Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis by management should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes included in this quarterly report on Form 10-Q (the Quarterly Report) and in The Howard Hughes Corporation’s (HHC or the Company) annual report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission (SEC) on February 27, 2023 (the Annual Report). All references to numbered Notes are to specific notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
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FORWARD-LOOKING INFORMATION |
Certain statements contained in or incorporated by reference into this Quarterly Report, including, without limitation, those related to our future operations constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements and may include words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “project,” “realize,” “should,” “transform,” “would,” and other statements of similar expression.
These forward-looking statements involve known and unknown risks, uncertainties, and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Quarterly Report or in the information incorporated herein by reference. In addition, you should interpret many of the risks identified below and set forth in our 2022 Annual Report on Form 10-K (2022 Annual Report) as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.
Forward-looking statements include:
– accelerated growth in our core Master Planned Communities (MPC) assets
– expected performance of our stabilized, income-producing properties and the performance and stabilization timing of properties that we have recently placed into service or are under construction
– forecasts of our future economic performance
– expected benefits of our derivative instruments and mortgage activity over time
– expected capital required for our operations and development opportunities for our properties
– impact of technology on our operations and business
– expected performance of our segments
– expected commencement and completion for property developments and timing of sales or rentals of certain properties
– estimates of our future liquidity, development opportunities, development spending and management plans
– the potential impact of a resurgence of the COVID-19 pandemic on our business, our tenants and the economy in general, and our ability to accurately assess and predict such impacts on the financial condition, results of operations, cash flows, and performance of our Company
– descriptions of assumptions underlying or relating to any of the foregoing.
Some of the risks, uncertainties, and other important factors that may affect future results or cause actual results to differ materially from those expressed or implied by forward-looking statements include:
–the cyclical nature of residential and commercial building and changes in economic, real estate, or other conditions
–macroeconomic conditions such as volatility in capital markets, and a prolonged recession in the national economy, including any adverse business or economic conditions in the homebuilding, condominium-development, retail and office sectors
–our inability to obtain operating and development capital, including our inability to obtain or refinance debt capital from lenders and the capital markets
–rising interest rates and inflation
–the availability of debt and equity capital
–our continuing ability to obtain operating and development capital on favorable terms, or at all
–our ability to compete effectively, including the potential impact of heightened competition for tenants and potential decreases in occupancy at our properties
–our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us
–potential increases in real estate construction costs, including construction cost increases as the result of natural disasters or trade disputes and tariffs on goods imported in the United States
–potential defaults by purchasers on their obligations to purchase our condominiums
–extreme weather conditions or climate change, including natural disasters, that may cause property damage or interrupt business
–the impact of water and electricity shortages on our business, financial condition, and results of operations
–the impact of a resurgence of the COVID-19 pandemic on our business, our tenants and the economy in general, including as described above
–contamination of our properties by hazardous or toxic substances
–terrorist activity, acts of violence, or breaches of our data security
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
–losses that are not insured or that exceed the applicable insurance limits
–our ability to lease new or redeveloped space
–our ability to obtain the necessary governmental permits for the development of our properties and necessary regulatory approvals pursuant to an extensive entitlement process involving multiple and overlapping regulatory jurisdictions, which often require discretionary action by local governments
–increased construction costs exceeding our original estimates, delays or overruns, claims for construction defects, or other factors affecting our ability to develop, redevelop or construct our properties
–regulation of the portion of our business that is dedicated to the formation and sale of condominiums, including regulatory filings to state agencies, additional entitlement processes, and requirements to transfer control to a condominium association’s board of directors in certain situations
–fluctuations in regional and local economies, the impact of rising interest rates on residential housing and condominium markets, local real estate conditions, and competition from competing retail properties and the internet
–inherent risks related to disruption of information technology networks and related systems, including cyber security attacks
–our ability to attract and retain key personnel
–our ability to collect rent and attract tenants
–our ability to manage and service our debt and comply with related debt covenants, restrictions, and limitations, including our $750,000,000 5.375% Senior Notes due 2028, $650,000,000 4.125% Senior Notes due 2029 and $650,000,000 4.375% Senior Notes due 2031, contain restrictions that may limit our ability to operate our business
–our directors’ involvement or interests in other businesses, including real estate activities and investments
–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
–catastrophic events or geo-political conditions, such as the COVID-19 pandemic and resurgence of different variants that may disrupt our business
–other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in our other reports and other public filings with the SEC
Although we presently believe that the plans, expectations, and anticipated results expressed in or suggested by the forward-looking statements contained in or incorporated by reference into this Quarterly Report are reasonable, all forward-looking statements are inherently subjective, uncertain, and subject to change, as they involve substantial risks and uncertainties, including those beyond our control. New factors emerge from time to time, and it is not possible for us to predict the nature, or assess the potential impact, of each new factor on our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made, except as otherwise may be required by law.
The above list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included in our 2022 Annual Report. The risk factors contained in our 2022 Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings that we make with the SEC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OVERVIEW |
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Our award-winning assets include one of the nation's largest portfolios of MPCs spanning approximately 101,000 gross acres, as well as operating properties, strategic developments, and other unique assets across seven states from New York to Hawai‘i. We create some of the most sought-after communities in the country by curating an environment tailored to meet the needs of our residents and tenants. Our unique business model allows us to drive outsized risk-adjusted returns while maintaining a sharp focus on sustainability to ensure our communities are equipped with the resources to last several decades.
We operate through four business segments: Operating Assets, MPCs, Strategic Developments, and Seaport. We create a unique and continuous value-creation cycle through operational and financial synergies associated with our three primary business segments of Operating Assets, MPCs, and Strategic Developments. In our MPC segment, we plan, develop, and manage small cities and large-scale, mixed-use communities, in markets with strong long-term growth fundamentals. This business focuses on the horizontal development of residential land. The improved acreage is then sold to homebuilders who build and sell homes to new residents. New homeowners create demand for commercial developments, such as retail, office, self-storage, and hospitality offerings. We build these commercial properties through Strategic Developments at the appropriate time using the cash flow harvested from the sale of land to homebuilders, which helps mitigate development risk. Once the commercial developments are completed, the assets transition to Operating Assets, which increase recurring Net Operating Income (NOI), further funding our Strategic Developments. New office, retail, and other commercial amenities make our MPC residential land more appealing to buyers and increase the velocity of land sales at premiums that typically exceed the broader market. This increased demand for residential land generates more cash flow from MPCs, thus continuing the value-creation cycle. Our fourth business segment, the Seaport, is one of the few multi-block districts largely under private management by a single owner in New York City. This historic waterfront area is being revitalized and enhanced into a mixed-use neighborhood featuring unique culinary and entertainment offerings.
