The Howard Hughes Corporation Reports Third Quarter 2012 Results
Third Quarter Highlights
Third quarter 2012 net income was $14.9 million, excluding the $(64.3) million non-cash warrant loss compared to the third quarter 2011 net loss of $(5.6) million, excluding the $169.9 million non-cash warrant gain.
Master Planned Community land sales were $40.4 million for the third quarter 2012 compared to $32.2 million for the third quarter 2011.
Net operating income for our income-producing Operating Assets was $16.1 million for third quarter 2012, up from $13.5 million in the third quarter of 2011.
Acquired a 169,590 square foot Class A office building in Columbia, MD by assuming a $16.0 million non-recourse mortgage bearing interest at 4.25% and our commitment to fund $5.0 million for leasing.
Commenced Phase Two of the Ward Village Shops - part of Ward Centers in Honolulu, HI - a $26.0 million project to build 57,000 square feet of new retail space for Pier 1 Imports and Nordstrom Rack, whose relocation opens space for future redevelopment. The tenants are expected to take occupancy in late 2013/early 2014 and should contribute approximately $1.0 million of incremental annual NOI to Ward Centers.
Announced the master plan to transform Ward Centers into an urban master planned community called Ward Village. Ward Village, when fully developed, will contain over 4,000 condominium units and over one million square feet of retail and other commercial space. Phase One of the redevelopment will consist of two market rate, mixed-use residential towers, one reserved housing tower and the renovation of the IBM building. Construction on Phase One is expected to begin in 2014.
Closed on $40.0 million of mezzanine capital commitments for the ONE Ala Moana condominium development, including $3.0 million of non-refundable capital for pre-development costs.
Entered into a letter of intent with Macy's to become a 180,000 square foot anchor tenant at the Shops at Summerlin. This project is expected to contain 1.5 million square feet of mixed use development, including retail, entertainment and 198,000 square feet of office space. We expect Macy's will be a catalyst for the launch of this project in 2013.
Commenced construction on Millennium Woodlands Phase II, a 314-unit Class A apartment building located in The Woodlands, which is being developed through a joint venture with the same developer with whom we developed the Millennium Waterway Apartments.
The Howard Hughes Corporation (NYS: HHC) today announced its results for the third quarter 2012.
For the three months ended September 30, 2012, net loss attributable to common stockholders was $(49.4) million compared with net income of $164.3 million for the three months ended September 30, 2011. Excluding the $(64.3) million warrant loss, net income attributable to common stockholders for the three months ended September 30, 2012 was $14.9 million compared with a net loss, excluding the $169.9 million warrant gain, of $(5.6) million for the three months ended September 30, 2011.
Beginning with the acquisition of our former partner's 47.5% interest in The Woodlands on July 1, 2011, we consolidated the financial results of The Woodlands. Prior to the acquisition, we accounted for our interest in The Woodlands as an unconsolidated real estate affiliate. Consequently, our statement of operations for the nine months ended September 30, 2012 is not comparable to the same period in 2011.
If The Woodlands acquisition had occurred on January 1, 2011, total revenues of the Company for the nine months ended September 30, 2011 would have been approximately $276.2 million, on a pro forma basis, compared to $268.5 million for the nine months ended September 30, 2012. The principal reason for the $7.7 million decrease in revenues, on a pro forma basis, is $9.1 million of lower condominium sales at the Nouvelle at Natick property as a result of the sale of the last two units owned by the Company in the second quarter of 2012. For a more complete comparison of operating results between periods, please refer to Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-Q for the period ended September 30, 2012.
David R. Weinreb, CEO of The Howard Hughes Corporation, stated, "During the third quarter we made significant progress on advancing several of our developments from the Seaport in New York City to Ward Centers in Honolulu. Obtaining Macy's as a lead anchor tenant for the Shops at Summerlin is a significant milestone and we anticipate beginning construction on this 1.5 million square foot development in 2013. We also announced the upcoming launch of sales and construction of our 206-unit Ala Moana condominium project, called ONE Ala Moana, and commenced work on our newest 200,000 square foot office tower at The Woodlands, One Hughes Landing."
Weinreb continued, "Our financial position and liquidity remain strong. With $273 million of unrestricted cash, a conservatively leveraged balance sheet and positive cash flow from our master planned communities and operating assets, we are well-positioned to undertake all of our major development initiatives."
For comparative purposes, Master Planned Communities ("MPC") land sales and Operating Assets net operating income ("NOI") relating to The Woodlands, and a discussion of results as if we consolidated The Woodlands during the nine months ended September 30, 2011 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, refer to the Supplemental Information contained in this earnings release.
