The following discussion should be read in conjunction with our Consolidated Financial Statements and the related notes filed as a part of this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties, assumptions and other factors, including those described in Part I, Item 1A. Risk Factors and elsewhere in this Annual Report. These factors and others not currently known to us could cause our financial results in 2022 and subsequent fiscal years to differ materially from those expressed in, or implied by, those forward-looking statements. You are cautioned not to place undue reliance on this information which speaks only as of the date of this report. We are not obligated to update this information, whether as a result of new information, future events or otherwise, except as may be required by law. This section of our Form 10-K discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of 2020 and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report Form 10-K for the year endedDecember 31, 2021 . All references to numbered Notes are to specific Notes to our Consolidated Financial Statements included in this Annual Report and which descriptions are incorporated into the applicable response by reference. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) have the same meanings as in such Notes. Index Page Overview 37 Results of Operations 42 Operating Assets 42 Master Planned Communities 44 Seaport 49 Strategic Developments 52 Corporate Income, Expenses and Other Items 56 Liquidity and Capital Resources 57 Critical Accounting Policies 61 Recently Issued Accounting Pronouncements and Developments 61 HHC 2022 FORM 10-K | 36
-------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents OVERVIEW Index to Financial Statements OVERVIEW General Overview Please refer to Item 1. Business for a general discussion of our business strategy, competitive strengths and a general description of the assets contained in our four business segments and Item 2. Properties for details regarding the asset type, size, location and key metrics about our various properties.
We are primarily focused on creating shareholder value by increasing our per-share net asset value. Often, the nature of our business results in short-term volatility in our net income due to the timing of MPC land sales, recognition of condominium revenue and operating business pre-opening expenses.
2022 Results During 2022, we maintained positive momentum and successfully navigated challenging market dynamics to deliver solid financial results which met or exceeded our 2022 guidance expectations in every segment. This strong performance is a testament to our premier communities and best-in-class assets, further highlighting the strength of our unique business model. MPCs delivered exceptional results despite significant reductions in new home sales across our communities. Excluding reduced equity earnings, primarily from The Summit which had limited remaining inventory due to its past sales success, MPC earnings before taxes (EBT) increased 11% year over year, driven by solid land sales, high residential prices per acre and increased builder price participation revenue. Operating Assets delivered 9% year-over-year net operating income (NOI) growth-excluding dispositions-even considering market and recessionary challenges throughout the year. This improvement was led by multi-family, where new developments and strong rent growth contributed to significant increases in NOI. In office, we made considerable progress with the lease-up of our towers, executing approximately 510,000 square feet of new or expanded leases during the year which will provide meaningful NOI growth in the coming years.Ward Village had another strong year, closing on more than 600 condo units and contracting to sell nearly 1,000 condo units in future towers. During the year, we completed construction on K?'ula, made significant progress on the construction ofVictoria Place , and commenced construction onThe Park Ward Village . We also launched presales atUlana Ward Village , a designated workforce housing tower, and at Kalae, which has been met with exceptional demand. The Seaport continued to improve throughout 2022 with a nearly 50% year-over-year increase in foot traffic which contributed to improved demand at our managed restaurants and our most successful summer concert series to date. In addition, the grand opening of theTin Building by Jean-Georges in the third quarter of 2022 was met with strong demand and positive culinary reviews. 2023 Outlook Proceeding into 2023, we maintain a positive long-term outlook for our businesses, although ongoing market uncertainty is expected to contribute to reduced residential land sales and relatively flat Operating Assets NOI in 2023. Despite these near-term challenges, HHC is well-positioned for growth in the years ahead with its substantial landbank in highly desirable master planned communities, exceptional portfolio of assets and significant pipeline of future commercial development. With the significant financing activity completed in 2022 and early 2023, we are well positioned to advance new developments in our communities. MPC EBT is projected to be comparable to earnings generated on average during 2017 and 2018, prior to a period of outsized land and home sales in Summerlin, Bridgeland, andThe Woodlands Hills during the COVID-19 pandemic. Since mid-2022, a slowing housing market, which has been largely driven by a rise in mortgage rates and shrinking home affordability, has softened new home sales and homebuilder demand for new acreage in the near-term. As a result, we expect 2023 MPC EBT to decline as compared to 2022. Operating Assets NOI is projected to benefit from multi-family rent growth and new developments in Bridgeland,Downtown Columbia , and Summerlin encompassing nearly 1,400 units. The office portfolio is expected to benefit from leasing momentum experienced throughout 2022, but free rent periods on many of the new leases and the impact of tenant vacancies during 2022 will likely result in a modest year-over-year decline in office NOI. Overall, excluding the impact of divested retail assets in the prior year, Operating Assets NOI is expected to be relatively flat compared to 2022. Projected revenue from condominium closings in 2023 is expected to decrease, as our next major condominium project,Victoria Place , is not scheduled to be completed until early 2024. Projected condominium sales for 2023 will be driven by the closing of our remaining completed units at 'A'ali'i and K?'ula. As ofDecember 31, 2022 , 'A'ali'i was 96% sold and K?'ula was 97% sold. HHC 2022 FORM 10-K | 37 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents OVERVIEW Index to Financial Statements 2022 HighlightsTotal Company -Net income attributable to common stockholders increased to$184.5 million , or$3.65 per diluted share, for the year endedDecember 31, 2022 , compared to income of$56.1 million , or$1.03 per diluted share, for the year endedDecember 31, 2021 . -We continue to maintain a strong liquidity position with$626.7 million of cash and cash equivalents and available capacity of$200 million on the Secured Bridgeland Notes as ofDecember 31, 2022 , with limited near-term debt maturities. -During 2022, we completed the sale of three retail properties, Outlet Collection at Riverwalk,Lake Woodlands Crossing andCreekside Village Green , as well as our interest in the 110 North Wacker office property, for total net proceeds of$215.9 million . Operating Assets -Operating Assets NOI totaled$225.8 million in 2022, a$7.1 million increase compared to$218.7 million in the prior year. Excluding the impact of dispositions in 2021 and 2022, Operating Assets NOI increased$13.7 million compared to the prior-year period. -Multi-family NOI increased$12.7 million primarily due to rent growth and strong lease-up of our new developments inThe Woodlands andDowntown Columbia , including Creekside ParkThe Grove , Two Lakes Edge, The Lane at Waterway andJuniper Apartments . -Office NOI increased$1.4 million , primarily related to the continued lease-up at 9950Woodloch Forest and the expiration of rent abatements at 9950Woodloch Forest , 6100 Merriweather and8770 New Trails . These increases were partially offset by decreases atThe Woodlands andColumbia properties due to expiration of leases. In 2022, the Company executed 510,000 square feet of new or expanded office leases including 253,000 square feet inThe Woodlands , 155,000 square feet inDowntown Columbia and 102,000 square feet in Summerlin. -NOI related to our Retail and Other properties remained relatively flat in 2022 compared to the prior year.
MPC
-MPC EBT totaled$283.0 million in 2022, a$33.6 million decrease compared to$316.6 million in the prior year. -The decrease in EBT was primarily due to lower equity earnings of$60.8 million , primarily related to limited supply of land inventory at The Summit, partially offset by higher builder price participation, primarily at Summerlin. Excluding the impact of the decrease in equity earnings, MPC EBT increased$27.2 million compared to the prior-year period. -The average price per acre of residential land sold increased 32% to$768,000 per acre, a full-year record for HHC. -Builder price participation totaled$71.8 million in 2022, a$26.6 million increase compared to$45.1 million in the prior year. -During 2022, JDM Member exercised options to repurchase a 12.0% ownership interest in Teravalis, resulting in an 88.0% member equity interest for the Company.
