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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2022
or
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 001-34856
THE HOWARD HUGHES CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 36-4673192 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
9950 Woodloch Forest Drive, Suite 1100, The Woodlands, Texas 77380
(Address of principal executive offices, including zip code)
(281) 719-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of each exchange on which registered: |
Common stock, par value $0.01 per share | | HHC | | New York Stock Exchange |
The number of shares of common stock, $0.01 par value, outstanding as of May 3, 2022, was 51,352,222.
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TABLE OF CONTENTS | Page |
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Item 1. | Financial Statements | |
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Item 2. | | |
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Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | | | | | | | | | | | |
thousands except par values and share amounts | March 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Investment in real estate: | | | |
Master Planned Communities assets | $ | 2,313,497 | | | $ | 2,282,768 | |
Buildings and equipment | 3,990,267 | | | 3,962,441 | |
Less: accumulated depreciation | (785,831) | | | (743,311) | |
Land | 322,439 | | | 322,439 | |
Developments | 1,354,619 | | | 1,208,907 | |
Net property and equipment | 7,194,991 | | | 7,033,244 | |
Investment in real estate and other affiliates | 246,362 | | | 369,949 | |
Net investment in real estate | 7,441,353 | | | 7,403,193 | |
Net investment in lease receivable | 2,901 | | | 2,913 | |
Cash and cash equivalents | 688,037 | | | 843,212 | |
Restricted cash | 365,483 | | | 373,425 | |
Accounts receivable, net | 86,810 | | | 86,388 | |
Municipal Utility District receivables, net | 409,390 | | | 387,199 | |
Notes receivable, net | 7,192 | | | 7,561 | |
Deferred expenses, net | 120,559 | | | 119,825 | |
Operating lease right-of-use assets, net | 56,175 | | | 57,022 | |
Prepaid expenses and other assets, net | 289,787 | | | 300,956 | |
Total assets | $ | 9,467,687 | | | $ | 9,581,694 | |
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LIABILITIES | | | |
Mortgages, notes and loans payable, net | $ | 4,674,950 | | | $ | 4,591,157 | |
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Operating lease obligations | 69,157 | | | 69,363 | |
Deferred tax liabilities | 203,429 | | | 204,837 | |
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Accounts payable and accrued expenses | 966,753 | | | 983,167 | |
Total liabilities | 5,914,289 | | | 5,848,524 | |
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Commitments and Contingencies (see Note 9) | | | |
Redeemable noncontrolling interest | — | | | 22,500 | |
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EQUITY | | | |
Preferred stock: $0.01 par value; 50,000,000 shares authorized, none issued | — | | | — | |
Common stock: $0.01 par value; 150,000,000 shares authorized, 56,300,324 issued and 52,432,109 outstanding as of March 31, 2022, 56,173,276 shares issued and 54,065,661 outstanding as of December 31, 2021 | 564 | | | 563 | |
Additional paid-in capital | 3,964,412 | | | 3,960,418 | |
Accumulated deficit | (14,334) | | | (16,456) | |
Accumulated other comprehensive income (loss) | (6,103) | | | (14,457) | |
Treasury stock, at cost, 3,868,215 shares as of March 31, 2022, and 2,107,615 shares as of December 31, 2021 | (391,655) | | | (220,073) | |
Total stockholders' equity | 3,552,884 | | | 3,709,995 | |
Noncontrolling interests | 514 | | | 675 | |
Total equity | 3,553,398 | | | 3,710,670 | |
Total liabilities and equity | $ | 9,467,687 | | | $ | 9,581,694 | |
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See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| | | Three Months Ended March 31, |
thousands except per share amounts | | | | | 2022 | | 2021 |
REVENUES | | | | | | | |
Condominium rights and unit sales | | | | | $ | 19,616 | | | $ | 37,167 | |
Master Planned Communities land sales | | | | | 61,468 | | | 37,477 | |
Rental revenue | | | | | 95,109 | | | 85,899 | |
Other land, rental and property revenues | | | | | 19,537 | | | 23,243 | |
Builder price participation | | | | | 14,496 | | | 6,794 | |
Total revenues | | | | | 210,226 | | | 190,580 | |
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EXPENSES | | | | | | | |
Condominium rights and unit cost of sales | | | | | 14,180 | | | 54,968 | |
Master Planned Communities cost of sales | | | | | 24,686 | | | 15,651 | |
Operating costs | | | | | 65,555 | | | 58,598 | |
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Rental property real estate taxes | | | | | 15,182 | | | 13,991 | |
Provision for (recovery of) doubtful accounts | | | | | 844 | | | (578) | |
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General and administrative | | | | | 25,891 | | | 21,766 | |
Depreciation and amortization | | | | | 48,593 | | | 49,308 | |
Other | | | | | 2,409 | | | 1,644 | |
Total expenses | | | | | 197,340 | | | 215,348 | |
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OTHER | | | | | | | |
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Gain (loss) on sale or disposal of real estate and other assets, net | | | | | (9) | | | — | |
Other income (loss), net | | | | | (221) | | | (10,308) | |
Total other | | | | | (230) | | | (10,308) | |
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Operating income (loss) | | | | | 12,656 | | | (35,076) | |
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Interest income | | | | | 24 | | | 41 | |
