village of $113.9 million. Due to the change in accounting methods, the two quarters are not comparable. From inception through October 31, 2018 we have closed on the sales of a total of 479 units to residents.

Balance Sheet Third Quarter Activity and Subsequent Events

On September 25, 2018, the Company and its joint venture partners closed on an amendment to the 110 North Wacker construction loan. The amendment increased the maximum borrowing capacity from $494.5 million to $512.6 million, modified the lenders and commitments included in the loan syndication and increased the Company's guarantee to approximately $92.3 million. The loan was modified as a result of the additional floors incorporated in the development plan, as previously discussed.

On September 11, 2018, the Company closed on an $89.8 million construction loan for 6100 Merriweather and an $85.7 million construction loan for Columbia Multi-family. Each loan bears interest at one-month LIBOR plus 2.75%, has an initial maturity date of September 11, 2022, has two, one-year extension options and is cross-collateralized.

On September 18, 2018, the Company closed on a $700.0 million loan for the Corporate Credit Facility, of which $615.0 million is a term loan and $85.0 million is a revolver. The loans under the facility bear interest at one-month LIBOR plus 1.65% and mature September 18, 2023. The Company has a one-time right to request an increase of $50.0 million in the aggregate amount of the revolver loan commitment. The net term loan proceeds were used to repay approximately $608.7 million of existing debt, and the revolver remains undrawn. Concurrent with the funding of the term loan on September 21, 2018, the Company entered into a swap agreement to fix 100.0% of the outstanding principal of the term loan to a total rate equal to 4.61%.

On July 27, 2018, the Company closed on a $34.2 million construction loan for Bridgeland Apartments, bearing interest at one-month LIBOR plus 2.25% with an initial maturity date of July 27, 2022 and a one-year extension option.

On July 20, 2018, the Company closed on a $51.2 million construction note for Summerlin Ballpark, bearing interest at 4.92% per annum and maturing on December 15, 2039. The note is secured by the ballpark and by the proceeds of the Naming Rights and Marketing agreement between the Company and the Las Vegas Convention and Visitors Authority, which provides an annual payment of $4.0 million to the Company in each of the next 20 years.

As of September 30, 2018, our total consolidated debt equaled approximately 44.7% of our total assets and our leverage ratio (debt to enterprise value, as defined in the Supplemental Information) was 39.5%. We believe our low leverage, with a focus on project-specific financing, reduces our exposure to potential downturns and provides us with the ability to evaluate new opportunities. As of September 30, 2018, we had $454.1 million of cash and cash equivalents.

About The Howard Hughes Corporation®

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

Safe Harbor Statement

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

  • budgeted costs, future lot sales and estimates of NOI and EBT;
  • capital required for our operations and development opportunities for the properties in our Operating Assets and Strategic Developments segments;
  • expected commencement and completion for property developments and timing of sales or rentals of certain properties;
  • expected performance of our MPC segment and other current income producing properties;
  • transactions related to our non-core assets;
  • the performance and our operational success at our Seaport District;
  • forecasts of our future economic performance; and
  • future liquidity, finance opportunities, development opportunities, development spending and management plans.

These statements involve known and unknown risks, uncertainties and other factors that may have a material impact on any future results, performance and achievements expressed or implied by such forward-looking statements. These risk factors are described in our Annual Report on Form 10-K, which has been filed with the Securities and Exchange Commission on February 26, 2018. Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There may be other factors currently unknown to us that we have not described in our Annual Report that could cause results to differ from our expectations. These forward-looking statements present our estimates and assumptions as of the date of this press release. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this release.

Our Financial Presentation

As discussed throughout this release, we use certain non-GAAP performance measures, in addition to the required GAAP presentations, as we believe these measures improve the understanding of our operational results and make comparisons of operating results among peer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations and calculation of the Company's reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change. The non-GAAP financial measures used throughout this release are Net operating income, Funds from operations, Core funds from operations, and Adjusted funds from operations. We provide a more detailed discussion about these non-GAAP measures in our reconciliation of non-GAAP measures provided in this earnings release.