Seaport
-Seaport generated negative NOI of$9.8 million , representing a$7.8 million improvement compared to the prior year, primarily as a result of an earlier launch of the summer concert series and additional concerts scheduled in 2022 compared to 2021, increased demand at our managed restaurants, increased private event activity and rental revenue related to theTin Building landlord operations. Seaport NOI excludes equity losses of$36.2 million in 2022, related to pre-opening costs and initial operating losses for theTin Building by Jean-Georges managed business. Strategic Developments -Strategic Developments EBT totaled$190.2 million in 2022, a$106.5 million increase compared to$83.8 million in the prior year. -The increase in EBT was primarily due to an increase in net condominium sales of$74.4 million driven by timing and mix of condominium closings. -We closed on 607 units during the year endedDecember 31, 2022 , including 549 units at K?'ula, which was completed in the third quarter of 2022, 56 units at 'A'ali'i and the final 2 units at Waiea. -During 2022, we achieved 100% presold status atVictoria Place and 100% sold status at Waiea. -The Park Ward Village , our eighth condominium project atWard Village , began public presales inJuly 2021 and began construction inDecember 2022 . As ofDecember 31, 2022 , we have entered into contracts for 501 units, representing 91.9% of total units. HHC 2022 FORM 10-K | 38 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents OVERVIEW Index to Financial Statements -Ulana Ward Village , our ninth condominium project, was announced in 2021, with all units designated as workforce housing units and are being offered to local residents who meet certain maximum income and net worth requirements. As ofDecember 31, 2022 , we have entered into contracts for 676 units, representing 97.1% of total units. Construction began atUlana Ward Village inJanuary 2023 . -Kalae, our tenth condominium project, began public presales inSeptember 2022 and as ofDecember 31, 2022 , we have entered into contracts for 240 units, representing 72.9% of total units. -We placed the following assets in service upon substantial completion of construction in 2022: (i)Memorial Hermann Medical Office Building , a medical office property inThe Woodlands ; (ii) 1700 Pavilion, an office property in Summerlin; (iii) Marlow, a multi-family property inColumbia ; (iv) Starling at Bridgeland, a multi-family property in Bridgeland; (v)Creekside Park Medical Plaza , a medical office property inThe Woodlands ; and (vi) K?'ula Retail, a retail property inWard Village . These assets placed in service represent 830 multi-family units and 388,000 square feet of office and retail space. -We began construction on the following assets in 2022: (i)South Lake Medical Office Building , a medical office property inColumbia ; (ii)The Park Ward Village , our eighth condominium project inWard Village ; (iii) Summerlin South Office, an office property in Summerlin; and (iv) Wingspan, a single-family rental community in Bridgeland. These assets under construction represent 263 single-family units, 545 condominium units and 259,800 square feet of office and retail space.
Corporate
-Net expenses related to Corporate income, expenses and other items remained relatively flat compared to the prior-year period as the nonrecurring loss on extinguishment of debt in 2021 and lower net interest expense was offset by an increase in income tax expense. Capital and Financing Activities -In 2022, our financing activity included new borrowings of$899.2 million (excluding undrawn amounts on new construction loans), draws on existing mortgages of$336.7 million , and repayments on mortgages and credit facility of$1.1 billion . For additional information refer to Note 7 - Mortgages, Notes and Loans Payable, Net in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. -In the first quarter of 2022, the Company repurchased$153.4 million of its common stock, completing all authorized share repurchases under a$250.0 million share repurchase program approved in 2021. InMarch 2022 , the Board authorized an additional$250.0 million of share repurchases. Under this program, the Company has repurchased approximately$235.0 million as ofDecember 31, 2022 . HHC 2022 FORM 10-K | 39 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents OVERVIEW Index to Financial Statements Earnings Before Taxes In addition to the required presentations using accounting principles generally accepted inthe 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. Because our four segments, Operating Assets, MPC, Seaport and Strategic Developments, are managed separately, we use different operating measures to assess operating results and allocate resources among them. The one common operating measure used to assess operating results for our business segments is EBT. EBT, as it relates to each business segment, includes the revenues and expenses of each segment, as shown below. EBT excludes corporate expenses and other items that are not allocable to the segments. See discussion herein at Corporate income, expenses and other items for further details. We present EBT for each segment because we use this measure, among others, internally to assess the core operating performance of our assets. EBT should not be considered an alternative to GAAP net income attributable to common stockholders or GAAP net income, as it has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations of EBT are that it does not include the following in our calculations: -cash expenditures, or future requirements for capital expenditures or contractual commitments -corporate general and administrative expenses -interest expense on our corporate debt -income taxes that we may be required to pay -any cash requirements for replacement of fully depreciated or amortized assets -limitations on, or costs related to, the transfer of earnings from our unconsolidated ventures to us
A reconciliation between EBT and Net income is presented below:
Operating Strategic Assets Segment Seaport Developments thousands (a) MPC Segment Segment Segment Total Year endedDecember 31, 2022 Total revenues$ 431,834 $ 408,365
(194,496) (173,905) (104,393) (504,036) (976,830) Segment operating income (loss) 237,338 234,460 (15,925) 175,727 631,600 Depreciation and amortization (154,626) (394) (36,338) (5,319) (196,677) Interest income (expense), net (89,959) 50,305 3,902 17,073 (18,679) Other income (loss), net (1,140) 23 245 1,799 927 Equity in earnings (losses) from unconsolidated ventures 22,263 (1,407) (36,273) 868 (14,549) Gain (loss) on sale or disposal of real estate and other assets, net 29,588 - - 90 29,678 Gain (loss) on extinguishment of debt (2,230) - - - (2,230) Segment EBT$ 41,234 $ 282,987
(245,434) Net income (loss) 184,636 Net (income) loss attributable to noncontrolling interests (103) Net income (loss) attributable to common stockholders$ 184,533 HHC 2022 FORM 10-K | 40
-------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents OVERVIEW Index to Financial Statements Operating Strategic Assets Segment Seaport Developments thousands (a) MPC Segment Segment Segment Total Year EndedDecember 31, 2021 Total revenues$ 442,698 $ 409,746
(209,020) (193,851) (77,198) (436,698) (916,767) Segment operating income (loss) 233,678 215,895 (22,190) 83,411 510,794 Depreciation and amortization (163,031) (366) (30,867) (6,512) (200,776) Interest income (expense), net (75,391) 42,683 357 3,701 (28,650) Other income (loss), net (10,746) - (3,730) 2,536 (11,940) Equity in earnings (losses) from unconsolidated ventures (67,042) 59,399 (1,988) (221) (9,852) Gain (loss) on sale or disposal of real estate and other assets, net 39,168 - - 13,911 53,079 Gain (loss) on extinguishment of debt (1,926) (1,004) - - (2,930) Provision for impairment - - - (13,068) (13,068) Segment EBT$ (45,290) $ 316,607
(247,733) Net income (loss) 48,924 Net (income) loss attributable to noncontrolling interests 7,176 Net income (loss) attributable to common stockholders$ 56,100 (a)Total revenues includes hospitality revenues of$35.6 million for the year endedDecember 31, 2021 . Total operating expenses includes hospitality operating costs of$30.5 million for the year endedDecember 31, 2021 . InSeptember 2021 , the Company completed the sale of its three hospitality properties. HHC 2022 FORM 10-K | 41 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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RESULTS OF OPERATIONS Index to Financial Statements RESULTS OF OPERATIONS
See sections below for detailed discussion of our operating results by segment.