Interest expense | | | | | (27,438) | | | (34,210) | |
Gain (loss) on extinguishment of debt | | | | | (282) | | | (35,915) | |
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Equity in earnings (losses) from real estate and other affiliates | | | | | 17,912 | | | 15,796 | |
Income (loss) before income taxes | | | | | 2,872 | | | (89,364) | |
Income tax expense (benefit) | | | | | 701 | | | (21,205) | |
Net income (loss) | | | | | 2,171 | | | (68,159) | |
Net (income) loss attributable to noncontrolling interests | | | | | (49) | | | 1,565 | |
Net income (loss) attributable to common stockholders | | | | | $ | 2,122 | | | $ | (66,594) | |
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Basic income (loss) per share | | | | | $ | 0.04 | | | $ | (1.20) | |
Diluted income (loss) per share | | | | | $ | 0.04 | | | $ | (1.20) | |
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
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| Three Months Ended March 31, | | |
thousands | 2022 | | 2021 | | | | |
Net income (loss) | $ | 2,171 | | | $ | (68,159) | | | | | |
Other comprehensive income (loss): | | | | | | | |
Interest rate swaps (a) | 15,077 | | | 6,356 | | | | | |
| | | | | | | |
| | | | | | | |
Reclassification of the Company's share of previously deferred derivative gains to net income (b) | (6,723) | | | — | | | | | |
Share of investee’s other comprehensive income (c) | — | | | 1,217 | | | | | |
| | | | | | | |
Other comprehensive income (loss) | 8,354 | | | 7,573 | | | | | |
Comprehensive income (loss) | 10,525 | | | (60,586) | | | | | |
Comprehensive (income) loss attributable to noncontrolling interests | (49) | | | 1,565 | | | | | |
Comprehensive income (loss) attributable to common stockholders | $ | 10,476 | | | $ | (59,021) | | | | | |
(a)Amounts are shown net of tax expense of $4.5 million for the three months ended March 31, 2022, and $1.8 million for the three months ended March 31, 2021.
(b)In March 2022, the Company completed the sale of its ownership interest in 110 North Wacker and released a net of $6.7 million from Accumulated other comprehensive income (loss), representing the Company’s $8.6 million share of previously deferred gains associated with the Venture’s derivative instruments net of tax expense of $1.9 million. See Note 2 - Investment in Real Estate and Other Affiliates for additional information.
(c)Amount is shown net of tax expense of $0.3 million for the three months ended March 31, 2021.
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | Additional | | | | Other | | | | | | Total | | | | |
| Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
thousands except shares | Shares | | Amount | | Capital | | Deficit | | Income (Loss) | | Shares | | Amount | | Equity | | Interests (a) | | Equity |
Balance, December 31, 2021 | 56,173,276 | | | $ | 563 | | | $ | 3,960,418 | | | $ | (16,456) | | | $ | (14,457) | | | (2,107,615) | | | $ | (220,073) | | | $ | 3,709,995 | | | $ | 675 | | | $ | 3,710,670 | |
Net income (loss) | — | | | — | | | — | | | 2,122 | | | — | | | — | | | — | | | 2,122 | | | 49 | | | 2,171 | |
Interest rate swaps, net of tax expense (benefit) of $4,503 | — | | | — | | | — | | | — | | | 15,077 | | | — | | | — | | | 15,077 | | | — | | | 15,077 | |
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| | | | | | | | | | | | | | | | | | | |
Deconsolidation of Associations of Unit Owners | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (210) | | | (210) | |
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| | | | | | | | | | | | | | | | | | | |
Reclassification of the Company’s share of previously deferred derivative gains, net of tax expense of $1,912 (b) | — | | | — | | | — | | | — | | | (6,723) | | | — | | | — | | | (6,723) | | | — | | | (6,723) | |
| | | | | | | | | | | | | | | | | | | |
Repurchase of common shares | — | | | — | | | — | | | — | | | — | | | (1,750,668) | | | (170,670) | | | (170,670) | | | — | | | (170,670) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Stock plan activity | 127,048 | | | 1 | | | 3,994 | | | — | | | — | | | (9,932) | | | (912) | | | 3,083 | | | — | | | 3,083 | |
Balance, March 31, 2022 | 56,300,324 | | | $ | 564 | | | $ | 3,964,412 | | | $ | (14,334) | | | $ | (6,103) | | | (3,868,215) | | | $ | (391,655) | | | $ | 3,552,884 | | | $ | 514 | | | $ | 3,553,398 | |
| | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | 56,042,814 | | | $ | 562 | | | $ | 3,947,278 | | | $ | (72,556) | | | $ | (38,590) | | | (1,070,558) | | | $ | (122,091) | | | $ | 3,714,603 | | | $ | 420 | | | $ | 3,715,023 | |
Net income (loss) excluding income (loss) of $(1,570) attributable to redeemable noncontrolling interest (a) | — | | | — | | | — | | | (66,594) | | | — | | | — | | | — | | | (66,594) | | | 5 | | | (66,589) | |
Interest rate swaps, net of tax expense (benefit) of $1,790 | — | | | — | | | — | | | — | | | 6,356 | | | — | | | — | | | 6,356 | | | — | | | 6,356 | |
Share of investee's other comprehensive income, net of tax expense (benefit) of $346 | — | | | — | | | — | | | — | | | 1,217 | | | — | | | — | | | 1,217 | | | — | | | 1,217 | |
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| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Issuance of common shares | — | | | — | | | (5) | | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | |
Stock plan activity | 135,419 | | | 1 | | | 5,264 | | | — | | | — | | | — | | | — | | | 5,265 | | | — | | | 5,265 | |
Balance, March 31, 2021 | 56,178,233 | | | $ | 563 | | | $ | 3,952,537 | | | $ | (139,150) | | | $ | (31,017) | | | (1,070,558) | | | $ | (122,091) | | | $ | 3,660,842 | | | $ | 425 | | | $ | 3,661,267 | |
(a)Excludes redeemable noncontrolling interest. See Note 2 - Investment in Real Estate and Other Affiliates.