Master Planned Communities
Land sales in our MPC segment, excluding deferred land sales and other revenue, increased $8.3 million to $40.4 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 primarily due to the increased residential and commercial land sales of $5.5 million and $2.8 million, respectively. Residential land sales increased at Summerlin and Bridgeland by $8.7 million offset by lower land sales at Columbia of $2.3 million. Commercial land sales increased by $2.8 million due to a $5.3 million land sale at Columbia for the development of an apartment complex offset by lower commercial land sales at The Woodlands of $2.5 million. In addition, deferred residential sales of $2.0 million were recognized in 2011 related to Summerlin which did not reoccur in 2012.
The Houston, Texas economy remains strong. ExxonMobil is constructing a three million square foot corporate campus just south of The Woodlands and is expected to begin relocating employees to this new location starting in 2014 and ending in 2015. We anticipate this development will further increase the demand for housing and commercial space at The Woodlands and Bridgeland master planned communities. The latest phase of construction on the greater Houston area's perimeter loop, the Grand Parkway, will bisect the Bridgeland community and will connect the ExxonMobil campus, the airport and the Energy Corridor, which we believe will serve as another catalyst for growth.
At Summerlin, existing inventory levels for both new and resale homes continue to decline resulting in improved pricing. Summerlin sold 95 and 362 residential lots during the three and nine months ended September 30, 2012, respectively, compared to none and 312 residential lots during the three and nine months ended September 30, 2011, respectively. Summerlin's pipeline remains robust, with 147 residential lots under contract representing approximately $11.8 million of sales, of which $3.7 million and $8.1 million are expected to close in 2012 and 2013, respectively, if all sales are completed. The Shops at Summerlin project is expected to create added value for the community and positively impact prices for lots and homes as the market continues to normalize.
NOI from the combined retail, office and resort and conference center and multi-family properties was $16.1 million for the three months ended September 30, 2012, compared to NOI of $13.5 million for the three months ended September 30, 2011. This includes our share of NOI of our non-consolidated ventures of $0.3 million for the three months ended September 30, 2012 and $1.1 million for the three months ended September 30, 2011. The $2.6 million increase in NOI in the third quarter 2012 compared to the third quarter 2011 is primarily attributable to 4 Waterway Square, 9303 New Trails, 20/25 Waterway Avenue and the Millennium Waterway apartments, all located at The Woodlands, reaching stabilized NOI in late 2011/early 2012.
On July 26, 2012, we announced the redevelopment of Riverwalk Marketplace, located in New Orleans, LA, into the first upscale urban outlet center named The Outlet Collection at Riverwalk. Our plans currently anticipate expanding the existing gross leasable area by approximately 44,000 square feet to 244,000 square feet. The redevelopment is contingent upon obtaining an acceptable amount of pre-leasing for the property and financing.
On August 15, 2012, we acquired 70 Columbia Corporate Center, a 169,590 square foot Class A office building by assuming a $16.0 million non-recourse mortgage bearing a 4.25% interest rate and maturing in August 2017. At closing, we funded $5.0 million into escrow for capital expenditures, tenant improvements and leasing commissions at the property. We are entitled to a 10.0% cumulative preferred return, after debt service, on our invested capital in the property. Cash flow is then split pro-rata according to each party's capital contribution between us and the lender, to amortize the mortgage. Excess proceeds from a capital event, after repayment of outstanding debt and the preferred return will be split 30% to the lender and 70% to us. At closing, we signed a 76,308 square foot tenant which will increase occupancy to approximately 68.7% and annual NOI to approximately $1.9 million.
During the second quarter of 2012, we substantially completed construction of 69,923 square feet of retail space at Phase One of Ward Village Shops at Ward Centers in Honolulu, HI. TJ Maxx took occupancy of 35,744 square feet in May 2012, and we are seeking a tenant for the remaining approximately 34,000 square foot space. We expect that when the space is fully leased our total construction costs will be approximately $17.0 million. We also announced and began development on Phase Two of Ward Village Shops, which will encompass 57,000 square feet of retail space and is expected to cost approximately $26.0 million. Pier 1 Imports and Nordstrom Rack are being relocated from other space at Ward Centers and will occupy Phase Two. Both of these tenants are expected to contribute an incremental $1.0 million of combined annual NOI when they take possession in late 2013/early 2014.