In addition to the required presentations using GAAP, we use certain non-GAAP performance measures, such as NOI. See the Operating Assets and Seaport sections below for the reconciliation of this GAAP to non-GAAP financial measure and a statement indicating why management believes the non-GAAP financial measure provides useful information for investors.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OVERVIEW |
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First Quarter 2023 Highlights |
Comparison of the three months ended March 31, 2023, to the three months ended March 31, 2022
Total Company
–Net income attributable to common stockholders decreased to a net loss of $22.7 million, or $0.46 per diluted share, for the three months ended March 31, 2023, compared to net income of $2.1 million, or $0.04 per diluted share, for the three months ended March 31, 2022.
–We continue to maintain a strong liquidity position with $417.7 million of cash and cash equivalents, $1.2 billion of undrawn lender commitment available to be drawn for property development, $200.0 million of available capacity on the Secured Bridgeland Notes, and limited near-term debt maturities.
Operating Assets
–Operating Assets NOI totaled $54.3 million in the current quarter, a $3.8 million increase compared to $50.5 million in the prior-year period.
–Office NOI increased $2.6 million, primarily due to the continued lease-up at 9950 Woodloch Forest as well as lease-up, the expiration of rent abatements, and tenant recoveries at various properties in The Woodlands, partially offset by decreases related to rent abatements at 3 Waterway Square and lower occupancy at One Hughes Landing and various properties in Downtown Columbia.
–Retail NOI increased $2.5 million, primarily driven by tenant upgrades and retail sales growth in Downtown Summerlin, as well as increased tenant recoveries in The Woodlands and Ward Village.
–Multi-family NOI increased $1.5 million, primarily due to winter weather-related insurance recoveries and rent growth at our properties in The Woodlands.
–Operating Assets NOI was negatively affected by the retail asset dispositions of Lake Woodlands Crossing, Outlet Collection at Riverwalk, and Creekside Village Green in 2022, resulting in a $1.5 million decrease.
MPC
–MPC Earnings Before Tax (EBT) totaled $62.4 million in the current quarter, a $2.7 million increase compared to $59.7 million in the prior-year period.
–The increase in EBT for the current quarter was primarily due to higher commercial land sales, net of costs, at Bridgeland and higher residential land sales at The Woodlands, offset by no institutional land sales at Summerlin.
Seaport
–Seaport NOI totaled a loss of $5.6 million in the current quarter and remained relatively flat compared to a loss of $5.7 million in the prior-year period, as NOI increased due to rental revenue from the Tin Building landlord operations, partially offset by decreased revenues due to the closure of the Winter Greens concept for the 2023 season. Seaport NOI excludes the impact of the Company’s equity ownership interest in the Tin Building by Jean-Georges managed business, which had an NOI loss of $9.2 million in the current quarter, inclusive of Tin Building rental expense which commenced in the third quarter of 2022, and a loss of $3.6 million in the prior-year period. See Seaport segment discussion for additional detail.
Strategic Developments
–Strategic Developments EBT totaled a loss of $3.4 million in the current quarter, an $8.8 million decrease compared to income of $5.4 million in the prior-year period.
–The decrease in EBT was primarily attributable to a decrease in profits from condominium sales of $3.9 million driven by the timing and mix of condominium closings. The Company closed on 1 unit at Kō'ula and 4 units at ‘A‘ali‘i during the three months ended March 31, 2023, compared to 24 at ‘A‘ali‘i during the three months ended March 31, 2022.
–The Park Ward Village, our eighth condominium project, began public sales in July 2021 and began construction in December 2022. As of March 31, 2023, we have entered into contracts for 504 units, representing 92.5% of total units.
–Ulana Ward Village, our ninth condominium project, was announced in 2021 and began construction in January 2023, with all units designated as workforce housing units offered to local residents who meet certain maximum income and net worth requirements. As of March 31, 2023, we have entered into contracts for 686 units, representing 98.6% of total units.
–Kalae, our tenth condominium project, began public presales in September 2022 and as of March 31, 2023, we have entered into contracts for 262 units, representing 79.6% of total units.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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Segment EBT Segment EBT for Operating Assets is presented below:
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Operating Assets Segment EBT | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Rental revenue | | | | | | | $ | 92,475 | | | $ | 93,606 | | | $ | (1,131) | |
Other land, rental, and property revenues | | | | | | | 8,450 | | | 6,081 | | | 2,369 | |
Total revenues | | | | | | | 100,925 | | | 99,687 | | | 1,238 | |
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Operating costs | | | | | | | (35,420) | | | (31,635) | | | (3,785) | |
Rental property real estate taxes | | | | | | | (14,580) | | | (14,159) | | | (421) | |
(Provision for) recovery of doubtful accounts | | | | | | | 2,401 | | | (821) | | | 3,222 | |
Total operating expenses | | | | | | | (47,599) | | | (46,615) | | | (984) | |
Segment operating income (loss) | | | | | | | 53,326 | | | 53,072 | | | 254 | |
Depreciation and amortization | | | | | | | (39,632) | | | (38,430) | | | (1,202) | |
Interest income (expense), net | | | | | | | (28,911) | | | (20,118) | | | (8,793) | |
Other income (loss), net | | | | | | | 2,282 | | | (169) | | | 2,451 | |
Equity in earnings (losses) from unconsolidated ventures | | | | | | | 1,905 | | | 15,175 | | | (13,270) | |
Gain (loss) on sale or disposal of real estate and other assets, net | | | | | | | 4,730 | | | — | | | 4,730 | |
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Gain (loss) on extinguishment of debt | | | | | | | — | | | (282) | | | 282 | |
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Segment EBT | | | | | | | $ | (6,300) | | | $ | 9,248 | | | $ | (15,548) | |
For the three months ended March 31, 2023:
Operating Assets segment EBT decreased $15.5 million compared to the prior-year period primarily due to the following:
–Equity earnings decreased $13.3 million as a result of a $6.3 million impact due to the change in value of derivative instruments on certain equity investments and a $5.0 million impact of the sale of 110 North Wacker in the first quarter of 2022. This decrease is due to the release of our share of accumulated other comprehensive income related to 110 North Wacker’s derivative instruments upon the sale in 2022.
–Interest expense increased $8.8 million primarily due to new financings secured by our Operating assets and higher interest on variable-rate debt.
These decreases to EBT were partially offset by the following:
–Gain on asset sales increased $4.7 million due to the sale of certain retail assets in Ward Village in the first quarter of 2023.
Net Operating Income In addition to the required presentations using accounting principles generally accepted in the United States (GAAP), we use certain non-GAAP performance measures, 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 our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change.
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). NOI excludes straight-line rents and amortization of tenant incentives, net; interest expense, net; ground rent amortization; demolition costs; other income (loss); amortization; depreciation; development-related marketing cost; gain on sale or disposal of real estate and other assets, net; provision for impairment; and equity in earnings from unconsolidated ventures.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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We believe that NOI is a useful supplemental measure of the performance of our Operating Assets and Seaport segments because it provides a performance measure that reflects the revenues and expenses directly associated with owning and operating real estate 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 rental and occupancy rates, tenant mix, and operating costs have on our operating results, gross margins, and investment returns.