(b)In March 2022, the Company completed the sale of its ownership interest in 110 North Wacker and released a net of $6.7 million from Accumulated other comprehensive income (loss), representing the Company’s $8.6 million share of previously deferred gains associated with the Venture’s derivative instruments net of tax expense of $1.9 million. See Note 2 - Investment in Real Estate and Other Affiliates for additional information.
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | | | | | | | | | | | |
| Three Months Ended March 31, |
thousands | 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income (loss) | $ | 2,171 | | | $ | (68,159) | |
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | | | |
Depreciation | 43,665 | | | 44,844 | |
Amortization | 4,149 | | | 4,097 | |
Amortization of deferred financing costs | 2,663 | | | 2,453 | |
Amortization of intangibles other than in-place leases | 819 | | | 386 | |
Straight-line rent amortization | (1,270) | | | (3,981) | |
Deferred income taxes | (4,000) | | | (21,619) | |
Restricted stock and stock option amortization | 3,837 | | | 2,533 | |
| | | |
Net gain on sale of equity method investments | (5,016) | | | — | |
| | | |
| | | |
| | | |
(Gain) loss on extinguishment of debt | 282 | | | 35,915 | |
Impairment charges | — | | | 717 | |
| | | |
| | | |
Equity in (earnings) losses from real estate and other affiliates, net of distributions and impairment charges | (6,108) | | | (10,633) | |
Provision for doubtful accounts | 515 | | | 432 | |
| | | |
Master Planned Community development expenditures | (78,883) | | | (52,980) | |
Master Planned Community cost of sales | 24,686 | | | 15,652 | |
Condominium development expenditures | (76,350) | | | (81,206) | |
Condominium rights and units cost of sales | 13,603 | | | 53,017 | |
Net Changes: | | | |
Accounts and notes receivable | 11,996 | | | (3,578) | |
Prepaid expenses and other assets | (5,931) | | | 30,739 | |
| | | |
Condominium deposits received | 37,056 | | | 15,528 | |
Deferred expenses | (3,800) | | | (1,134) | |
Accounts payable and accrued expenses | (64,844) | | | (47,765) | |
| | | |
| | | |
Cash provided by (used in) operating activities | (100,760) | | | (84,742) | |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Property and equipment expenditures | (281) | | | (400) | |
Operating property improvements | (8,186) | | | (11,829) | |
Property development and redevelopment | (93,219) | | | (45,188) | |
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| | | |
| | | |
| | | |
| | | |
Distributions from real estate and other affiliates | 205,099 | | | 985 | |
Investments in real estate and other affiliates, net | (69,554) | | | (553) | |
| | | |
Cash provided by (used in) investing activities | 33,859 | | | (56,985) | |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Proceeds from mortgages, notes and loans payable | 175,075 | | | 1,402,869 | |
Principal payments on mortgages, notes and loans payable | (91,939) | | | (1,283,512) | |
| | | |
Repurchases of common shares | (179,293) | | | — | |
Debt extinguishment costs | — | | | (29,655) | |
Special Improvement District bond funds released from (held in) escrow | 3,792 | | | 2,264 | |
Deferred financing costs and bond issuance costs, net | (2,030) | | | (20,253) | |
Taxes paid on stock options exercised and restricted stock vested | (1,996) | | | (2,134) | |
| | | |
Stock options exercised | 175 | | | 3,479 | |
| | | |
Cash provided by (used in) financing activities | (96,216) | | | 73,058 | |
| | | |
Net change in cash, cash equivalents and restricted cash | (163,117) | | | (68,669) | |
Cash, cash equivalents and restricted cash at beginning of period | 1,216,637 | | | 1,242,997 | |
Cash, cash equivalents and restricted cash at end of period | $ | 1,053,520 | | | $ | 1,174,328 | |
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, |
thousands | 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Interest paid | $ | 67,871 | | | $ | 64,563 | |
Interest capitalized | 19,553 | | | 17,138 | |
Income taxes paid (refunded), net | 526 | | | — | |
| | | |
NON-CASH TRANSACTIONS | | | |
| | | |
| | | |
Reclassification of Redeemable noncontrolling interest to Accounts payable and accrued expenses upon sale of 110 North Wacker | 22,500 | | | — | |
Accrued property improvements, developments and redevelopments | 7,693 | | | 8,467 | |
| | | |
| | | |
Accrued repurchase of common shares | 6,868 | | | — | |
| | | |
| | | |
Capitalized stock compensation | 1,971 | | | 517 | |
See Notes to Condensed Consolidated Financial Statements.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
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| | |
1. Summary of Significant Accounting Policies |
General The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), with intercompany transactions between consolidated subsidiaries eliminated. In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the Securities and Exchange Commission (the SEC), these Condensed Consolidated Financial Statements do not include all of the information and disclosures required by GAAP for complete financial statements. Readers of this quarterly report on Form 10-Q (Quarterly Report) should refer to The Howard Hughes Corporation (HHC or the Company) audited Consolidated Financial Statements, which are included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 28, 2022 (the Annual Report). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and equity for the interim periods have been included. The results for the three months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, and future fiscal years.