Operating Assets Segment EBT The following table presents segment EBT for Operating Assets for the years endedDecember 31 : Operating Assets Segment EBT 2022-2021 thousands 2022 2021 $ Change Rental revenue$ 379,693 $ 360,830 $ 18,863 Other land, rental and property revenues 52,141 81,868 (29,727) Total revenues 431,834 442,698 (10,864) Operating costs (141,678) (158,994) 17,316 Rental property real estate taxes (52,096) (50,661) (1,435) (Provision for) recovery of doubtful accounts (722) 635 (1,357) Total operating expenses (194,496) (209,020) 14,524 Segment operating income (loss) 237,338 233,678 3,660 Depreciation and amortization (154,626) (163,031) 8,405 Interest income (expense), net (89,959) (75,391) (14,568) Other income (loss), net (1,140) (10,746) 9,606 Equity in earnings (losses) from unconsolidated ventures 22,263 (67,042) 89,305
Gain (loss) on sale or disposal of real estate and other assets, net
29,588 39,168 (9,580) Gain (loss) on extinguishment of debt (2,230) (1,926) (304) Segment EBT$ 41,234 $ (45,290) $ 86,524 Operating Assets segment EBT increased$86.5 million compared to the prior-year period primarily due to the following: -Equity earnings increased$89.3 million primarily driven by the impact of the sale of 110 North Wacker in the first quarter of 2022. This increase is due to losses incurred at 110 North Wacker in 2021 during the lease-up period that were not recurring in 2022, as well as the recognition of income upon the sale in 2022, primarily due to the release of our share of accumulated other comprehensive income related to 110 North Wacker's derivative instruments. -Total revenues, net of operating costs increased$6.5 million due to an increase of$11.3 million primarily driven by the stabilization of our newer multi-family properties inThe Woodlands andColumbia , partially offset by a decrease of$4.8 million related to the sale of our hospitality properties in the third quarter of 2021. -Other loss decreased$9.6 million due to a nonrecurring$10.0 million loss incurred inFebruary 2021 on the settlement of the rate-lock agreement upon repayment of our outstanding loans for 1201Lake Robbins andThe Woodlands Warehouse . -Depreciation and amortization decreased$7.1 million and interest expense decreased$3.9 million as a result of the sale of our hospitality properties in the third quarter of 2021. These increases to EBT were partially offset by the following: -Interest expense increased$18.5 million , excluding the impact of the sale of the hospitality assets referenced above, primarily due to financing activity for our operating assets in 2022, as well as increased interest costs associated with variable-rate debt. -Gain on asset sales decreased$9.6 million as the combined gain on the sales ofCreekside Park Village ,Lake Woodlands Crossing and the Outlet Collection at Riverwalk in 2022, was lower than the gain on the sale of the hospitality properties in 2021. HHC 2022 FORM 10-K | 42 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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Statements
Net Operating Income 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, when compared year over year, reflects the revenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in rental and occupancy rates and operating costs as variances between years in NOI typically result from changes in rental rates, occupancy, tenant mix and operating expenses. 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 costs; gain on sale or disposal of real estate and other assets, net; provision for impairment and equity in earnings from unconsolidated ventures. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that property-specific factors such as lease structure, lease rates and tenant base have on our operating results, gross margins and investment returns. Projected annual stabilized NOI is initially projected prior to the development of the asset based on market assumptions and is revised over the life of the asset as market conditions evolve. Adjustments to an asset's stabilized NOI are made when changes to the asset's long-term performance are thought to be more than likely and permanent. Although we believe that NOI provides useful information to investors about the performance of our Operating Assets and Seaport segments, due to the exclusions noted above, NOI should only be used as an additional measure of the financial performance of such assets and not as an alternative to GAAP net income. 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. Operating Assets NOI 2022-2021 thousands 2022 2021 $ Change Total Operating Assets segment EBT$ 41,234 $ (45,290) $ 86,524 Add back: Depreciation and amortization 154,626 163,031 (8,405) Interest (income) expense, net 89,959 75,391 14,568
Equity in (earnings) losses from unconsolidated ventures (22,263)
67,042 (89,305)
(Gain) loss on sale or disposal of real estate and other assets, net
(29,588) (39,168) 9,580 (Gain) loss on extinguishment of debt 2,230 1,926 304 Impact of straight-line rent (11,241) (14,715) 3,474 Other 827 10,449 (9,622) Operating Assets NOI$ 225,784 $ 218,666 $ 7,118
The below table presents Operating Assets NOI by property type:
Operating Assets NOI by Property Type 2022-2021 thousands 2022 2021 $ Change Office$ 111,210 $ 109,838 $ 1,372 Retail 51,525 52,448 (923) Multi-family 45,564 32,895 12,669 Other 14,067 13,492 575 Dispositions 3,418 9,993 (6,575) Operating Assets NOI$ 225,784 $ 218,666 $ 7,118 Operating Assets NOI increased$7.1 million compared to the prior-year period primarily due to the following: -Multi-family NOI increased$12.7 million driven by rent growth and strong lease-up of our new developments inThe Woodlands andDowntown Columbia , including Creekside ParkThe Grove , Two Lakes Edge, The Lane at Waterway andJuniper Apartments . -Office NOI increased$1.4 million primarily due to the continued lease-up at 9950Woodloch Forest and the expiration of rent abatements at 9950Woodloch Forest , 6100 Merriweather and8770 New Trails . These increases were partially offset by decreases atThe Woodlands andColumbia properties due to expiration of leases. -These increases were partially offset by a$6.6 million decrease due to the sale of our hospitality properties inThe Woodlands in the third quarter of 2021 and the Outlet Collection at Riverwalk in the second quarter of 2022. HHC 2022 FORM 10-K | 43 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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RESULTS OF OPERATIONS Index to Financial Statements Master Planned Communities Segment EBT The following table presents segment EBT for MPC for the years endedDecember 31 : MPC Segment EBT 2022-2021 thousands 2022 2021 $ Change Master Planned Community land sales (a)$ 316,065 $ 346,217 $ (30,152) Other land, rental and property revenues 20,539 18,391 2,148 Builder price participation (b) 71,761 45,138 26,623 Total revenues 408,365 409,746 (1,381) Master Planned Communities cost of sales (119,466) (153,630) 34,164 Operating costs (54,439) (40,221) (14,218) Total operating expenses (173,905) (193,851) 19,946 Segment operating income (loss) 234,460 215,895 18,565 Depreciation and amortization (394) (366) (28) Interest income (expense), net 50,305 42,683 7,622 Other income (loss), net 23 - 23 Equity in earnings (losses) from unconsolidated ventures (1,407) 59,399 (60,806) Gain (loss) on extinguishment of debt - (1,004) 1,004 Segment EBT$ 282,987 $ 316,607 $ (33,620) (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 segment EBT by MPC for the years endedDecember 31 : MPC Segment EBT by MPC 2022-2021 thousands 2022 2021 $ Change Bridgeland$ 94,913 $ 67,187 $ 27,726 Summerlin 179,063 245,674 (66,611) Teravalis (a) (1,977) (11) (1,966) The Woodlands (4,406) (11,703) 7,297 The Woodlands Hills 17,690 16,405 1,285 Columbia (2,296) (945) (1,351) Segment EBT$ 282,987 $ 316,607 $ (33,620) Floreo (b)$ (2,848) $ (16) $ (2,832) (a)As ofDecember 31, 2022 , the Company owns an 88.0% interest and consolidates Teravalis. For additional detail, refer to Note 3 - Acquisitions and Dispositions in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. (b)These amounts represent 100% of Floreo EBT. The Company owns a 50% interest in Floreo. Refer to Note 2 - Investments inUnconsolidated Ventures in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K for a description of the joint venture