A reconciliation of Operating Assets segment EBT to Operating Assets NOI is presented in the table below. Refer to the Seaport section for a reconciliation of Seaport segment EBT to Seaport NOI.
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Operating Assets NOI | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Total Operating Assets segment EBT | | | | | | | $ | (6,300) | | | $ | 9,248 | | | $ | (15,548) | |
Add back: | | | | | | | | | | | |
Depreciation and amortization | | | | | | | 39,632 | | | 38,430 | | | 1,202 | |
Interest (income) expense, net | | | | | | | 28,911 | | | 20,118 | | | 8,793 | |
Equity in (earnings) losses from unconsolidated ventures | | | | | | | (1,905) | | | (15,175) | | | 13,270 | |
(Gain) loss on sale or disposal of real estate and other assets, net | | | | | | | (4,730) | | | — | | | (4,730) | |
(Gain) loss on extinguishment of debt | | | | | | | — | | | 282 | | | (282) | |
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Impact of straight-line rent | | | | | | | (1,113) | | | (2,438) | | | 1,325 | |
Other | | | | | | | (185) | | | 49 | | | (234) | |
Operating Assets NOI | | | | | | | $ | 54,310 | | | $ | 50,514 | | | $ | 3,796 | |
The table below presents Operating Assets NOI by property type:
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Operating Assets NOI by Property Type | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Office | | | | | | | $ | 27,728 | | | $ | 25,118 | | | $ | 2,610 | |
Retail | | | | | | | 14,608 | | | 12,134 | | | 2,474 | |
Multi-family | | | | | | | 12,633 | | | 11,142 | | | 1,491 | |
Other | | | | | | | (476) | | | 789 | | | (1,265) | |
Dispositions | | | | | | | (183) | | | 1,331 | | | (1,514) | |
Operating Assets NOI | | | | | | | $ | 54,310 | | | $ | 50,514 | | | $ | 3,796 | |
For the three months ended March 31, 2023:
Operating Assets NOI increased $3.8 million compared to the prior-year period primarily due to the following:
–Office NOI increased $2.6 million primarily due to the continued lease-up at 9950 Woodloch Forest as well as lease-up, the expiration of rent abatements, and tenant recoveries at various properties in The Woodlands, partially offset by decreases related to rent abatements at 3 Waterway Square and lower occupancy at One Hughes Landing and various properties in Downtown Columbia.
–Retail NOI increased $2.5 million primarily driven by tenant upgrades and retail sales growth in Downtown Summerlin, as well as increased tenant recoveries in The Woodlands and Ward Village.
–Multi-family NOI increased $1.5 million primarily driven by winter weather-related insurance recoveries and rent growth at our properties in The Woodlands.
–These increases were partially offset by a $1.5 million decrease related to the retail asset dispositions of Lake Woodlands Crossing, Outlet Collection at Riverwalk, and Creekside Village Green in 2022.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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Master Planned Communities |
Segment EBT Segment EBT for MPC Assets is presented below:
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MPC Segment EBT | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Master Planned Community land sales (a) | | | | | | | $ | 59,361 | | | $ | 61,468 | | | $ | (2,107) | |
Other land, rental, and property revenues | | | | | | | 3,643 | | | 4,728 | | | (1,085) | |
Builder price participation (b) | | | | | | | 14,009 | | | 14,496 | | | (487) | |
Total revenues | | | | | | | 77,013 | | | 80,692 | | | (3,679) | |
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Master Planned Communities cost of sales | | | | | | | (22,003) | | | (24,686) | | | 2,683 | |
Operating costs | | | | | | | (12,348) | | | (12,210) | | | (138) | |
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Total operating expenses | | | | | | | (34,351) | | | (36,896) | | | 2,545 | |
Segment operating income (loss) | | | | | | | 42,662 | | | 43,796 | | | (1,134) | |
Depreciation and amortization | | | | | | | (107) | | | (90) | | | (17) | |
Interest income (expense), net | | | | | | | 15,812 | | | 10,422 | | | 5,390 | |
Other income (loss), net | | | | | | | (103) | | | — | | | (103) | |
Equity in earnings (losses) from unconsolidated ventures | | | | | | | 4,108 | | | 5,550 | | | (1,442) | |
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Segment EBT | | | | | | | $ | 62,372 | | | $ | 59,678 | | | $ | 2,694 | |
(a)MPC land sales include deferred revenue from land sales closed in a previous period that met criteria for recognition in the current period and excludes amounts deferred from current period land sales that do not yet meet the recognition criteria.
(b)Builder price participation revenue is earned when a developer that acquired land from HHC develops and sells a home to an end user at a price higher than a predetermined breakpoint. The excess over the breakpoint is shared between HHC and the developer at the time of closing on the sale of the home based on a previously agreed-upon percentage. This revenue fluctuates based upon the number and the prices of homes closed that qualify for builder price participation payments.
The following table presents MPC segment EBT by MPC:
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MPC Segment EBT by MPC | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Bridgeland | | | | | | | $ | 31,104 | | | $ | 15,445 | | | $ | 15,659 | |
Columbia (a) | | | | | | | — | | | 314 | | | (314) | |
Summerlin | | | | | | | 28,390 | | | 44,914 | | | (16,524) | |
Teravalis (b) | | | | | | | (1,009) | | | (26) | | | (983) | |
The Woodlands | | | | | | | 2,295 | | | (4,351) | | | 6,646 | |
The Woodlands Hills | | | | | | | 1,592 | | | 3,382 | | | (1,790) | |
Segment EBT | | | | | | | $ | 62,372 | | | $ | 59,678 | | | $ | 2,694 | |
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Floreo (c) | | | | | | | $ | (952) | | | $ | (145) | | | $ | (807) | |
(a)Columbia MPC land development is complete and the sale of remaining land or development of additional commercial assets will occur as the market dictates. As such, the remaining Columbia land was transferred to the Strategic Developments segment in the first quarter of 2023.
(b)As of March 31, 2023, the Company owns an 88.0% interest and consolidates Teravalis. Teravalis EBT also includes the Company’s 50% interest in Floreo, which is accounted for under the equity method. For additional detail, refer to Note 2 - Investments in Unconsolidated Ventures and Note 3 - Acquisitions and Dispositions in the Condensed Consolidated Financial Statements.
(c)This represents 100% of Floreo EBT and is presented for informational purposes.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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MPC Segment EBT increased $2.7 million compared to the prior-year period primarily due to the following:
Bridgeland EBT increased $15.7 million compared to the prior period.