Certain amounts in the 2021 Condensed Consolidated Income Statement have been reclassified to conform to the current presentation. Specifically, the Company reclassified Demolition costs and Development-related marketing costs to Other.
Management has evaluated for disclosure or recognition all material events occurring subsequent to the date of the Condensed Consolidated Financial Statements up to the date and time this Quarterly Report was filed.
Restricted Cash Restricted cash reflects amounts segregated in escrow accounts in the name of the Company, primarily related to escrowed condominium deposits by buyers and other amounts related to taxes, insurance and legally restricted security deposits and leasing costs.
COVID-19 Pandemic The outbreak of COVID-19 resulted in a negative impact on the Company’s financial performance in 2020, particularly in the Operating Asset and Seaport segments. However, the Company experienced significant performance improvement during the second half of 2020 that continued through 2021, with full-year 2021 segment results equaling or exceeding pre-pandemic levels for the majority of the Company’s segments.
Accounts Receivable, net On a quarterly basis, management reviews tenant rents, tenant recoveries and straight-line rent assets for collectability. As required under Accounting Standards Codification (ASC) 842 - Leases, this analysis includes a review of past due accounts and considers factors such as the credit quality of tenants, current economic conditions and changes in customer payment trends. When full collection of a lease receivable or future lease payment is deemed to be not probable, a reserve for the receivable balance is charged against rental revenue and future rental revenue is recognized on a cash basis. Due to the continued impacts of COVID-19 on the collectability of tenant receivables, the Company determined that full collection of outstanding tenant rents and recoveries was not probable for some retail tenants. In addition, the Company determined that a reserve for estimated losses under ASC 450 - Contingencies is required as the amount is probable and can be reasonably estimated.
The following table represents the components of Accounts Receivable, net of amounts considered uncollectible, in the accompanying Condensed Consolidated Balance Sheets:
| | | | | | | | | | | |
thousands | March 31, 2022 | | December 31, 2021 |
Straight-line rent receivables | $ | 75,212 | | | $ | 72,461 | |
Tenant receivables | 6,751 | | | 8,647 | |
Other receivables | 4,847 | | | 5,280 | |
Accounts receivable, net (a) | $ | 86,810 | | | $ | 86,388 | |
(a)As of March 31, 2022, the total reserve balance for amounts considered uncollectible was $15.9 million, comprised of $10.1 million related to ASC 842 and $5.8 million related to ASC 450. As of December 31, 2021, the total reserve balance was $16.5 million, comprised of $11.5 million related to ASC 842 and $5.0 million related to ASC 450.
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FINANCIAL STATEMENTS FOOTNOTES |
|
The following table summarizes the impacts of the ASC 842 and ASC 450 reserves in the accompanying Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
thousands | Income Statement Location | | | | | 2022 | | 2021 |
ASC 842 reserve | Rental revenue | | | | | $ | (234) | | | $ | 1,031 | |
ASC 450 reserve | Provision for (recovery of) doubtful accounts | | | | | 844 | | | (578) | |
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Total impact | | | | | | $ | 610 | | | $ | 453 | |
Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates and assumptions include, but are not limited to, capitalization of development costs, provision for income taxes, recoverable amounts of receivables and deferred tax assets, initial valuations of tangible and intangible assets acquired and the related useful lives of assets upon which depreciation and amortization is based. Estimates and assumptions have also been made with respect to future revenues and costs, debt and options granted. In particular, Master Planned Communities (MPC) cost of sales estimates are highly judgmental, covering significant future time horizons and are sensitive to cost escalation, sales price escalation and lot absorption, which are affected by expectations about future market or economic conditions. Actual results could differ from these and other estimates. In addition, these estimates may change in the near term due to the continued demands and constraints on the Company’s supply chain resulting from the COVID-19 pandemic.