 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED







Three Months Ended September 30,



Nine Months Ended September 30,

(In thousands, except per share amounts)



2018



2017



2018



2017

Revenues:

















Condominium rights and unit sales



$

8,045





$

113,852





$

39,767





$

342,208



Master Planned Communities land sales



127,730





54,906





226,727





177,531



Minimum rents



53,244





44,654





153,156





136,053



Tenant recoveries



12,806





11,586





37,808





34,627



Hospitality revenues



19,108





17,776





64,738





57,190



Builder price participation



8,685





5,472





19,394





14,613



Other land revenues



7,145





4,561





15,988





19,606



Other rental and property revenues



20,397





5,929





42,266





17,309



Total revenues



257,160





258,736





599,844





799,137





















Expenses:

















Condominium rights and unit cost of sales



6,168





86,531





41,713





253,209



Master Planned Communities cost of sales



57,183





29,043





109,609





88,288



Master Planned Communities operations



13,044





8,180





33,956





24,881



Other property operating costs



42,942





21,354





91,847





60,153



Rental property real estate taxes



8,519





7,678





24,148





21,765



Rental property maintenance costs



4,456





3,380





11,604





10,016



Hospitality operating costs



14,723





13,525





45,707





41,534



Provision for doubtful accounts



2,282





448





4,417





1,728



Demolition costs



2,835





175





16,166





303



Development-related marketing costs



7,218





5,866





20,484





14,787



General and administrative



20,645





22,362





71,795





63,423



Depreciation and amortization



31,123





35,899





88,398





96,193



Total expenses



211,138





234,441





559,844





676,280





















Operating income before other items



46,022





24,295





40,000





122,857





















Other:

















Gains on sales of properties







237









32,452



Other (loss) income, net



(3,710)





(160)





(3,444)





750



Total other



(3,710)





77





(3,444)





33,202





















Operating income



42,312





24,372





36,556





156,059





















Interest income



2,080





1,764





6,759





3,171



Interest expense



(21,670)





(17,241)





(57,182)





(49,547)



Loss on redemption of senior notes due 2021















(46,410)



Warrant liability loss















(43,443)



Gain on acquisition of joint venture partner's interest















5,490



Equity in earnings from real estate and other affiliates



8,612





7,467





39,297





25,821



Income before taxes



31,334





16,362





25,430





51,141



Provision for income taxes



7,487





5,846





5,628





31,846



Net income



23,847





10,516





19,802





19,295



Net income attributable to noncontrolling interests



(482)





(12)





(51)





(12)



Net income attributable to common stockholders



$

23,365





$

10,504





$

19,751





$

19,283





















Basic income per share:



$

0.54





$

0.25





$

0.46





$

0.47





















Diluted income per share:



$

0.54





$

0.24





$

0.46





$

0.45



 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED







September 30,



December 31,

(In thousands, except shares and par value amounts)



2018



2017

Assets:









Investment in real estate:









Master Planned Communities assets



$

1,621,168





$

1,642,278



Buildings and equipment



2,510,945





2,238,617



Less: accumulated depreciation



(359,445)





(321,882)



Land



302,858





277,932



Developments



1,825,847





1,196,582



Net property and equipment



5,901,373





5,033,527



Investment in real estate and other affiliates



107,720





76,593



Net investment in real estate



6,009,093





5,110,120



Cash and cash equivalents



454,080





861,059



Restricted cash



158,468





103,241



Accounts receivable, net



15,437





13,041



Municipal Utility District receivables, net



237,567





184,811



Notes receivable, net



40,220





5,864



Deferred expenses, net



95,811





80,901



Prepaid expenses and other assets, net



286,194





370,027



Total assets



$

7,296,870





$

6,729,064













Liabilities:









Mortgages, notes and loans payable, net



$

3,261,210





$

2,857,945



Deferred tax liabilities



148,770





160,850



Accounts payable and accrued expenses



705,864





521,718



Total liabilities



4,115,844





3,540,513













Equity:









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









Common stock: $.01 par value; 150,000,000 shares authorized, 43,538,420 shares issued and 43,033,127 outstanding as of September 30, 2018 and 43,300,253 shares issued and 43,270,880 outstanding as of December 31, 2017



436





433



Additional paid-in capital



3,318,747





3,302,502



Accumulated deficit



(157,602)





(109,508)



Accumulated other comprehensive income (loss)



4,450





(6,965)



Treasury stock, at cost, 505,293 and 29,373 shares as of September 30, 2018 and December 31, 2017, respectively



(60,743)





(3,476)



Total Stockholders' equity



3,105,288





3,182,986



Noncontrolling interests



75,738





5,565



Total equity



3,181,026





3,188,551



Total liabilities and equity



$

7,296,870





$

6,729,064



 

Appendix – Reconciliations of Non-GAAP Measures



As of and for the Three and Nine Months Ended September 30, 2018



We use certain non-GAAP performance measures, in addition to the required GAAP presentations, as we believe these measures improve the understanding of our operational results and make comparisons of operating results among peer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations, and calculation of the Company's reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change. The non-GAAP financial measures used herein are Net operating income ("NOI"), Funds from operations ("FFO"), Core funds from operations ("Core FFO"), and Adjusted funds from operations ("AFFO").