–MPC sales, net of MPC cost of sales increased $14.1 million primarily due to the following activity:
–increase in commercial acres sold, with 108.8 acres sold at an average price of $247,000 per acre in the first quarter of 2023, compared to 9.8 acres sold at an average price of $262,000 per acre in the first quarter of 2022.
–decrease in residential acres sold partially offset by an increase in price per acre, with 22.5 acres sold at an average price of $542,000 per acre in the first quarter of 2023, compared to 31.3 acres sold at an average price of $495,000 per acre in the first quarter of 2022.
The Woodlands EBT increased $6.6 million compared to the prior period.
–MPC sales, net of MPC cost of sales increased $5.0 million primarily due to the following activity:
–increase in residential acres sold, with 3.5 acres sold in Aria Isle, an exclusive gated community, at an average price of $2.9 million per acre in the first quarter of 2023, compared to no residential land sales in the first quarter of 2022.
Summerlin EBT decreased $16.5 million compared to the prior period.
–MPC sales, net of MPC cost of sales decreased $17.2 million primarily due to the following activity:
–decrease in institutional acres sold, with no institutional land sales in the first quarter of 2023 compared to 16.6 acres sold at an average price of $1.6 million per acre in the first quarter of 2022.
–decrease in custom lots sold and price per lot, with one lot sold at a price of $2.0 million in the first quarter of 2023, compared to two lots sold with an average price of $2.5 million per lot in the first quarter of 2022.
The Woodlands Hills EBT decreased $1.8 million compared to the prior period.
–MPC sales, net of MPC cost of sales decreased $1.3 million primarily due to the following activity:
–decrease in residential acres sold partially offset by an increase in price per acre, with 4.9 acres sold at an average price of $431,000 per acre in the first quarter of 2023, compared to 11.4 acres sold at an average price of $360,000 per acre in the first quarter of 2022.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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MPC Net Contribution MPC Net Contribution is a non-GAAP financial measure derived from EBT, adjusted for certain items as discussed below. Management uses this measure because it captures current period performance through the velocity of sales, as well as current period development expenditures based upon demand at our MPCs, which varies depending upon the stage of the MPCs development lifecycle, and the overall economic environment. MPC Net Contribution is defined as MPC segment EBT, plus MPC cost of sales, Depreciation and amortization, and net collections from Special Improvement District (SID) bonds and Municipal Utility District (MUD) receivables, reduced by MPC development expenditures, land acquisitions, and Equity in earnings from unconsolidated ventures, net of distributions. MPC Net Contribution 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 nor should it be used as a comparison metric with other comparable businesses.
A reconciliation of segment EBT to MPC Net Contribution is presented below:
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MPC Net Contribution | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
MPC Segment EBT | | | | | | | $ | 62,372 | | | $ | 59,678 | | | $ | 2,694 | |
Plus: | | | | | | | | | | | |
Master Planned Communities cost of sales | | | | | | | 22,003 | | | 24,686 | | | (2,683) | |
Depreciation and amortization | | | | | | | 107 | | | 90 | | | 17 | |
MUD and SID bonds collections, net (a) | | | | | | | 1,364 | | | 21,759 | | | (20,395) | |
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Less: | | | | | | | | | | | |
MPC development expenditures | | | | | | | (89,345) | | | (78,883) | | | (10,462) | |
| | | | | | | | | | | |
Equity in (earnings) losses from unconsolidated ventures | | | | | | | (4,108) | | | (5,550) | | | 1,442 | |
MPC Net Contribution | | | | | | | $ | (7,607) | | | $ | 21,780 | | | $ | (29,387) | |
(a)SID collections are shown net of SID transfers to buyers in the respective periods.
MPC Net Contribution decreased $29.4 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to lower MUD and SID bond collections, net and increased MPC development expenditures in anticipation of future MPC land sales as home builders continue to exhaust their inventory of finished homes and cancellation rates experienced by homebuilders across our MPCs have decreased from 39% in the fourth quarter of 2022 to 18% in the first quarter of 2023.
MPC Land Inventory The following table summarizes MPC land inventory activity for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
thousands | Bridgeland | | Columbia (a) | | Summerlin | | Teravalis | | The Woodlands | | The Woodlands Hills | | Total MPC |
Balance December 31, 2022 | $ | 538,924 | | | $ | 16,625 | | | $ | 1,014,511 | | | $ | 544,546 | | | $ | 185,356 | | | $ | 111,564 | | | $ | 2,411,526 | |
| | | | | | | | | | | | | |
Development expenditures (b) | 50,163 | | | — | | | 35,555 | | | 21 | | | 1,387 | | | 2,219 | | | 89,345 | |
MPC Cost of sales | (12,952) | | | — | | | (2,977) | | | — | | | (5,060) | | | (1,014) | | | (22,003) | |
MUD reimbursable costs (c) | (32,738) | | | — | | | — | | | — | | | (486) | | | (2,729) | | | (35,953) | |
Transfer to Strategic Development and Operating Assets Segments | — | | | (16,625) | | | — | | | — | | | — | | | — | | | (16,625) | |
Other | (8,099) | | | — | | | (4,502) | | | — | | | 252 | | | 4,690 | | | (7,659) | |
Balance March 31, 2023 | $ | 535,298 | | | $ | — | | | $ | 1,042,587 | | | $ | 544,567 | | | $ | 181,449 | | | $ | 114,730 | | | $ | 2,418,631 | |
(a)Columbia MPC land development is complete and the sale of remaining land or development of additional commercial assets will occur as the market dictates. As such, the remaining Columbia land was transferred to the Strategic Developments segment in the first quarter of 2023.
(b)Development expenditures are inclusive of capitalized interest and property taxes.
(c)MUD reimbursable costs represent land development expenditures transferred to MUD Receivables.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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The Seaport is part non-stabilized operating asset, part development project, and part operating business. As such, the Seaport has a greater range of possible outcomes than our other projects. The greater uncertainty is largely the result of: (i) seasonality; (ii) potential sponsorship revenue; (iii) potential event revenue; and (iv) business operating risks from various start-up businesses. We operate and own, either directly, through license agreements, or in joint ventures, many of the tenants in the Seaport. As a result, the revenues and expenses of these businesses, as well as the underlying market conditions affecting these types of businesses, will directly impact the NOI of the Seaport. This is in contrast to our other retail properties where we primarily receive lease payments and are not as directly impacted by the operating performance of the underlying businesses. This causes the financial results and eventual stabilized yield of the Seaport to be less predictable than our other operating real estate assets with traditional lease structures. Further, as we open new operating businesses, either owned entirely or in partnership with third parties, we expect to incur pre-opening expenses and operating losses until those businesses stabilize, which likely will not happen until the Seaport reaches its critical mass of offerings. Given the factors and uncertainties listed above, we do not currently provide guidance on our expected NOI yield or stabilization date for the Seaport. As we move closer to opening a critical mass of offerings at the Seaport, we will re-establish goals for yield on costs and stabilization dates when the uncertainties and range of possible outcomes are clearer.