Noncontrolling Interests As of March 31, 2022, and December 31, 2021, noncontrolling interests primarily related to the Ward Village Homeowners’ Associations (HOAs). All revenues and expenses related to the HOAs are attributable to noncontrolling interests and do not impact net income attributable to common stockholders. For additional information on redeemable noncontrolling interest refer to Note 2 - Investment in Real Estate and Other Affiliates.
Financial Instruments - Credit Losses The Company is exposed to credit losses through the sale of goods and services to the Company’s customers. Receivables held by the Company primarily relate to short-term trade receivables and financing receivables, which include Municipal Utility District (MUD) receivables, Special Improvement District (SID) bonds, TIF receivables, net investments in lease receivables, and notes receivable. The Company assesses its exposure to credit loss based on historical collection experience and future expectations by portfolio segment. Historical collection experience is evaluated on a quarterly basis by the Company.
The amortized cost basis of financing receivables, consisting primarily of MUD receivables, totaled $503.1 million as of March 31, 2022, including accrued interest of $24.5 million. There has been no material activity in the allowance for credit losses for financing receivables for the three months ended March 31, 2022.
Financing receivables are considered to be past due once they are 30 days contractually past due under the terms of the agreement. The Company does not have significant receivables that are past due or on nonaccrual status. There have been no significant write-offs or recoveries of amounts previously written off during the current period for financing receivables.
Recently Issued Accounting Standards The following is a summary of recently issued accounting pronouncements which relate to the Company’s business.
ASU 2020-04, Reference Rate Reform The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform when certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has applied certain optional expedients that are retained through the end of the hedging relationship. The amendments in this update are effective as of March 12, 2020, through December 31, 2022. The guidance in Accounting Standards update (ASU) 2020-04 is optional and may be elected over time as reference rate reform activities occur. In addition to certain hedge accounting expedients elected during the first quarter of 2020, the Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
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FINANCIAL STATEMENTS FOOTNOTES |
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2. Investment in Real Estate and Other Affiliates |
As of March 31, 2022, the Company does not consolidate the investments below as it does not have the power to direct the activities that most significantly impact the economic performance of the ventures and does not have controlling interests in these investments. As a result, the Company reports its interests in accordance with the equity method. As of March 31, 2022, these ventures had mortgage financing totaling $204.0 million, with the Company’s proportionate share of this debt totaling $100.5 million. All of this indebtedness is without recourse to the Company.
Investments in real estate and other affiliates are reported as follows:
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| Economic/Legal Ownership | | Carrying Value | | | | | | Share of Earnings/Dividends |
| March 31, | December 31, | | March 31, | December 31, | | | | Three Months Ended March 31, |
thousands except percentages | 2022 | 2021 | | 2022 | 2021 | | | | | | 2022 | | 2021 |
Equity Method Investments | | | | | | | | | | | | | |
Operating Assets: | | | | | | | | | | | | | |
110 North Wacker (a) | — | % | see below | | $ | — | | $ | 194,999 | | | | | | | $ | 5,016 | | | $ | (15,705) | |
The Metropolitan Downtown Columbia (b) | 50 | % | 50 | % | | — | | — | | | | | | | 2,274 | | | (54) | |
Stewart Title of Montgomery County, TX | 50 | % | 50 | % | | 3,938 | | 4,185 | | | | | | | 253 | | | 251 | |
Woodlands Sarofim #1 | 20 | % | 20 | % | | 3,052 | | 3,215 | | | | | | | 9 | | | 31 | |
m.flats/TEN.M (c) | 50 | % | 50 | % | | — | | — | | | | | | | 2,985 | | | 318 | |
Master Planned Communities: | | | | | | | | | | | | | |
The Summit (d) | see below | see below | | 47,158 | | 41,536 | | | | | | | 5,622 | | | 27,650 | |
Trillium (d) | 50 | % | 50 | % | | 58,920 | | 59,080 | | | | | | | (72) | | | — | |
Seaport | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The Lawn Club (d) | see below | see below | | 2,969 | | 447 | | | | | | | — | | | — | |
Ssäm Bar (Momofuku) (d) | see below | see below | | 6,033 | | 5,852 | | | | | | | (102) | | | (352) | |
The Tin Building by Jean-Georges (d) | see below | see below | | 7,846 | | — | | | | | | | (3,609) | | | — | |
Jean-Georges Restaurants (e) | 25 | % | — | % | | 45,400 | | — | | | | | | | — | | | — | |
Strategic Developments: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
HHMK Development | 50 | % | 50 | % | | 10 | | 10 | | | | | | | — | | | — | |
KR Holdings | 50 | % | 50 | % | | 502 | | 127 | | | | | | | 814 | | | (98) | |
| | | | | | | | | | | | | |
West End Alexandria | see below | see below | | 56,630 | | 56,546 | | | | | | | 84 | | | — | |
| | | | | | | | | | | | | |
| | | | 232,458 | | 365,997 | | | | | | | 13,274 | | | 12,041 | |
Other equity investments (f) | | | | 13,904 | | 3,952 | | | | | | | 4,638 | | | 3,755 | |
Investment in real estate and other affiliates | | | | $ | 246,362 | | $ | 369,949 | | | | | | | $ | 17,912 | | | $ | 15,796 | |
(a)During the first quarter of 2022, the Company completed the sale of its ownership interest in 110 North Wacker. Refer to discussion below for additional information.