As a result of our three segments, Master Planned Communities, Operating Assets and Strategic Developments, being 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 earnings before tax ("EBT"). EBT, as it relates to each business segment, represents the revenues less expenses of each segment, including interest income, interest expense and Equity in earnings of real estate and other affiliates. EBT excludes corporate expenses and other items that are not allocable to the segments. We present EBT because we use this measure, among others, internally to assess the core operating performance of our assets. However, EBT should not be considered as an alternative to GAAP net income.





Three Months Ended September 30,



(Unaudited)



2018

2017

$ Change

2018

2017

$ Change

2018

2017

$ Change

2018

2017

$ Change

(In thousands)

Operating

MPC

Strategic

Consolidated

Total revenues

$

101,000



$

79,533



$

21,467



$

143,135



$

64,929



$

78,206



$

13,025



$

114,274



$

(101,249)



$

257,160



$

258,736



$

(1,576)



Total operating expenses

59,779



41,837



(17,942)



70,237



37,223



(33,014)



19,302



91,080



71,778



149,318



170,140



20,822



Segment operating income (loss)

41,221



37,696



3,525



72,898



27,706



45,192



(6,277)



23,194



(29,471)



107,842



88,596



19,246



Depreciation and amortization

(28,329)



(33,885)



5,556



(79)



(76)



(3)



(472)



(18)



(454)



(28,880)



(33,979)



5,099



Interest (expense) income, net

(18,891)



(15,940)



(2,951)



6,626



6,355



271



4,319



6,983



(2,664)



(7,946)



(2,602)



(5,344)



Other (loss) income, net

(2,887)



(249)



(2,638)



18





18



(450)



122



(572)



(3,319)



(127)



(3,192)



Equity in earnings (loss) from real estate and other affiliates

(529)



317



(846)



9,454



6,480



2,974



(316)



670



(986)



8,609



7,467



1,142



Gains on sales of properties















237



(237)





237



(237)



Segment EBT

$

(9,415)



$

(12,061)



$

2,646



$

88,917



$

40,465



$

48,452



$

(3,196)



$

31,188



$

(34,384)



$

76,306



$

59,592



$

16,714







































Corporate expenses and other items



52,459



49,076



(3,383)













Net income





$

23,847



$

10,516



$

13,331













Net income attributable to noncontrolling interests



(482)



(12)



(470)













Net income attributable to common stockholders



$

23,365



$

10,504



$

12,861







Nine Months Ended September 30,



(Unaudited)



2018

2017

$ Change

2018

2017

$ Change

2018

2017

$ Change

2018

2017

$ Change

(In thousands)

Operating

MPC

Strategic

Consolidated

Total revenues

$

285,481



$

243,498



$

41,983



$

261,665



$

211,711



$

49,954



$

52,698



$

343,928



$

(291,230)



$

599,844



$

799,137



$

(199,293)



Total operating expenses

149,169



123,879



(25,290)



143,608



113,171



(30,437)



70,225



264,524



194,299



363,002



501,574



138,572



Segment operating income (loss)

136,312



119,619



16,693



118,057



98,540



19,517



(17,527)



$

79,404



(96,931)



236,842



297,563



(60,721)



Depreciation and amortization

(79,190)



(88,918)



9,728



(245)



(247)



2



(2,650)



(1,177)



(1,473)



(82,085)



(90,342)



8,257



Interest (expense) income, net

(52,886)



(46,004)



(6,882)



19,826



17,902



1,924



18,260



18,321



(61)



(14,800)



(9,781)



(5,019)



Other (loss) income, net

(2,723)



(265)



(2,458)



18





18



(77)



137



(214)



(2,782)



(128)



(2,654)



Equity in earnings (loss) from real estate and other affiliates

1,056



3,739



(2,683)



34,682



21,552



13,130



3,556



530



3,026



39,294



25,821



13,473



Gains on sales of properties















32,452



(32,452)