Due to the range of asset types discussed above, we categorize the businesses in the Seaport segment into the following groups: Landlord Operations, Managed Businesses, the Tin Building, and Events and Sponsorships.
Landlord Operations Landlord Operations represent physical real estate in the Historic District and Pier 17 we have developed and own, and is inclusive of our office, retail, and multi-family properties.
Managed Businesses Managed Businesses represent retail and food and beverage businesses in the Historic District and Pier 17 that HHC owns, either wholly or through partnerships with third parties, and operates, including license and management agreements. These businesses include, among others, The Fulton, Mister Dips, Carne Mare, Malibu Farm, and Ssäm Bar. The Fulton and Malibu Farm are managed by Creative Culinary Management Company, LLC (CCMC), a Jean-Georges company, and Mister Dips and Carne Mare are managed by Seaport F&B LLC, an Andrew Carmellini company. These management companies are responsible for employment and supervision of all employees providing services for the food and beverage operations and restaurant as well as day-to-day operations and accounting for food and beverage operations.
The Company owns a 25% interest in Jean-Georges Restaurants, which currently operates over 40 restaurant and hospitality offerings around the world. This ownership interest is reported in accordance with the equity method.
In 2023, we plan to expand our Managed Businesses portfolio with the launch of The Lawn Club, a new concept that will transform 20,000 square feet of the Fulton Market Building into an immersive indoor and outdoor experience that includes an extensive indoor grass area, a stylish clubhouse bar, and a wide variety of lawn games.
Tin Building The Tin Building includes both landlord operations and managed business. The Company owns 100% of the Tin Building, which was completed and placed in service during the third quarter of 2022. The Company leased 100% of the space to the Tin Building by Jean-Georges joint venture, a managed business in which the Company has an equity ownership interest and reports its ownership interest in accordance with the equity method. Based on capital contribution and distribution provisions for the Tin Building by Jean-Georges, HHC currently recognizes all of the economic interest in the venture. The Company recognizes lease payments from the Tin Building by Jean-Georges in Rental revenue and recognizes its share of the offsetting rent expense in Equity earnings. As the Company currently recognizes 100% of operating income or losses from the Tin Building by Jean-Georges, the Tin Building lease has no net impact to Seaport EBT. However, Seaport NOI is impacted by the Rental revenue related to the Tin Building lease payments, as equity earnings are excluded from NOI by definition.
The Tin Building by Jean-Georges opened in late September 2022, with an expanded focus on experiences including in-person dining, retail shopping, and delivery. In the first quarter of 2023, the market place was open seven days per week, and foot traffic and sales were strong despite winter seasonality in the Seaport. As a result, equity losses improved by $6.5 million sequentially from the fourth quarter of 2022, to $9.2 million for the first quarter of 2023. Inefficiencies resulting from increased employee costs, menu refinements, and continued start-up costs contributed to the equity losses, but are expected to subside in the coming quarters. The Tin Building by Jean-Georges is managed by CCMC, a Jean-Georges company.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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Events and Sponsorships Our events and sponsorships businesses include our concert series, event catering, private events, and sponsorships. Food and beverage operations associated with concert concessions and catering are operated under management agreements with CCMC.
250 Water Street In October 2020, we announced our comprehensive proposal for the redevelopment of 250 Water Street, which includes the transformation of this underutilized full-block surface parking lot into a mixed-use development that will include affordable and market-rate apartments, community-oriented spaces, and office space. This project, which includes approximately 547,000 zoning square feet, presents a unique opportunity at the Seaport to redevelop this site into a vibrant mixed-use asset, provide long-term viability to the South Street Seaport Museum, and deliver much-needed affordable housing and economic stimulus to the area. In May 2021, we received approval from the New York City Landmarks Preservation Commission (LPC) on our proposed design for the 250 Water Street site. HHC received final approvals in December 2021 through the New York City Uniform Land Use Review Procedure known as ULURP, which will allow the necessary transfer of development rights to the parking lot site. Also in December 2021, an amendment to the Seaport ground lease was executed giving HHC extension options, at the discretion of HHC, for an additional 48 years from its current expiration in 2072 until 2120. We received a building foundation permit from the New York City Department of Buildings and began initial foundation work and remediation in the second quarter of 2022. Remediation of the site as a volunteer of the New York State Brownfield Cleanup program is expected to be completed in 2023. Various lawsuits have been filed challenging the LPC’s approval of our development project. For additional information regarding these lawsuits, see Note 9 - Commitments and Contingencies.
Segment EBT Segment EBT for Seaport is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
Seaport Segment EBT | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Rental revenue (a) | | | | | | | $ | 5,389 | | | $ | 1,503 | | | $ | 3,886 | |
Other land, rental, and property revenues | | | | | | | 6,508 | | | 7,873 | | | (1,365) | |
Total revenues | | | | | | | 11,897 | | | 9,376 | | | 2,521 | |
| | | | | | | | | | | |
Operating costs | | | | | | | (18,767) | | | (18,502) | | | (265) | |
Rental property real estate taxes | | | | | | | (168) | | | (334) | | | 166 | |
(Provision for) recovery of doubtful accounts | | | | | | | 19 | | | (23) | | | 42 | |
Total operating expenses | | | | | | | (18,916) | | | (18,859) | | | (57) | |
Segment operating income (loss) | | | | | | | (7,019) | | | (9,483) | | | 2,464 | |
Depreciation and amortization | | | | | | | (10,527) | | | (7,823) | | | (2,704) | |
Interest income (expense), net | | | | | | | 1,186 | | | (47) | | | 1,233 | |
Other income (loss), net | | | | | | | 1 | | | 350 | | | (349) | |
Equity in earnings (losses) from unconsolidated ventures (a) | | | | | | | (10,820) | | | (3,711) | | | (7,109) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Segment EBT | | | | | | | $ | (27,179) | | | $ | (20,714) | | | $ | (6,465) | |
(a) Lease payments for the Tin Building included in Rental revenue and offset in Equity losses were $2.8 million for the three months ended March 31, 2023. No rental payments were made during the first quarter of 2022 as the lease had not yet commenced. Refer to the Tin Building discussion above for additional detail.
For the three months ended March 31, 2023:
Seaport segment EBT decreased $6.5 million compared to the prior-year periods primarily due to the following:
–Equity losses increased $7.1 million primarily due to operating losses for the Tin Building by Jean-Georges, which opened in the third quarter of 2022.
–Depreciation expense increased $2.7 million primarily related to the Tin Building, which was completed and placed in service in the third quarter of 2022.