(b)The Metropolitan Downtown Columbia was in a deficit position of $9.4 million at March 31, 2022, and $11.3 million at December 31, 2021, due to distributions from operating cash flows in excess of basis. These deficit balances are presented in Accounts payable and accrued expenses at March 31, 2022, and December 31, 2021.
(c)M.flats/TEN.M was in a deficit position of $4.0 million at March 31, 2022, and $6.0 million at December 31, 2021, due to distributions from operating cash flows in excess of basis. These deficit balances are presented in Accounts payable and accrued expenses at March 31, 2022, and December 31, 2021.
(d)Refer to the discussion below for details on the ownership structure.
(e)On March 1, 2022, the Company purchased a 25% interest in Jean-Georges Restaurants. Refer to discussion below for additional information.
(f)Other equity investments represent equity investments not accounted for under the equity method. The Company elected the measurement alternative as these investments do not have readily determinable fair values. There were no impairments, or upward or downward adjustments to the carrying amounts of these securities either during current year or cumulatively. As of March 31, 2022, Other equity investments includes $10.0 million of warrants, which represents cash paid by HHC for the option to acquire additional ownership interest in Jean-Georges Restaurants. Refer to discussion below for additional details.
Significant activity for Investment in real estate and other affiliates and the related accounting considerations are described below.
110 North Wacker The Company formed a partnership with a local developer (the Partnership) during the second quarter of 2017. During the second quarter of 2018, the Partnership executed an agreement with USAA related to 110 North Wacker (collectively, the local developer and USAA are the Partners) to construct and operate the building at 110 North Wacker (the Venture).
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FINANCIAL STATEMENTS FOOTNOTES |
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The Company concluded that the Venture was within the scope of the variable interest model (VIE) model, and that it was the primary beneficiary of the Venture during the development phase of the project, and thus consolidated the venture; however, upon the building’s completion in the third quarter of 2020, the Company concluded it was no longer the primary beneficiary, resulting in the deconsolidation of the Venture. As of September 30, 2020, the Company derecognized all assets, liabilities and noncontrolling interest related to the Venture, recognized an equity method investment based on the fair value of its interest in 110 North Wacker and recognized a gain on deconsolidation of $267.5 million.
The Partnership was determined to be a VIE, and as the Company had the power to direct the activities of the Partnership that most significantly impact its economic performance, the Company was considered the primary beneficiary and consolidated the Partnership. Additionally, the local developer had the right to require the Company to purchase its interest in the Partnership if the Venture had not been sold or refinanced (with distributions made to the local developer and Company sufficient to repay all capital contributions) within a specified time period. Therefore, the local developer’s redeemable noncontrolling interest in the Partnership was presented as temporary equity as of December 31, 2021, on the Condensed Consolidated Balance Sheets. Given the nature of the Venture’s capital structure and the provisions for the liquidation of assets, the Company’s share of the Venture’s income-producing activities was recognized based on the Hypothetical Liquidation at Book Value (HLBV) method. In 2021, the Company recorded a $17.7 million impairment of its equity investment in the Venture due to a change in the anticipated holding period as it entered into a plan to sell the Partnership’s interest in the Venture.
On March 30, 2022, the Partnership completed the sale of its ownership interest in the Venture for a gross sales price of $208.6 million. Upon sale, the Company recognized income of $5.0 million in Equity in earnings (losses) from real estate and other affiliates in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2022. The amount recognized represents: (i) the difference between the sales price less related transaction costs of $17.6 million and the $195.0 million carrying value of the equity investment; (ii) a $0.4 million adjustment to the carrying value of the noncontrolling interest to reflect actual cash proceeds and (iii) $8.6 million of net fair value gains that were reclassed out of Accumulated other comprehensive income (loss) associated with the Venture’s derivative instruments. Based upon the Partnership’s waterfall, $168.9 million of the net sales proceeds were allocated to the Company with the remaining $22.1 million allocated to the local developer.
Upon sale of the equity interest in the Venture, the local developer’s put right that could require the Company to purchase its interest in the Partnership lapsed. Therefore, as of March 31, 2022, the local developer’s redeemable noncontrolling interest in the Partnership was reclassified from temporary equity to Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets. However, due to the timing of the sale transaction, the local developer’s share of the sales proceeds were not distributed until April 2022.