and further discussion. HHC 2022 FORM 10-K | 44 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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MPC Segment EBT decreased$33.6 million compared to the prior-year period primarily due to lower equity earnings of$60.8 million , primarily related to The Summit, partially offset by higher builder price participation of$26.6 million across all MPCs. Excluding the impact of the decrease in equity earnings, MPC EBT increased$27.2 million compared to the prior-year period. Summerlin EBT decreased$66.6 million compared to the prior period. -Equity earnings at The Summit decreased$59.4 million primarily related to lower sales in 2022 as a result of limited available Phase I inventory and an increase in projected amenity and completion costs recognized in 2022, partially offset by the gain recognized on the contribution of Phase II land in 2022. -MPC sales, net of MPC cost of sales decreased$27.4 million primarily due to the following activity. -decrease in superpad acres sold partially offset by an increase in price per acre, with 94.6 acres sold at an average price of$1.1 million per acre in 2022, compared to 310.9 acres sold at an average price of$656,000 per acre in 2021 -decrease in custom lots sold, with 4 lots sold with an average price of$2.2 million in 2022, compared to 15 lots sold with an average price of$1.5 million in 2021 -increase in institutional acres sold, with 16.6 acres sold at an average price of$1.6 million per acre in 2022, compared to no institutional land sales in 2021 -Builder price participation increased$17.7 million due to more eligible home closings and higher home sale prices. Bridgeland EBT increased$27.7 million compared to the prior period. -MPC sales, net of MPC cost of sales increased$27.2 million primarily due to the following activity. -increase in commercial acres sold, with 75.0 acres sold at an average price of$507,000 per acre in 2022, compared to no commercial land sales in 2021 -increase in residential price per acre, with 156.8 acres sold at an average price of$544,000 per acre in 2022, compared to 158.1 acres sold at an average price of$468,000 per acre in 2021 The Woodlands EBT increased$7.3 million compared to the prior period. -MPC sales, net of MPC cost of sales increased$5.7 million primarily due to the following activity. -increase in residential acres sold and price per acre, with 7.4 acres sold inAria Isle , an exclusive gated community, at an average price of$3.0 million per acre in 2022, compared to 3.9 acres sold at an average price of$618,000 per acre in 2021 -decrease in commercial acres sold, with no commercial land sales in 2022, compared to 1.6 acres sold at an average price of$1.7 million per acre in 2021 The Woodlands Hills EBT increased$1.3 million compared to the prior period. -MPC sales, net of MPC cost of sales decreased$1.5 million primarily due to the following activity. -decrease in residential acres sold partially offset by an increase in price per acre, with 61.9 acres sold at an average price of$382,000 per acre in 2022, compared to 80.1 acres sold at an average price of$337,000 per acre in 2021 -increase in institutional acres sold, with 8.0 acres sold at an average price of$175,000 per acre in 2022, compared to no institutional land sales in 2021 MPC Equity Investments The Summit The Summit, our joint venture with Discovery, offers a mix of custom lots, single-family homes and clubhouse suites in our Summerlin MPC. The original 555-acre community (Phase I) is nearing completion and consists of approximately 270 homes including 32 condominiums. In 2022, the Company contributed an additional 54 acres (Phase II) to The Summit adjacent to the existing Summit community to develop approximately 28 custom home sites. We recognized equity earnings of$30.0 thousand in 2022 and$59.4 million in 2021. We received no cash distributions in 2022 and$114.2 million in 2021.
Floreo
Land development is currently underway at Floreo, our joint venture with
For additional details on The Summit and Floreo, refer to Note 2 - Investments inUnconsolidated Ventures in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. HHC 2022 FORM 10-K | 45 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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Residential and Commercial Land Sales The following tables detail our
residential and commercial land sales for the years ended
Summary of MPC Land Sales Closed Land Sales Acres Sold Average Price Per Acre thousands 2022 2021 2022 2021 2022 2021 Residential Land Sales Closed Bridgeland Single family$ 85,320 $ 73,999 156.8 158.1$ 544 $ 468 Summerlin Superpad sites 108,196 203,855 94.6 310.9 1,144 656 Custom lots 8,910 22,270 2.0 11.7 4,455 1,903 The Woodlands Single family 21,864 2,412 7.4 3.9 2,955 618 The Woodlands Hills Single family 23,659 26,956 61.9 80.1 382 337 Total residential land sales closed (a)$ 247,949 $ 329,492 322.7 564.7$ 768
Commercial Land Sales Closed Bridgeland Commercial$ 38,034 $ - 75.0 -$ 507 $ - Institutional 9,937 9,335 35.7 58.1 278 161 Summerlin Commercial - 4,250 - 6.3 - 675 Institutional 26,016 - 16.6 - 1,567 - The Woodlands Commercial - 2,694 - 1.6 - 1,684 Institutional - 827 - 1.5 - 551 The Woodlands Hills Institutional 1,396 - 8.0 - 175 - Total commercial land sales closed (a)$ 75,383 $ 17,106 135.3 67.5$ 557 $ 253 (a)Excludes revenues related to sales closed in a previous period and deferred for recognition that met criteria for recognition in the current period. Please see the Reconciliation of MPC Land Sales Closed to GAAP Land Sales Revenue table below which reconciles Total residential and commercial land sales closed to Land sales revenue for the years endedDecember 31, 2022 and 2021. Reconciliation of MPC Land Sales Closed to GAAP Land Sales Revenue The following table reconciles Total residential and commercial land sales closed in the years endedDecember 31, 2022 and 2021, toMaster Planned Community land sales for the respective periods. Total net recognized (deferred) revenue includes revenues recognized in the current period which are related to sales closed in prior periods, offset by revenues deferred on sales closed in the current period. thousands 2022 2021
Total residential land sales closed
75,383 17,106 Net recognized (deferred) revenue: Bridgeland (18,388) (8,174) The Woodlands Hills (172) - Summerlin 3,248 (1,568)
Total net recognized (deferred) revenue (15,312) (9,742)
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Although our business does not involve the sale or resale of homes, we believe that net new home sales are an important indicator of future demand for our superpad sites and finished lots. Therefore, we use this statistic where relevant in our discussion of MPC operating results herein. Net new home sales reflect home sales made by homebuilders, less cancellations. Cancellations generally occur when a homebuyer signs a contract to purchase a home but later fails to qualify for a home mortgage or is unable to provide an adequate down payment to complete the home sale. Net New Home Sales Median Home Sales Price thousands except percentages 2022 2021 2022-2021 % Change 2022 2021 2022-2021 % Change Bridgeland 566 713 (20.6) %$ 525 $ 463 13.4 % Summerlin 775 1,578 (50.9) % 722 628 15.0 % The Woodlands (a) 32 144 (77.8) % 1,285 750 71.3 % The Woodlands Hills 201 326 (38.3) % 429 368 16.6 %
(a) New home sales in
MPC Net Contribution In addition to MPC segment EBT, 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 fromSpecial Improvement District (SID) bonds andMunicipal 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. The following table sets forth the MPC Net Contribution for the years endedDecember 31 : 2022-2021 thousands 2022 2021 $ Change MPC segment EBT$ 282,987 $ 316,607 $ (33,620) Plus: Master Planned Communities cost of sales 119,466 153,630 (34,164) Depreciation and amortization 394 366 28 MUD and SID bonds collections, net (a) 131,126 46,460 84,666 Distributions from unconsolidated ventures - 114,172 (114,172) Less: MPC development expenditures (396,102) (322,255) (73,847) MPC land acquisitions - (574,253) 574,253 Equity in (earnings) losses from unconsolidated ventures 1,407 (59,399) 60,806 MPC Net Contribution$ 139,278 $ (324,672) $ 463,950
(a)SID collections are shown net of SID transfers to buyers in the respective periods.