These decreases to EBT were partially offset by the following:
–Total revenues, net of Operating costs increased $2.3 million primarily driven by the opening of the Tin Building, offset by the closure of the Winter Greens concept for the 2023 season.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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Net Operating Income A reconciliation of Seaport segment EBT to Seaport NOI is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
Seaport NOI | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Total Seaport segment EBT | | | | | | | $ | (27,179) | | | $ | (20,714) | | | $ | (6,465) | |
Add back: | | | | | | | | | | | |
Depreciation and amortization | | | | | | | 10,527 | | | 7,823 | | | 2,704 | |
Interest (income) expense, net | | | | | | | (1,186) | | | 47 | | | (1,233) | |
Equity in (earnings) losses from unconsolidated ventures | | | | | | | 10,820 | | | 3,711 | | | 7,109 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Impact of straight-line rent | | | | | | | 586 | | | 1,888 | | | (1,302) | |
Other (income) loss, net | | | | | | | 847 | | | 1,503 | | | (656) | |
Seaport NOI | | | | | | | $ | (5,585) | | | $ | (5,742) | | | $ | 157 | |
The Seaport, including Managed Businesses, Events and Sponsorships, and the Tin Building, is approximately 68% leased. We may continue to incur operating expenses in excess of rental revenues while the remaining available space is in lease-up, as the Seaport continues to move toward its critical mass of offerings.
The table below presents Seaport NOI by category:
| | | | | | | | | | | | | | | | | | | | | | | |
Seaport NOI by Category | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Landlord Operations | | | | | | | $ | (4,290) | | | $ | (2,855) | | | $ | (1,435) | |
Landlord Operations - Multi-family | | | | | | | 28 | | | (132) | | | 160 | |
| | | | | | | | | | | |
Managed Businesses | | | | | | | (2,536) | | | (2,630) | | | 94 | |
Tin Building | | | | | | | 2,415 | | | — | | | 2,415 | |
Events and Sponsorships | | | | | | | (1,202) | | | (125) | | | (1,077) | |
Seaport NOI | | | | | | | $ | (5,585) | | | $ | (5,742) | | | $ | 157 | |
Seaport NOI remained relatively flat compared to the prior-year period, as increased rental revenue related to the Tin Building landlord operations was partially offset by decreased revenues due to the closure of the Winter Greens concept for the 2023 season.
Tin Building in the table above represents NOI from our landlord business and, as defined, excludes the impact of the Company’s equity ownership interest in the Tin Building by Jean-Georges managed business which opened in the third quarter of 2022. Tin Building by Jean-Georges had an NOI loss of $9.2 million for the three months ended March 31, 2023, and a loss of $3.6 million for the three months ended March 31, 2022. Combined NOI related to the Tin Building landlord operations and the Company’s share of NOI related to the Tin Building by Jean-Georges was a loss of $6.7 million for the three months ended March 31, 2023, and a loss of $3.6 million for the three months ended March 31, 2022.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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Our Strategic Developments assets generally require substantial future development to maximize their value. Other than our condominium properties, most of the properties and projects in this segment do not generate revenues. Our expenses relating to these assets are primarily related to costs associated with constructing the assets, selling condominiums, marketing costs associated with our Strategic Developments, carrying costs including, but not limited to, property taxes and insurance, and other ongoing costs relating to maintaining the assets in their current condition. If we decide to redevelop or develop a Strategic Developments asset, we would expect that with the exception of the residential portion of our condominium projects, upon completion of development, the asset would likely be reclassified to Operating Assets when the asset is placed into service and NOI would become a meaningful measure of its operating performance.
Segment EBT Segment EBT for Strategic Developments is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
Strategic Developments Segment EBT | | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Condominium rights and unit sales | | | | | | | $ | 6,087 | | | $ | 19,616 | | | $ | (13,529) | |
| | | | | | | | | | | |
Other land, rental, and property revenues | | | | | | | 353 | | | 840 | | | (487) | |
Total revenues | | | | | | | 6,440 | | | 20,456 | | | (14,016) | |
| | | | | | | | | | | |
Condominium rights and unit cost of sales | | | | | | | (4,536) | | | (14,180) | | | 9,644 | |
Operating costs | | | | | | | (5,852) | | | (3,208) | | | (2,644) | |
Rental property real estate taxes | | | | | | | (671) | | | (689) | | | 18 | |
| | | | | | | | | | | |
Total operating expenses | | | | | | | (11,059) | | | (18,077) | | | 7,018 | |
Segment operating income (loss) | | | | | | | (4,619) | | | 2,379 | | | (6,998) | |
Depreciation and amortization | | | | | | | (943) | | | (1,332) | | | 389 | |
Interest income (expense), net | | | | | | | 2,063 | | | 3,989 | | | (1,926) | |
Other income (loss), net | | | | | | | 94 | | | (485) | | | 579 | |
Equity in earnings (losses) from unconsolidated ventures | | | | | | | 5 | | | 898 | | | (893) | |
Gain (loss) on sale or disposal of real estate and other assets, net | | | | | | | — | | | (9) | | | 9 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Segment EBT | | | | | | | $ | (3,400) | | | $ | 5,440 | | | $ | (8,840) | |
For the three months ended March 31, 2023:
Strategic Developments segment EBT decreased $8.8 million compared to the prior-year period primarily due to the following:
–Condominium sales, net of cost of sales decreased $3.9 million due to the timing and mix of condominium closings. Refer to the Ward Village section below for details.
–Operating costs increased $2.6 million primarily due to increased litigation costs related to the Company’s efforts to recover Waiea defect remediation costs from responsible parties.
–Interest income (expense), net decreased $1.9 million primarily due to the change in value related to derivative instruments associated with 1700 Pavilion and Tanager Echo.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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Ward Village Condominium revenue is recognized when construction of the condominium tower is complete and unit sales close, leading to variability in revenue recognized between periods. We closed on 1 unit at Kō'ula and 4 units at ‘A‘ali‘i during the three months ended March 31, 2023, compared to 24 at ‘A‘ali‘i during the three months ended March 31, 2022, due to lower available inventory at completed towers in both periods as Kō'ula was not completed until the third quarter of 2022, and construction on Victoria Place is not scheduled for completion until 2024.
Completed Condominiums As of March 31, 2023, our six completed towers are 98.5% sold with only 27 units remaining at ‘A‘ali‘i and 14 units remaining at Kō'ula. Ae’o, Ke Kilohana, Anaha, and Waiea are completely sold.
Condominiums Under Construction As of March 31, 2023, 96.8% of the units at our three towers under construction, Victoria Place, The Park Ward Village, and Ulana Ward Village, are under contract. We launched public presales of our seventh condominium project, Victoria Place, in December 2019 and broke ground in February 2021. Victoria Place will be a 40-story, 349-unit condominium project that will consist of one-, two- and three-bedroom residences. As of the second quarter of 2022, Victoria Place was 100.0% presold.