The following table presents changes in Redeemable noncontrolling interest:
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thousands | Redeemable Noncontrolling Interest |
Balance as of December 31, 2021 | | $ | 22,500 | |
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Net income (loss) attributable to noncontrolling interest | | (407) | |
Disposition of noncontrolling interest related to 110 North Wacker | | (22,093) | |
Balance as of March 31, 2022 | | $ | — | |
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Balance as of December 31, 2020 | | $ | 29,114 | |
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Net income (loss) attributable to noncontrolling interest | | (1,570) | |
Share of investee’s other comprehensive income | | 174 | |
Balance as of March 31, 2021 | | $ | 27,718 | |
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The Lawn Club On January 19, 2021, the Company formed HHC Lawn Games, LLC with The Lawn Club NYC, LLC (Endorphin Ventures), to construct and operate an immersive indoor and outdoor restaurant that includes an extensive area of indoor grass, a stylish clubhouse bar and a wide variety of lawn games. This concept is expected to open in late 2022. Under the terms of the agreement, the Company will fund 80% of the cost to construct the restaurant, and Endorphin Ventures will contribute the remaining 20%. The Company also entered into a lease agreement with HHC Lawn Games, LLC (Lease Agreement) to lease 20,000 square feet of the Fulton Market Building for this venture. The Company will report its ownership interest in accordance with the equity method.
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FINANCIAL STATEMENTS FOOTNOTES |
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Available cash will be distributed 80% to the Company and 20% to Endorphin Ventures until each member’s unreturned capital account has been reduced to zero. Distributions will then be allocated 60% to the Company and 40% to Endorphin Ventures until the amounts paid to the Company under the Lease Agreement and the aggregate amounts distributed to the Company equal $100 per square foot of the property on an annual basis. Any remaining cash will be distributed equally between both members. Given the nature of The Lawn Club’s capital structure and the provisions for the liquidation of assets, the Company’s share of The Lawn Club’s income-producing activities will be recognized based on the HLBV method.
Ssäm Bar In 2016, the Company formed Pier 17 Restaurant C101, LLC (Ssäm Bar) with MomoPier, LLC (Momofuku), an affiliate of the Momofuku restaurant group, to construct and operate a restaurant and bar at Pier 17 in the Seaport. Under the terms of the agreement, the Company funded 89.75% of the costs to construct the restaurant, and Momofuku contributed the remaining 10.25%.
As of March 31, 2022, and December 31, 2021, Ssäm Bar is classified as a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest. The carrying value of Ssäm Bar as of March 31, 2022, is $6.0 million and is classified as Investments in real estate and other affiliates in the Condensed Consolidated Balance Sheets. The Company’s maximum exposure to loss as a result of this investment is limited to the aggregate carrying value of the investment as the Company has not provided any guarantees or otherwise made firm commitments to fund amounts on behalf of this VIE.
After each member receives a 10% preferred return on its capital contributions, available cash will be allocated 75% to the Company and 25% to Momofuku, until each member’s unreturned capital account has been reduced to zero. Any remaining cash will be distributed 50% to each of the members. Given the nature of the Ssäm Bar’s capital structure and the provisions for the liquidation of assets, the Company’s share of the Ssäm Bar’s income-producing activities is recognized based on the HLBV method.
The Tin Building by Jean-Georges In 2015, the Company formed Fulton Seafood Market, LLC with VS-Fulton Seafood Market, LLC (Fulton Partner) to operate The Tin Building by Jean-Georges, a 53,783 square foot marketplace with an expanded focus on experiences including in-person dining, retail shopping, mobile ordering and delivery. The marketplace is expected to open in the second quarter of 2022.
As of March 31, 2022, The Tin Building by Jean-Georges is classified as a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest. The Company further concluded that it is not the primary beneficiary of the VIE as it does not have the power to direct the restaurant related activities that most significantly impact its economic performance. As such, the Company accounts for its ownership interest in accordance with the equity method.
The Company owns 100% of the Tin Building and entered into a lease agreement with Fulton Seafood Market LLC to lease the constructed space for this venture. The Company, as landlord, funded 100% of the development and construction of the Tin Building, and under the terms of the agreement contributes the cash necessary to fund pre-opening, opening and operating costs of Fulton Seafood Market LLC. The Fulton Partner is not required to make any capital contributions under the LLC agreements. Because the Company is unable to quantify the maximum amount of additional capital contributions that may be funded in the future associated with this investment, the Company’s maximum exposure related to loss as a result of this investment is based upon the carrying value of the investment.
Under the LLC agreement, available cash (other than available cash attributable to a capital event) will be distributed 100% to the Company until it receives a cumulative preferred return of 18% per year on its costs incurred in excess of a specified threshold. Available cash will then be allocated 65% to the Company and 35% to the Fulton Partner.
Given the nature of The Tin Building by Jean-Georges’ capital structure and the provisions for the liquidation of assets, the Company’s share of The Tin Building by Jean-Georges’ income-producing activity will be recognized based on the HLBV method. The HLBV calculation utilizes a distribution waterfall that returns available cash attributable to a capital event first, to the Company until 100% of the Company’s unreturned capital amount and the preferred return has been paid in full; then, 65% to the Company and 35% to the Fulton Partner.
The carrying value of The Tin Building by Jean-Georges as of March 31, 2022, is $7.8 million and represents HHC contributions of $11.4 million, partially offset by $3.6 million of equity losses for the current period related to pre-opening expenses.