MPC Net contribution increased for the year endedDecember 31, 2022 , primarily due to no MPC land acquisitions in 2022. Excluding the impact of the acquisition of Teravalis in 2021, MPC Net Contribution decreased primarily due to a decrease in Distributions from unconsolidated ventures related to a large distribution received in 2021 representing the return of the Company's initial capital contribution in accordance withThe Summit LLC agreement and higher MPC development expenditures, partially offset by higher MUD and SID bond collections, net. HHC 2022 FORM 10-K | 47 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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MPC Land Inventory The following table summarizes MPC land inventory activity: The Woodlands thousands Bridgeland Columbia Summerlin Teravalis The Woodlands Hills
Total MPC Balance December 31, 2020$ 486,867 $ 16,625 $ 888,954 $ -$ 177,341 $ 117,732 $ 1,687,519 Acquisitions - - - 569,541 4,712 - 574,253 Development expenditures (a) 142,556 - 156,433 - 5,448 17,818 322,255 MPC Cost of sales (20,235) - (120,578) - (2,035) (10,782) (153,630) MUD reimbursable costs (b) (102,563) - - - (248) (9,604)
(112,415)
Transfer to Strategic (1,617) - (4,209) Developments - (1,700) - (892) Investments in - - - (59,000) - -
(59,000)
unconsolidated ventures Other 15,145 - 8,615 - 3,092 1,143
27,995
Balance December 31, 2021 520,153 16,625 931,724 510,541 187,418 116,307 2,282,768 Acquisitions - - - - - - - Development expenditures (a) 189,752 - 161,540 195 14,844 29,771 396,102 MPC Cost of sales (32,746) - (64,183) - (12,310) (10,227) (119,466) MUD reimbursable costs (b) (145,995) - - - (110) (24,521) (170,626) Transfer to Strategic - (12,424) - (17,634) Developments (777) - (4,433) Other 8,537 - (2,146) 33,810 (53) 234 40,382
Balance
(a)Development expenditures are inclusive of capitalized interest and property taxes. (b)MUD reimbursable costs represent land development expenditures transferred to MUD Receivables. HHC 2022 FORM 10-K | 48 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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RESULTS OF OPERATIONS Index to Financial Statements Seaport 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. We primarily categorize the businesses in the Seaport segment into the following groups: Landlord Operations, Managed Businesses, theTin Building and Events and Sponsorships. Landlord Operations Landlord Operations represent physical real estate in theHistoric District andPier 17 that 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 theHistoric District andPier 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 byCreative Culinary Management Company, LLC (CCMC), a Jean-Georges company, and Mister Dips andCarne Mare are managed bySeaport F&B LLC , anAndrew 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.
In March of 2022, the Company paid
In 2023, we plan to expand our Managed Businesses portfolio with the launch of
Tin BuildingThe Tin Building includes both landlord operations and managed business. The Company owns 100% of theTin Building which was completed and placed in service during the third quarter of 2022. The Company leased 100% of the space to theTin 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.The Tin Building by Jean-Georges had a soft opening in early August and a grand opening celebration in late September, with an expanded focus on experiences including in-person dining, retail shopping and delivery. Subsequent to the grand opening, operating hours were constrained due to labor shortages; however, during the fourth quarter of 2022, despite continued labor shortages, operating hours were extended to seven days a week.The Tin Building by Jean-Georges is managed by CCMC, a Jean-Georges company. Based on capital contribution and distribution provisions for theTin Building by Jean-Georges, HHC currently receives substantially all of the economic interest in the venture. 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. The 2022 summer concert series, which began in May and ran through the end of October, included 60 shows, more than any previous year, and sold over 188,200 tickets, representing over 90% of available ticket inventory. HHC 2022 FORM 10-K | 49 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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250 Water Street InOctober 2020 , we announced our comprehensive proposal for the redevelopment of250 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 theSouth Street Seaport Museum and deliver much-needed affordable housing and economic stimulus to the area. InMay 2021 , we received approval from theNew York City Landmarks Preservation Commission (LPC) on our proposed design for the250 Water Street site. HHC received final approvals inDecember 2021 through theNew 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 inDecember 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 theNew 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 theNew 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 10 - Commitments and Contingencies in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. Impact of COVID-19 In response to the COVID-19 pandemic, we closed the Seaport inMarch 2020 and cancelled our 2020 Seaport summer concert series. Many businesses were able to resume operations, on a limited basis, in the third quarter of 2020. Most restrictions were lifted in June of 2021; however, many businesses at the Seaport continued to operate at reduced levels through the third quarter of 2021, primarily due to labor shortages. All venues were open and operating at close to full capacity during the fourth quarter of 2021; however, operations were negatively impacted by the rise of the Omicron variant in the beginning of 2022 before returning to normal inMarch 2022 . Throughout the second through fourth quarters of 2022, substantially all businesses were open and operating at close to full capacity. Segment EBT The following table presents segment EBT for the Seaport for the years endedDecember 31 : Seaport Segment EBT 2022-2021 thousands 2022 2021 $ Change Rental revenue$ 19,410 $ 7,901 $ 11,509 Other land, rental and property revenues 69,058 47,107 21,951 Total revenues 88,468 55,008 33,460 Operating costs (102,271) (75,721) (26,550) Rental property real estate taxes (885) (1,322) 437 (Provision for) recovery of doubtful accounts (1,237) (155) (1,082) Total operating expenses (104,393) (77,198) (27,195) Segment operating income (loss) (15,925) (22,190) 6,265 Depreciation and amortization (36,338) (30,867) (5,471) Interest income (expense), net 3,902 357 3,545 Other income (loss), net 245 (3,730) 3,975 Equity in earnings (losses) from unconsolidated ventures (36,273) (1,988) (34,285) Segment EBT$ (84,389) $ (58,418) $ (25,971) Seaport segment EBT loss increased$26.0 million compared to the prior-year period primarily due to the following: -Equity losses increased$34.3 million primarily driven by pre-opening costs and initial operating losses for theTin Building by Jean-Georges, which opened in the third quarter of 2022 with limited operating hours. -This was partially offset by a$6.9 million increase in Total revenues, net of Operating costs driven by higher demand at our managed restaurants, a longer concert series, increased private events, and the opening of theTin Building , which was completed and placed in service in the third quarter of 2022. HHC 2022 FORM 10-K | 50 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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Net Operating Income A reconciliation of Seaport segment EBT to Seaport NOI is presented below: Seaport NOI 2022-2021 thousands 2022 2021 $ Change Total Seaport segment EBT$ (84,389) $ (58,418) $ (25,971) Add back: Depreciation and amortization 36,338 30,867 5,471 Interest (income) expense, net (3,902) (357) (3,545) Equity in (earnings) losses from unconsolidated ventures 36,273 1,988 34,285 Impact of straight-line rent 456 1,632 (1,176) Other (income) loss, net 5,456 6,725 (1,269) Seaport NOI$ (9,768) $ (17,563) $ 7,795 The Seaport, including Managed Businesses, Events and Sponsorships and theTin 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 and until the economy recovers from the economic impact of the COVID-19 pandemic.
The below table presents Seaport NOI by category:
Seaport NOI by Category 2022-2021 thousands 2022 2021 $ Change Landlord Operations$ (15,702) $ (15,027) $ (675) Landlord Operations - Multi-family 110 (5) 115 Managed Businesses (85) (1,057) 972 Tin Building 4,015 - 4,015 Events and Sponsorships 1,894 (1,474) 3,368 Seaport NOI$ (9,768) $ (17,563) $ 7,795 Seaport NOI improved compared to the prior-year period, primarily as a result of an earlier launch of the summer concert series and additional concerts scheduled in 2022 compared to 2021, increased demand at our managed restaurants, increased private event activity and rental revenue related to theTin Building landlord operations.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 theTin Building by Jean-Georges managed business, which had a loss of$36.2 million for the year endedDecember 31, 2022 , driven by pre-opening costs and initial operating losses. Combined NOI related to theTin Building landlord operations and the Company's share of NOI related to theTin Building by Jean-Georges was a loss of$32.2 million for the year endedDecember 31, 2022 . HHC 2022 FORM 10-K | 51 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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RESULTS OF OPERATIONS Index to Financial Statements Strategic Developments 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 in service and NOI would become a meaningful measure of its operating performance. All development costs discussed herein are exclusive of land costs.