We launched public sales of our eighth condominium project, The Park Ward Village, in July 2021 and broke ground in December 2022. The Park Ward Village will be a 41-story, 545-unit condominium project and will include studio, one-, two- and three-bedroom residences. As of March 31, 2023, we have entered into contracts for 504 units, representing 92.5% of total units.
In 2021, HHC announced plans for our ninth condominium project, Ulana Ward Village and broke ground in January 2023. This mixed-use residence will consist of 696 studio, one-, two- and three-bedroom units. All units are designated as workforce housing units and are being offered to local residents who meet certain maximum income and net worth requirements. As of March 31, 2023, we have entered into contracts for 686 units, representing 98.6% of total units.
Predevelopment Condominiums In September 2022, we launched public sales of our tenth condominium project, Kalae. This will be a 38-story, 329-unit condominium project and will consist of one-, two- and three-bedroom residences. As of March 31, 2023, we have entered into contracts for 262 units, representing 79.6% of total units.
The following provides further detail for Ward Village as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Units Closed | Units Under Contract | Total Units | Total % of Units Closed or Under Contract | Total % of Residential Square Feet Closed or Under Contract | Completion Date |
Completed | | | | | | | |
Waiea | (a) | 177 | | — | | 177 | | 100.0 | % | 100.0 | % | Q4 2016 |
Anaha | (a) | 317 | | — | | 317 | | 100.0 | % | 100.0 | % | Q4 2017 |
Ae’o | (a) | 465 | | — | | 465 | | 100.0 | % | 100.0 | % | Q4 2018 |
Ke Kilohana | (a) | 423 | | — | | 423 | | 100.0 | % | 100.0 | % | Q2 2019 |
‘A‘ali‘i | (a) | 723 | | — | | 750 | | 96.4 | % | 94.6 | % | Q4 2021 |
Kō'ula | (b) | 550 | | 1 | | 565 | | 97.5 | % | 98.1 | % | Q3 2022 |
Under construction | | | | | | | |
Victoria Place | | — | | 349 | | 349 | | 100.0 | % | 100.0 | % | 2024 |
The Park Ward Village | (c) | — | | 504 | | 545 | | 92.5 | % | 93.3 | % | 2025 |
Ulana Ward Village | (d) | — | | 686 | | 696 | | 98.6 | % | 99.3 | % | 2025 |
Predevelopment | | | | | | | |
Kalae | (e) | — | | 262 | | 329 | | 79.6 | % | 82.5 | % | 2026 |
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(a)The retail portions of these projects are 100% leased and have been placed in service.
(b)The retail portion of this project has been placed in service and is 29% leased.
(c)There will be approximately 26,800 square feet of retail space as part of this project.
(d)There will be approximately 32,100 square feet of retail space as part of this project.
(e)There will be approximately 2,000 square feet of retail space as part of this project.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
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| | |
Corporate Income, Expenses, and Other Items |
The following table contains certain corporate-related and other items not related to segment activities and that are not otherwise included within the segment analyses. Variances related to income and expenses included in NOI or EBT are explained within the previous segment discussions. Significant variances for consolidated items not included in NOI or EBT are described below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
thousands | | | | | | | 2023 | | 2022 | | $ Change |
Corporate income | | | | | | | $ | 14 | | | $ | 15 | | | $ | (1) | |
General and administrative | | | | | | | (23,553) | | | (25,891) | | | 2,338 | |
Corporate interest expense, net | | | | | | | (24,195) | | | (21,660) | | | (2,535) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Corporate other income (loss), net | | | | | | | 2,707 | | | 83 | | | 2,624 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Corporate depreciation and amortization | | | | | | | (800) | | | (918) | | | 118 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | | | | | | | (3,571) | | | (2,409) | | | (1,162) | |
Income tax (expense) benefit | | | | | | | 1,278 | | | (701) | | | 1,979 | |
Total Corporate income, expenses and other items | | | | | | | $ | (48,120) | | | $ | (51,481) | | | $ | 3,361 | |
For the three months ended March 31, 2023:
Corporate income, expenses, and other items was favorably impacted compared to the prior-year period by the following:
–Corporate other income increased $2.6 million primarily related to the receipt of insurance proceeds.
–General and administrative expenses decreased $2.3 million primarily attributable to an increase in capitalized costs associated with development activity and allocations to projects in other segments.
–Income tax expense decreased $2.0 million primarily due to a decrease in Income before income taxes. Refer to Note 10 - Income Taxes for additional information.
Corporate income, expenses, and other items was unfavorably impacted compared to the prior-year period by the following:
–Corporate interest expense, net increased $2.5 million primarily due to the change in value related to derivative instruments. Refer to Note 8 - Derivative Instruments and Hedging Activities for additional information on derivative instruments.
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
LIQUIDITY AND CAPITAL RESOURCES | |
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LIQUIDITY AND CAPITAL RESOURCES |
We continue to maintain a strong balance sheet and ensure we maintain the financial flexibility and liquidity necessary to fund future growth. In 2023, we drew $32.1 million on existing mortgages and made repayments on mortgages of $3.2 million. As of March 31, 2023, we have $1.2 billion of undrawn lender commitment available to be drawn for property development, subject to certain restrictions, and $200.0 million of available capacity on the Secured Bridgeland Notes.
| | | | | | | | | | | |
| Three Months Ended March 31, |
thousands | 2023 | | 2022 |
Cash provided by (used in) operating activities | $ | (144,270) | | | $ | (100,760) | |
Cash provided by (used in) investing activities | (94,096) | | | 33,859 | |
Cash provided by (used in) financing activities | 28,601 | | | (96,216) | |
Operating Activities Each segment’s relative contribution to our cash flows from operating activities will likely vary significantly from year to year given the changing nature of our development focus. Other than our condominium properties, most of the properties and projects in our Strategic Developments segment do not generate revenues, and the cash flows and earnings may vary. Condominium deposits received from contracted units offset by other various cash uses related to condominium development and sales activities are a substantial portion of our operating activities in 2023. Operating cash continued to be utilized in 2023 to fund ongoing development expenditures in our Strategic Developments, Seaport, and MPC segments, consistent with prior years.
The cash flows and earnings from the MPC business may fluctuate more than from our operating assets because the MPC business generates revenues from land sales rather than recurring contractual revenues from operating leases. MPC land sales are a substantial portion of our cash flows from operating activities and are partially offset by development costs associated with the land sales business and acquisitions of land that is intended to ultimately be developed and sold.
Net cash used in operating activities was $144.3 million for the three months ended March 31, 2023, and net cash used in operating activities was $100.8 million for the three months ended March 31, 2022. The $43.5 million net increase in cash used in operating activities was primarily due to a $35.3 million increase in net cash used associated with our condominiums and an $18.0 million decrease in MUD receivable collections.