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FINANCIAL STATEMENTS FOOTNOTES |
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Jean-Georges Restaurants On March 1, 2022, the Company acquired a 25% interest in JG Restaurant HoldCo LLC (Jean-Georges Restaurants) for $45.0 million from JG TopCo LLC (Jean-Georges). Jean-Georges Restaurants currently has over 40 hospitality offerings and a pipeline of new concepts. The Company concluded that Jean-Georges Restaurants is not a VIE. The Company further concluded that it does not possess a controlling financial interest under the voting model. As such, the Company will account for its ownership interest in accordance with the equity method and recorded its initial investment at cost, inclusive of legal fees and transaction costs. Under the terms of the agreement, all cash distributions and the recognition of income producing activities will be pro rata based on economic ownership interest.
Concurrent with the aforementioned acquisition by the Company of a 25% interest in Jean-Georges Restaurants, the Company entered into a warrant agreement with Jean-Georges. The Company paid $10.0 million for the option to acquire up to an additional 20% interest in Jean-Georges Restaurants. The warrant became exercisable on March 2, 2022, subject to automatic exercise in the event of dissolution or liquidation, and will expire on March 2, 2026. Per the agreement, the $10.0 million is to be used for working capital of Jean-Georges Restaurants. The Company has elected the measurement alternative for this purchase option as the equity security does not have a readily determinable fair value. As such, the investment will be measured at cost, less any identified impairment charges.
Creative Culinary Management Company, LLC (CCMC), a wholly owned subsidiary of Jean-Georges Restaurants, provides management services for certain retail and food and beverages businesses that HHC owns, either wholly or through partnerships with third parties. The Company’s businesses managed by CCMC include The Tin Building by Jean-Georges, The Fulton, The Greens and Malibu Farm. Pursuant to the various management agreements, CCMC is responsible for employment and supervision of all employees providing services for the food and beverage operations and restaurant as well as the day-to-day operations and accounting for the food and beverage operations.
The Summit In 2015, the Company formed DLV/HHPI Summerlin, LLC (The Summit) with Discovery Land Company (Discovery). The Company contributed land with a carrying value of $13.4 million and transferred SID bonds related to such land with a carrying value of $1.3 million to The Summit at the agreed upon capital contribution value of $125.4 million, or $226,000 per acre and has no further capital obligations. Discovery is required to fund up to a maximum of $30.0 million of cash as their capital contribution, of which $3.8 million has been contributed. The gains on the contributed land are recognized in Equity in earnings from real estate and other affiliates as The Summit sells lots.
As of March 31, 2022, the Company has received cash distributions equal to its capital contribution of $125.4 million and a 5.0% preferred return on such capital contribution, and Discovery has received cash distributions equal to two times its equity contribution. Any further cash distributions and income-producing activities will be recognized according to equity ownership. As of March 31, 2022, HHC has received $179.1 million in total distributions and Discovery has received $27.0 million in total distributions.
Trillium In the fourth quarter of 2021, simultaneous with the Douglas Ranch land acquisition, the Company entered into a Limited Liability Company Agreement (LLC Agreement) with JDM Partners and El Dorado Holdings to form Trillium Development Holding Company, LLC (Trillium) for the purpose of developing the first village within the new Douglas Ranch MPC in Phoenix’s West Valley.
Within the 3,029-acre Trillium development located in the greater Phoenix, Arizona area, JDM Partners owned approximately 2,579 acres and El Dorado Holdings owned approximately 450 acres. Simultaneously with the LLC Agreement, all parties executed the Contribution and Purchase Agreement under which the Company acquired a 50% interest in the land owned by JDM Partners and a 50% interest in the land owned by El Dorado Holdings for $59.0 million, and immediately contributed its ownership interest in the property to Trillium in exchange for a 50% equity interest. At the same time, JDM Partners contributed its remaining 50% interest in its land and El Dorado Holdings contributed its remaining 50% interest in its land to Trillium in exchange for the remaining equity interest. Subsequent to these contributions, member equity interest in Trillium was 50% for the Company, 42.5% for JDM Partners and 7.5% for El Dorado Holdings. The Company will report its ownership interest in accordance with the equity method. Under the terms of the agreement, all future capital contributions, cash distributions and the recognition of income producing activities will be pro rata based on economic ownership interest. The first Trillium land sales are expected to occur by the third quarter of 2022.
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FINANCIAL STATEMENTS FOOTNOTES |
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West End Alexandria In the fourth quarter of 2021, the Company entered into an Asset Contribution Agreement with Foulger-Pratt Development, LLC (Foulger-Pratt) and Seritage SRC Finance (Seritage). Prior to this agreement, Foulger-Pratt owned 100% interest in Landmark Land Holdings, LLC (West End Alexandria). Pursuant to this agreement, the Company conveyed its 33-acre Landmark Mall property with an agreed upon fair value of $56.0 million and Seritage conveyed an additional 19 acres of land with an agreed upon fair value of $