Segment EBT The following table presents segment EBT for Strategic Developments
for the years ended
Strategic Developments Segment EBT 2022-2021 thousands 2022 2021 $ Change Condominium rights and unit sales$ 677,078 $ 514,597 $ 162,481 Rental revenue - 319 (319) Other land, rental and property revenues 2,685 5,193 (2,508) Total revenues 679,763 520,109 159,654 Condominium rights and unit cost of sales (483,983) (414,199) (69,784) Operating costs (19,001) (19,063) 62 Real estate taxes (1,052) (3,415) 2,363 (Provision for) recovery of doubtful accounts - (21) 21 Total operating expenses (504,036) (436,698) (67,338) Segment operating income (loss) 175,727 83,411 92,316 Depreciation and amortization (5,319) (6,512) 1,193 Interest income (expense), net 17,073 3,701 13,372 Other income (loss), net 1,799 2,536 (737) Equity in earnings (losses) from unconsolidated ventures 868 (221) 1,089 Gain (loss) on sale or disposal of real estate and other assets, net 90 13,911 (13,821) Provision for impairment - (13,068) 13,068 Segment EBT$ 190,238 $ 83,758 $ 106,480 Strategic Developments segment EBT increased$106.5 million compared to the prior-year period primarily due to the following: -Condominium sales, net of cost of sales increased$74.4 million , excluding the change in remediation cost of$18.3 million discussed below, driven by the timing and mix of condominium closings. The Company closed on 607 units at a higher average profit in 2022, including 549 units at K?'ula which was completed in the third quarter of 2022, 56 units at 'A'ali'i and the final 2 units at Waiea, compared to 670 units in 2021. -Condominium cost of sales also decreased$18.3 million due to charges related to the defect remediation accrual at Waiea. We charged$2.7 million in 2022, related to additional anticipated costs, compared to charges of$21.0 million in 2021. -Provision for impairment decreased$13.1 million due to the impairment ofCentury Park in 2021, compared to no strategic asset impairments in 2022. -Interest income increased$13.4 million primarily due to the change in value related to the derivative instruments associated with 1700 Pavilion and Tanager Echo.
These increases in EBT were partially offset by the following:
-Gain on asset sales decreased
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Strategic Developments Projects The following describes the status of our major
construction projects and announced Strategic Developments projects as of
Downtown Columbia The Master Plan and zoning forDowntown Columbia , as amended in 2017, allows for a total of approximately 14,000,000 square feet for all ofDowntown Columbia . Upon completion, the redevelopment ofDowntown Columbia will include three neighborhoods,Lakefront District ,Merriweather District andCentral District , and will feature residential, office, hotel, retail, cultural and public uses including public parks and trails. The majority of the properties will be developed on raw land, surface parking lots and other assets controlled by HHC. Based on the Development Rights and Responsibilities Agreement, signed in 2018 with the County, the existing Master Plan, zoning and project approval process cannot be amended for a period of 30 years. Additionally, pursuant to a 2010 development agreement, we have a preferred residential and office development covenant that provides us the right of first offer for new development densities of both residential and office space within theColumbia Mall Ring Road . This covenant expires in 2030. We are currently focusing on the redevelopment of the Merriweather and Lakefront Districts. At theMerriweather District , we completed construction on Marlow, a 472-unit multi-family property, in the fourth quarter of 2022. At theLakefront District , we began construction onSouth Lake Medical Office Building , an 86,000 square foot medical office property, in the third quarter of 2022, and anticipate project completion in 2024. Total development costs are expected to be approximately$44.8 million , which will be partially financed with a construction loan expected to close in 2023. We expect to reach projected annual stabilized NOI of$3.2 million by 2027.
Bridgeland
Wingspan Wingspan will be a 263-unit single-family rental community in Bridgeland situated on approximately 28.8 acres. This new product type will offer one- to four-bedroom units with single-family home benefits including private outdoor spaces and attached garages. Total development costs are expected to be approximately$86.5 million , which will be partially financed with a$54.1 million construction loan that closed inDecember 2022 . We began construction in the second quarter of 2022 and anticipate project completion in 2024. We expect to reach projected annual stabilized NOI of$4.9 million by 2026.
Summerlin
Tanager Echo Tanager Echo will be a 294-unit multi-family property located in Downtown Summerlin, comprised of studio, one and two-bedroom units. Total development costs are expected to be approximately$86.9 million , which will be partially financed with a$59.5 million construction loan that closed inSeptember 2021 . We began construction in the second quarter of 2021 and anticipate project completion in the first quarter of 2023. We expect to reach projected annual stabilized NOI of$5.9 million by 2026. Summerlin South Office Summerlin South Office will be a 147,000 square foot office property. Total development costs are expected to be approximately$53.9 million , which will be partially financed with a construction loan expected to close in 2023. We began construction in the fourth quarter of 2022 and anticipate project completion in the fourth quarter of 2023. We expect to reach projected annual stabilized NOI of$4.3 million by 2026.
We continue to transformWard Village into a vibrant neighborhood offering unique retail experiences, dining and entertainment, along with exceptional residences and workforce housing set among open public spaces and pedestrian-friendly streets. We believe we have found the optimal mix of price point and product in theHonolulu market for condominium development as evidenced by the demand for our condominium projects discussed below. The ongoing and completed construction at our mixed-use condominium projects includes 197,779 square feet of retail to serve our new residents and the community at large. As we progress the buildout of the master plan, which ultimately contemplates a total of approximately 1,000,000 million square feet of commercial space at completion, we will periodically redevelop, reposition, or replace the existing retail spaces as part of new mixed-use projects. HHC 2022 FORM 10-K | 53 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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Condominium revenue is recognized when construction of the condominium tower is complete and unit sales close, leading to potentially significant variability in revenue recognized between periods. Sales contracts for condominium units are subject to a 30-day rescission period, and the buyers are typically required to make an initial deposit at signing and an additional deposit 30 days later at which point their total deposit becomes non-refundable. Buyers are typically then required to make a final deposit within approximately 90 days of our receipt of their second deposit. Certain buyers are required to deposit the remainder of the sales price on a predetermined pre-closing date, which is specified in the sales contracts for each condominium project. Contracted amounts disclosed below represent sales that are past the 30-day rescission period. During 2022, we launched presales atUlana Ward Village and Kalae, achieved 100% presold status atVictoria Place , achieved 100% sold status at Waiea, completed construction and began welcoming residents at K?'ula, and began construction atThe Park Ward Village . Subsequent to year end, we began construction atUlana Ward Village . Completed Condominiums As ofDecember 31, 2022 , our six completed towers are 98.3% sold with 31 units remaining to be sold at 'A'ali'i and 15 units remaining to be sold at K?'ula. Ae'o, Ke Kilohana, Anaha and Waiea are completely sold. Condominiums Under Construction As ofDecember 31, 2022 , 95.1% of the units at our two towers under construction,Victoria Place andThe Park Ward Village , are under contract. We launched public presales of our seventh condominium project,Victoria Place , inDecember 2019 and broke ground inFebruary 2021 .Victoria Place will be a 40-story, 349-unit condominium project and will include one, two and three-bedroom residences. As ofDecember 31, 2022 ,Victoria Place is 100.0% presold. We launched public presales of our eighth condominium project,The Park Ward Village , inJuly 2021 and broke ground inOctober 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 ofDecember 31, 2022 , we have entered into contracts for 501 units, representing 91.9% of total units. Predevelopment Condominiums In 2021, HHC announced plans for our ninth condominium project,Ulana Ward Village . 