On October 10, 2012, we announced plans to transform Ward Centers into an urban master planned community called Ward Village that will feature retail, dining, entertainment, along with market-rate and affordable housing situated in public open spaces and pedestrian friendly streets. Our plan, which is fully entitled, is to build more than 4,000 residential units and over one million square feet of retail and other commercial space. Phase One of the redevelopment will consist of two mixed-use residential towers, one reserved housing tower and the renovation of the IBM building. One of the towers will be constructed on the site being vacated by Pier 1 Imports. We anticipate breaking ground on Phase One in 2014 with an expected completion date of 2016.
On July 6, 2012, we sold 11.5 acres at Alameda Plaza consisting of 104,705 square feet of mostly vacant retail space for $4.5 million. Our net earnings recognized on the sale were $2.0 million. We are continuing to explore the sale of the remaining 10.5 acres consisting of 85,636 square feet of mostly vacant retail space.
On July 18, 2012, we announced the development of a 66-acre mixed use site called Hughes Landing at Lake Woodlands, located in The Woodlands, TX, and north of Houston. Hughes Landing will have up to eight office buildings, hotel, retail and multi-family residential housing. We announced construction of the first office building, One Hughes Landing, an eight story, 195,227 square foot Class A building. Construction of this building is expected to begin in the fall of 2012 with completion anticipated in the fall of 2013. Total budgeted construction costs are $45.0 million (exclusive of land value), and we anticipate closing on a $38.0 million financing in the fourth quarter 2012.
On September 17, 2012, our joint venture to develop a 206-unit condominium tower at the Ala Moana shopping center located in Honolulu, HI, closed on two $20.0 million non-recourse mezzanine loan commitments with two investors. $3.0 million of the $40.0 million provided by the mezzanine lenders may be drawn and used to fund the pre-development costs of the venture. Per the terms of the mezzanine loans, the venture is not required to repay this $3.0 million if the construction loan fails to close or if the project does not go forward, of which approximately $2.0 million has been funded as of September 30, 2012 and is non-interest bearing. The mezzanine loans, have a blended interest rate of 12.0%, must be drawn in full at the construction loan closing date and mature on April 30, 2018 with the option to extend for one year. We currently anticipate approval of the condominium documents in the fourth quarter of 2012 and expect to begin pre-sales before the end of 2012. We anticipate that the construction loan will close in June 2013 and construction is expected to begin in the second quarter of 2013 with anticipated completion at the end of 2014, subject to obtaining an acceptable level of pre-sales and construction financing.
On September 19, 2012, we announced a letter of intent with Macy's to become the first anchor tenant for the Shops at Summerlin, located in downtown Summerlin, NV. Macy's will occupy approximately 180,000 square feet of space. When completed, the Shops at Summerlin will contain a one million square foot fashion center, 280,000 square feet of big box and junior anchor retail space and a 198,000 square foot office building. We currently expect that the Macy's announcement will be a precursor to obtaining retail commitments sufficient to begin the project in 2013.
During the third quarter 2012, Millennium Woodlands Phase II, LLC, our joint venture with The Dinerstein Companies to develop a 314-unit Class A apartment building in The Woodlands, TX, commenced construction. We have a 81.4% ownership interest in the venture. The project is expected to cost approximately $53.9 million (including our contributed land valued at $15.5 million) and the venture obtained a $37.7 million construction loan, which is non-recourse to us, to construct the building. Please refer to Note 7 - Real Estate Affiliates in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 for a more detailed description of this joint venture.
About the Howard Hughes Corporation
The Howard Hughes Corporation owns, manages and develops commercial, residential and mixed-use real estate throughout the United States. Our properties include master planned communities, commercial mixed-use, retail and office properties, development opportunities and other unique assets spanning 18 states from New York to Hawaii. The Howard Hughes Corporation is traded on the New York Stock Exchange under the ticker symbol "HHC", and is headquartered in Dallas, Texas. For more information, 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," "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.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands, except per share amounts)
Master Planned Community land sales
Builder price participation
Condominium unit sales
Resort and conference center revenues
Other land revenues
Other rental and property revenues
Master Planned Community cost of sales
Master Planned Community operations
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Condominium unit cost of sales
Resort and conference center operations
Provision for (recovery of) doubtful accounts
General and administrative
Depreciation and amortization
Early extinguishment of debt
Warrant liability gain (loss)
Reduction in tax indemnity receivable
Investment in Real Estate Affiliate basis adjustment
Equity in earnings from Real Estate Affiliates
Income (loss) before taxes
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to common stockholders
Basic income (loss) per share:
Diluted income (loss) per share:
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Investment in real estate:
Master Planned Community assets
Buildings and equipment
Less: accumulated depreciation
Developments in progress
Net property and equipment
Investment in Real Estate Affiliates