32,452



(32,452)



Segment EBT

$

2,569



$

(11,829)



$

14,398



$

172,338



$

137,747



$

34,591



$

1,562



$

129,667



$

(128,105)



$

176,469



$

255,585



$

(79,116)







































Corporate expenses and other items



156,667



236,290



79,623













Net income





$

19,802



$

19,295



$

507













Net income attributable to noncontrolling interests



(51)



(12)



(39)













Net income attributable to common stockholders



$

19,751



$

19,283



$

468



 

NOI



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







Three Months Ended September 30,



Nine Months Ended September 30,





(Unaudited)



(Unaudited)

(In thousands)



2018



2017



2018



2017

Total Operating Assets segment EBT (a)



$

(9,415)





$

(12,061)





$

2,569





$

(11,829)





















Add Back:

















Depreciation and amortization



28,329





33,885





79,190





88,918



Interest expense (income), net



18,891





15,940





52,886





46,004



Equity in earnings (loss) from real estate and other affiliates



529





(317)





(1,056)





(3,739)



Straight-line rent revenue



(3,632)





(1,421)





(9,551)





(5,198)



Other



3,098





290





2,820





348



Total Operating Assets NOI - Consolidated



37,800





36,316





126,858





114,504





















Dispositions:

















Cottonwood Square







(165)









(500)



Park West







8









61



Total Operating Asset Dispositions NOI







(157)









(439)





















Consolidated Operating Assets NOI excluding properties sold or in redevelopment



$

37,800





$

36,159





$

126,858





$

114,065





















Company's Share NOI - Equity investees



891





1,186





2,130





3,315





















Distributions from Summerlin Hospital Investment











3,435





3,383





















Total NOI



$

38,691





$

37,345





$

132,423





$

120,763



___________________

(a) EBT excludes corporate expenses and other items that are not allocable to the segments. Prior periods have been adjusted to be consistent with the current year presentation.

 

FFO, Core FFO, and Adjusted FFO (AFFO)



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



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







Three Months Ended September 30,



Nine Months Ended September 30,





(Unaudited)



(Unaudited)

(In thousands)



2018



2017



2018



2017

Net (loss) income attributable to common shareholders



$

23,365





$

10,504





$

19,751





$

19,283



Add:

















Segment real estate related depreciation and amortization



28,880





33,979





82,085





90,342



Gains on sales of properties







(237)









(32,452)



Income tax expense (benefit) adjustments - deferred

















Gains on sales of properties







83









12,164



Reconciling items related to noncontrolling interests



482





12





51





12



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



1,186





963





3,871





2,896



FFO



$

53,913





$

45,304





$

105,758





$

92,245





















Adjustments to arrive at Core FFO:

















Acquisition expenses



$





$





$





$

32



Loss on redemption of senior notes due 2021















46,410



Gain on acquisition of joint venture partner's interest















(5,490)



Warrant loss















43,443



Severance expenses



139





361





420





2,449



Non-real estate related depreciation and amortization



2,243





1,920





6,313





5,851



Straight-line amortization



(3,676)





(2,257)





(10,104)





(6,903)



Deferred income tax expense (benefit)



7,179





6,897





4,621





19,280



Non-cash fair value adjustments related to hedging instruments



(394)





68





(1,262)





399



Share based compensation



2,877





1,663





8,231





5,352



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



10,053





6,041





36,650





15,090



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



191





132





441





423



Core FFO



$

72,525





$

60,129





$

151,068





$

218,581





















Adjustments to arrive at AFFO:

















Tenant and capital improvements



$

(1,519)





$

(3,541)





$

(10,684)





$

(10,156)



Leasing Commissions



(244)





(738)





(1,694)





(2,027)



AFFO



$

70,762





$

55,850





$

138,690





$

206,398





















FFO per diluted share value



$

1.24





$

1.05





$

2.44





$

2.14





















Core FFO per diluted share value



$

1.67





$

1.39





$

3.49





$

5.07





















AFFO per diluted share value



$

1.63





$

1.29





$

3.20





$

4.79



 

Contact Information:

David R. O'Reilly

Chief Financial Officer

(214) 741-7744                                 

David.OReilly@howardhughes.com

Cision View original content to download multimedia:http://www.prnewswire.com/news-releases/the-howard-hughes-corporation-reports-third-quarter-2018-results-300744226.html

SOURCE The Howard Hughes Corporation

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