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 ofDecember 31, 2022 , we have entered into contracts for 676 units, representing 97.1% of total units. Construction began atUlana Ward Village inJanuary 2023 . We launched public presales of our tenth condominium project, Kalae, inSeptember 2022 . This will be a 38-story, 329-unit condominium project and will consist of one-,two- and three-bedroom residences. As ofDecember 31, 2022 , we have entered into contracts for 240 units, representing 72.9% of total units. HHC 2022 FORM 10-K | 54 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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The following provides further details forWard Village as ofDecember 31, 2022 : Total % of Units Total % of Residential Closed or Under Square Feet Closed or Units Closed Units Under Contract Total Units Contract 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 (b) 719 - 750 95.9 % 93.7 % Q4 2021 K?'ula (c) 549 1 565 97.3 % 97.9 % Q3 2022 Under Construction Victoria Place - 349 349 100.0 % 100.0 % 2024 The Park Ward Village (d) - 501 545 91.9 % 92.8 % 2025 Predevelopment Ulana Ward Village (e) - 676 696 97.1 % 98.7 % 2025 Kalae (f) - 240 329 72.9 % 74.6 % 2026 (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 88% leased. (c)The retail portion of this project has been placed in service and is 29% leased. (d)There will be approximately 26,800 square feet of retail space as part of this project. (e)There will be approximately 32,100 square feet of retail space as part of this project. (f)There will be approximately 2,000 square feet of retail space as part of this project. HHC 2022 FORM 10-K | 55
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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 for the years endedDecember 31 : 2022-2021 thousands 2022 2021 $ Change Corporate income$ 58 $ 340 $ (282) General and administrative (81,772) (81,990) 218 Corporate interest expense, net (88,394) (101,279) 12,885 Gain (loss) on extinguishment of debt (147) (35,084) 34,937 Corporate other income (loss), net 982 425 557 Corporate depreciation and amortization (3,684) (4,324) 640 Other (11,977) (10,668) (1,309) Income tax (expense) benefit (60,500) (15,153) (45,347)
Total Corporate income, expenses and other items
$ 2,299 Corporate income, expenses and other items was favorably impacted compared to the prior-year period by the following: -Loss on extinguishment of debt decreased$34.9 million due to the repurchase of the Company's$1.0 billion 5.375% Senior Notes due 2025 that occurred in the first quarter of 2021. -Corporate interest expense decreased$12.9 million primarily due to the change in value of derivative instruments and the repurchase of the$1.0 billion 5.375% Senior Notes in the first quarter of 2021, partially offset by the issuance of$650 million 4.125% Senior Notes and$650 million 4.375% Senior Notes in the first quarter of 2021. Refer to Note 9 - Derivative Instruments and Hedging Activities for additional information on derivative instruments. Corporate income, expenses and other items was unfavorably impacted compared to the prior-year period by the following: -Income tax expense increased$45.3 million primarily due to an increase in income before income taxes. Refer to Note 12 - Income Taxes for additional information. Income Taxes thousands except percentages 2022 2021
Income tax expense (benefit)
24.7 % 23.6 % The Company's effective tax rate is typically impacted by non-deductible executive compensation and other permanent differences as well as state income taxes, which cause the Company's effective tax rate to deviate from the federal statutory rate. The Company's effective tax rate for the year endedDecember 31, 2022 , was 24.7% compared to 23.6% for the year endedDecember 31, 2021 . The increase was primarily due to the following: -a release of a valuation allowance of$4.7 million on the Company's capital loss carryover in 2021 related to a capital loss generated by the sale of the Company's 50% equity method investment inCircle T Ranch and Power Center in 2020 (refer to Note 3 - Acquisitions and Dispositions in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K for additional details), partially offset by a decrease related to the tax impact of noncontrolling interests
For additional information on income taxes, see Note 12 - Income Taxes in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
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LIQUIDITY AND CAPITAL RESOURCES Index to Financial
Statements
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 2022, to enhance our liquidity profile and extend the terms of our maturities, we entered into new borrowings of$899.2 million (excluding undrawn amounts on new construction loans), drew on existing mortgages of$336.7 million , and made repayments on mortgages and credit facility of$1.1 billion . As ofDecember 31, 2022 , we have$934.1 million 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. In 2022, the Company sold its ownership interest in 110 North Wacker for net proceeds to the Company of$168.9 million and sold the Outlet Collection at Riverwalk for net proceeds of$8.2 million . These sales completed our planned non-core assets sales, with 15 non-core assets sold since the fourth quarter of 2019, generating approximately$578.1 million of net proceeds after debt repayment. Additionally, during the fourth quarter of 2022, the Company completed the sale of two retail properties inThe Woodlands ,Lake Woodlands Crossing andCreekside Village Green , for combined net proceeds after debt repayment of$38.8 million . InOctober 2021 , the board of directors (Board) ofThe Howard Hughes Corporation , authorized a share repurchase program, pursuant to which the Company was authorized to purchase up to$250.0 million of its common stock through open-market transactions. The Company has completed all share repurchases under this plan, with$96.6 million repurchased in the fourth quarter of 2021 and$153.4 million repurchased in the first quarter of 2022. InMarch 2022 , the Board authorized an additional$250.0 million of share repurchases. Under this program, the Company has repurchased approximately$235.0 million as ofDecember 31, 2022 . All purchases were funded with cash on hand. Cash Flows Year Ended December 31, thousands 2022 2021
Cash provided by (used in) operating activities
101,458
Cash provided by (used in) financing activities (222,259)
156,140
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 2022. Operating cash continued to be utilized in 2022 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 provided by operating activities increased$609.2 million in 2022, compared to 2021, primarily due to$574.3 million of MPC land acquisition costs in 2021 related to Teravalis and Floreo, compared to no MPC land acquisition costs in 2022. Additionally, cash provided by operating activities included a$129.8 million increase in net cash associated with our condominiums and a$70.6 million increase in MUD receivable collections. The impact of these items was partially offset by an increase of$73.9 million in cash used pertaining to master planned community development expenditures, a decrease of$34.9 million in cash provided by distributions from equity method investments and a decrease of$19.2 million in cash provided related to the return of an interest rate lock deposit in the first quarter of 2021 associated with a debt instrument. HHC 2022 FORM 10-K | 57 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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LIQUIDITY AND CAPITAL RESOURCES Index to Financial
Statements
Investing Activities Net cash used in investing activities increased$322.2 million in 2022, compared to 2021, primarily due to a$240.7 million decrease in proceeds from sales of properties, a$78.4 million increase in cash used for property development and redevelopment expenditures and a$99.2 million increase in cash used for investments in real estate and other affiliates, primarily attributable to the Company's investment inJean-Georges Restaurants . Proceeds from sales of properties in 2022 related toCreekside Village Green ,Lake Woodlands Crossing and the Outlet Collection at Riverwalk and proceeds from the sale of properties in 2021 related to the Company's hospitality properties, Monarch City andCentury Park . This increase in net cash used was partially offset by a$115.6 million increase in distributions from unconsolidated ventures. The distributions received in 2022 primarily related to the sale of the Company's ownership interest in 110 North Wacker, compared to the distributions received in 2021 related to the return of the Company's initial capital contribution at the Summit. Financing Activities Net cash used in financing activities increased$378.4 million in 2022, compared to 2021, primarily due to a$322.7 million increase in cash used for repurchases of common shares in 2022, and a$112.0 million net decrease in cash provided by proceeds from debt financing activity, net of principal payments primarily due to significant debt financing activity in 2021.