Investing Activities Net cash used in investing activities was $94.1 million for the three months ended March 31, 2023, and net cash provided by investing activities was $33.9 million for the three months ended March 31, 2022. The $128.0 million increase in net cash used in investing activities was primarily due to a $202.9 million decrease in distributions from unconsolidated ventures, primarily related to distributions received from the sale of the Company’s ownership interest in 110 North Wacker in the first quarter of 2022, which resulted in a net increase to the Company’s liquidity of $168.9 million after the payment of transaction costs and distributions to our partner. This increase was partially offset by a decrease in cash used related to investments in unconsolidated ventures of $57.8 million, primarily attributable to the Company’s investment in Jean-Georges Restaurants in the first quarter of 2022, and an $18.6 million decrease in property development and redevelopment expenditures.
Financing Activities Net cash provided by financing activities was $28.6 million for three months ended March 31, 2023, and cash used in financing activities was $96.2 million for three months ended March 31, 2022. The increase in cash provided by financing activities of $124.8 million was primarily due to repurchases of common shares of $179.3 million in the first quarter of 2022 with no similar activity in 2023, and a decrease in principal payments on mortgages, notes, and loans payable of $88.7 million. This increase was partially offset by a decrease in proceeds from mortgages, notes, and loans payable of $143.0 million.
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Short- and Long-Term Liquidity |
Short-Term Liquidity In the next 12 months, we expect our primary sources of cash to include cash flow from MPC land sales, cash generated from our operating assets, first mortgage financings secured by our assets, and deposits from condominium sales (which are restricted to funding construction of the related developments). We expect our primary uses of cash to include condominium and other strategic pre-development and development costs, MPC land development costs, and debt principal payments and debt service costs. We believe that our sources of cash, including existing cash on hand, will provide sufficient liquidity to meet our existing obligations and anticipated ordinary course operating expenses for at least the next 12 months.
Long-Term Liquidity The development and redevelopment opportunities in Strategic Developments, Seaport, and Operating Assets are capital intensive and will require significant additional funding, if and when pursued. Any additional funding beyond those sources listed above would be raised with a mix of construction, bridge, and long-term financings, by entering into joint venture arrangements, as well as future equity raises.
We cannot provide assurance that financing arrangements for our properties will be on favorable terms or occur at all, which could have a negative impact on our liquidity and capital resources. In addition, we typically must provide completion guarantees to lenders in connection with their financing for our projects. We also provided completion guarantees to the City of New York for the redevelopment of the Tin Building, as well as the Hawai‘i Community Development Authority for reserve condominium units at Ward Village. The Company received the necessary approvals from the New York City Economic Development Corporation to relinquish the Tin Building guarantee in early 2023.
Contractual Cash Obligations and Commitments The following table aggregates our contractual cash obligations and commitments as of March 31, 2023:
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thousands | Remaining in 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total |
Mortgages, notes, and loans payable | $ | 147,382 | | $ | 78,322 | | $ | 416,664 | | $ | 559,816 | | $ | 298,587 | | $ | 3,330,273 | | $ | 4,831,044 | |
Interest payments (a) | 193,537 | | 234,400 | | 213,274 | | 187,948 | | 155,557 | | 388,069 | | 1,372,785 | |
Ground lease commitments (b) | 2,179 | | 2,849 | | 2,903 | | 2,959 | | 3,016 | | 241,699 | | 255,605 | |
Total | $ | 343,098 | | $ | 315,571 | | $ | 632,841 | | $ | 750,723 | | $ | 457,160 | | $ | 3,960,041 | | $ | 6,459,434 | |
(a)Interest is based on the borrowings that are presently outstanding and current floating interest rates.
(b)Primarily relates to a $247.9 million Seaport ground lease which has an initial expiration date of December 31, 2072, and is subject to extension options through December 31, 2120. Future cash payments are not inclusive of extension options. The remaining $7.7 million in ground lease commitments relates to Kewalo Basin Harbor.
Debt As of March 31, 2023, the Company had $4.8 billion of outstanding debt, $1.2 billion of undrawn lender commitment available to be drawn for property development, subject to certain restrictions, and $200 million of available capacity on the Secured Bridgeland Notes. Refer to Note 6 - Mortgages, Notes, and Loans Payable, Net in the Condensed Consolidated Financial Statements. Our proportionate share of the debt of our unconsolidated ventures totaled $128.8 million as of March 31, 2023. All of this indebtedness is without recourse to the Company, with the exception of the collateral maintenance obligation for Floreo. See Note 9 - Commitments and Contingencies for additional information related to the Company’s collateral maintenance obligation.
Debt Compliance As of March 31, 2023, the Company was in compliance with all debt covenants with the exception of for four property-level debt instruments. As a result, the excess net cash flow after debt service from the underlying properties became restricted. While the restricted cash could not be used for general corporate purposes, it could be used to fund operations of the underlying assets and did not have a material impact on the Company’s liquidity or its ability to operate these assets.
Net Debt The following table summarizes our net debt on a segment basis as of March 31, 2023. Net debt is defined as Mortgages, notes, and loans payable, net, including our ownership share of debt of our unconsolidated ventures, reduced by liquidity sources to satisfy such obligations such as our ownership share of Cash and cash equivalents and SID, MUD, and TIF receivables. Although net debt is a non-GAAP financial measure, we believe that such information is useful to our investors and other users of our financial statements as net debt and its components are important indicators of our overall liquidity, capital structure, and financial position. However, it should not be used as an alternative to our debt calculated in accordance with GAAP.
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thousands | Operating Assets | Master Planned Communities | Seaport | Strategic Developments | Segment Totals | Non-Segment Amounts | March 31, 2023 |
Mortgages, notes, and loans payable, net | $ | 2,234,017 | | $ | 329,019 | | $ | 99,833 | | $ | 88,051 | | $ | 2,750,920 | | $ | 2,027,186 | | $ | 4,778,106 | |
Mortgages, notes, and loans payable of unconsolidated ventures | 90,374 | | 38,331 | | 99 | | — | | 128,804 | | — | | 128,804 | |
Less: | | | | | | | |
Cash and cash equivalents | (88,797) | | (85,139) | | (3,230) | | (2,003) | | (179,169) | | (238,577) | | (417,746) | |
Cash and cash equivalents of unconsolidated ventures | (1,258) | | (43,756) | | (9,289) | | (7,601) | | (61,904) | | — | | (61,904) | |
Special Improvement District receivables | — | | (63,363) | | — | | — | | (63,363) | | — | | (63,363) | |
Municipal Utility District receivables, net | — | | (508,284) | | — | | (2,794) | | (511,078) | | — | | (511,078) | |
TIF receivable | — | | — | | — | | (1,469) | | (1,469) | | — | | (1,469) | |
Net Debt | $ | 2,234,336 | | $ | (333,192) | | $ | 87,413 | | $ | 74,184 | | $ | 2,062,741 | | $ | 1,788,609 | | $ | 3,851,350 | |
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MARKET RISK AND CONTROLS AND PROCEDURES | |