Short- and Long-Term Liquidity
Short-Term Liquidity In the next twelve 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 pre-development and development costs, debt principal payments and debt service costs, MPC land development costs and other strategic developments 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 theCity of New York for the redevelopment of theTin Building , as well as the Hawai'iCommunity Development Authority for reserve condominium units atWard Village . The Company received the necessary approvals from theNew York City Economic Development Corporation to relinquish theTin Building guarantee in early 2023. Summary of Remaining Development Costs The following table summarizes remaining development costs related to projects under construction and related debt held in Operating Assets, Seaport and Strategic Developments segments as ofDecember 31, 2022 . Total cost remaining to be paid net of debt and buyer deposits consists of$139.8 million related to substantially completed projects,$50.7 million related to projects with estimated completion dates within the next 12 months and$75.3 million related to projects with estimated completion dates in 2024 and 2025. Projects that are substantially complete and have been placed into service in the Operating Assets or Seaport segments and completed condominium projects in the Strategic Developments segment are included in the following table if the project has more than$1.0 million of estimated costs remaining to be incurred. As ofDecember 31, 2022 ,$49.9 million primarily relates to warranty repairs at Waiea inWard Village . However, we anticipate recovering a substantial amount of these costs in the future, which is not reflected in the table below. The remaining cost related to substantially completed projects primarily represent costs associated with the completion of common areas at our completed condominium towers and budgeted tenant allowances necessary to bring our completed operating assets to stabilized occupancy. HHC 2022 FORM 10-K | 58 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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LIQUIDITY AND CAPITAL RESOURCES Index to Financial
Statements
We expect to be able to meet our cash funding requirements with a combination of existing and anticipated construction loans, condominium buyer deposits, free cash flow from our Operating Assets and MPC segments, net proceeds from condominium sales and our existing cash balances. Costs Remaining to be Paid, Net of Debt Estimated Remaining Buyer and Buyer Remaining to be Deposits/Holdback to be Debt to be Deposits/Holdbacks to be thousands Spent Drawn Drawn (a) Drawn (b) Operating Assets Columbia$ 60,018 $ -$ 31,689 $ 28,329 The Woodlands 6,833 - 7,146 (313) Bridgeland 9,344 - 11,514 (2,170) Summerlin 36,086 - 36,935 (849) Total Operating Assets 112,281 - 87,284 24,997 Seaport Assets Seaport 38,923 - - 38,923 Total Seaport Assets 38,923 - - 38,923 Strategic Developments Columbia 40,239 - - 40,239 Bridgeland 74,849 - 54,065 20,784 Summerlin 78,666 - 28,001 50,665 Ward Village (c) 1,042,985 257,159 695,630 90,196 Total Strategic Developments 1,236,739 257,159 777,696 201,884 Total$ 1,387,943 $ 257,159$ 864,980 $ 265,804 (a)Refer to Note 7 - Mortgages, Notes and Loans Payable, Net in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K for additional information on debt. (b)Negative balances relate to costs paid by HHC but not yet reimbursed by lenders. We expect to receive funds from our lenders for these costs in the future. (c)Estimated remaining to be spent includes amounts for Waiea warranty repairs. However, we anticipate recovering a substantial amount of these costs in the future, which is not reflected in this schedule.
Contractual Cash Obligations and Commitments The following table aggregates our
contractual cash obligations and commitments as of
thousands 2023 2024 2025
2026 2027 Thereafter Total
Mortgages, notes and loans payable
261,983 242,078 221,851
194,918 155,947 389,564 1,466,341 Ground lease commitments (b)
2,791 2,847 2,905 2,965 3,026 240,574 255,108 Total$ 430,836 $ 307,075 $ 611,070 $ 754,358 $ 457,431 $ 3,962,867 $ 6,523,637 (a)Interest is based on the borrowings that are presently outstanding and current floating interest rates. (b)Primarily relates to a$247.4 million Seaport ground lease which has an initial expiration date ofDecember 31, 2072 , and is subject to extension options throughDecember 31, 2120 . Future cash payments are not inclusive of extension options. The remaining$7.7 million in ground lease commitments relates toKewalo Basin Harbor . We lease land or buildings at certain properties from third parties. Rental payments are expensed as incurred and have been, to the extent applicable, straight-lined over the term of the lease. Contractual rental expense, including participation rent, was$5.6 million for the year endedDecember 31, 2022 , and$7.2 million for the year endedDecember 31, 2021 . The amortization of above- and below-market ground leases and straight-line rents included in the contractual rent amount were not significant. Debt As ofDecember 31, 2022 , the Company had$4.7 billion of outstanding debt,$934.1 million 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 7 - Mortgages, Notes and Loans Payable, Net in our Consolidated Financial Statements for additional detail. HHC 2022 FORM 10-K | 59 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of
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Debt Compliance As ofDecember 31, 2022 , the Company was in compliance with all debt covenants with the exception of the debt service coverage ratios for three 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 ofDecember 31, 2022 . 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. Master Non- Operating Planned Strategic Segment Segment December 31, thousands Assets Communities Seaport
Developments Totals Amounts 2022 Mortgages, notes and loans payable, net
$ 2,213,179 $ 329,297 $ 99,762
90,380 34,680 107 - 125,167 - 125,167
Less:
Cash and cash equivalents (143,197) (148,184) (11,928) (559) (303,868) (322,785) (626,653) Cash and cash equivalents of unconsolidated ventures (2,053) (25,060) (8,860) (3,883) (39,856) - (39,856)Special Improvement District receivables - (64,091) - - (64,091) - (64,091)Municipal Utility District receivables, net - (473,068) - - (473,068) - (473,068) TIF receivable - - - (1,893) (1,893) - (1,893) Net Debt$ 2,158,309 $ (346,426) $ 79,081
Unconsolidated Ventures We have interests in certain unconsolidated ventures which, as ofDecember 31, 2022 , have mortgage financing totaling$249.9 million , with our proportionate share of this debt totaling$125.2 million . All of this indebtedness is without recourse to the Company, with the exception of the collateral maintenance obligation for Floreo. See Note 10 - Commitments and Contingencies in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K for additional information related to the Company's collateral maintenance obligation. The following table summarizes our share of affiliate debt and cash as ofDecember 31, 2022 : Company's Share of Company's Share of Unconsolidated Unconsolidated thousands Ventures' Debt Ventures' Cash Operating Assets The Metropolitan Downtown Columbia $ 40,200 $ 499 Stewart Title of Montgomery County, TX - 881 Woodlands Sarofim #1 975 150 m.flats/TEN.M 49,205 523 Master Planned Communities The Summit 9,281 13,523 Floreo 25,399 11,537 Seaport The Lawn Club - 1,843 Tin Building by Jean-Georges - 1,492 Jean-George Restaurants 107 5,314 Ssäm Bar (formerly Bar Way?) - 211 Strategic Developments HHMK Development - 10 KR Holdings - 485 West End Alexandria - 3,388 Total $ 125,167 $ 39,856 HHC 2022 FORM 10-K | 60
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LIQUIDITY AND CAPITAL RESOURCES Index to Financial Statements CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with GAAP requires management to make informed judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. We believe that of our significant accounting policies, which are described in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K, the accounting policies below involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to understand and evaluate fully our financial condition and results of operations.
Impairments
Methodology We review our long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Although the carrying amount may exceed the estimated fair value of certain properties, a real estate asset is only considered to be impaired when its carrying amount is not expected to be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations and the carrying amount of the asset is reduced. The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset or, for MPCs, is expensed as a cost of sales when land is sold. Judgments and uncertainties An impairment loss is recognized if the carrying amount of an asset is not recoverable and exceeds its fair value. The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy, pricing, development costs, sales pace and capitalization rates, selling costs, and estimated holding periods for the applicable assets. As such, the evaluation of anticipated cash flows is highly subjective and is based in part on assumptions that could differ materially from actual results in future periods. Unfavorable changes in any of the primary assumptions could result in a reduction of anticipated future cash flows and could indicate property impairment. Uncertainties related to the primary assumptions could affect the timing of an impairment. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.
Master Planned Communities Cost of Sales
Methodology When residential or commercial land is sold, the cost of sales includes actual costs incurred and estimates of future development costs benefiting the property sold. When land is sold, costs are allocated to each sold superpad or lot based upon the relative sales value. For purposes of allocating development costs, estimates of future revenues and development costs are re-evaluated throughout the year, with adjustments being allocated prospectively to the remaining parcels available for sale. For certain parcels of land, including acquired parcels that the Company does not intend to develop or for which development was complete at the date of acquisition, the specific identification method is used to determine the cost of sales. Judgments and uncertainties MPC cost of sales estimates are highly judgmental as they are sensitive to cost escalation, sales price escalation and pace of absorption, which are subject to judgment and affected by expectations about future market or economic conditions. Changes in the assumptions used to estimate future development costs could result in a significant impact on the amounts recorded as cost of sales.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Please refer to Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K for additional information about new accounting pronouncements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES Index to Financial Statements
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