The Howard Hughes Corporation® Reports Third Quarter 2016 Results

The Howard Hughes Corporation (NYSE: HHC) (the “Company”) announced operating results for the third quarter ended September 30, 2016. The attached financial statements, exhibits and reconciliations of non-GAAP measures provide the details of these results.

Third Quarter Highlights:

• Net income attributable to common stockholders was $8.0 million or $0.19 per diluted common share.
• Adjusted net income was $47.2 million, an increase of $18.7 million compared to the third quarter of 2015.
• Furthered the revitalization of the Seaport District by obtaining approval for the Pier 17 and Tin Building Minor Modification, announcing that iconic Italian fashion store 10 Corso Como will open its only North American location in the district and welcoming iPic Theaters as the first anchor to open as part of the redevelopment.
• Commenced construction of Two Merriweather, a 130,000 square-foot, Class A mixed-use office building in Downtown Columbia after successfully pre-leasing 75.0% of the office space.
• Continued sales momentum at Ward Village with 35 new condominium contracts executed since the end of the second quarter, representing over 11.1% of the remaining inventory under construction as of June 30, 2016. Began construction of Ke Kilohana.
• Strong third quarter MPC performance driven by Bridgeland with 12.2 acres of residential land sales, an increase of 110.3% compared to the same period in 2015, and by The Summit, our joint venture with Discovery Land in Summerlin, which contracted 21 custom lots for approximately $94.3 million in land sales during the third quarter 2016.
• Successfully completed a $238.7 million refinancing at Ward Village, extending the initial maturity to September 12, 2021, and at Two Merriweather, obtaining a $33.2 million non-recourse construction loan maturing on October 7, 2020.
• Announced the appointment of David R. O’Reilly to the position of Chief Financial Officer effective October 17, 2016.

“We had a solid third quarter as we continued to increase cash flow across the portfolio and make progress in delivering value at our strategic developments while strengthening our MPCs. In Las Vegas, by bringing the NHL practice facility to Downtown Summerlin, we continue to further distinguish the community as the premier place to live in the region while also increasing visitors to our downtown,” said David R. Weinreb, Chief Executive Officer. “I am particularly pleased at the progress we have made towards the revitalization of the Seaport District. During the quarter, we announced that iconic Italian fashion store 10 Corso Como will be coming to the Seaport as our retail anchor, opened iPic Theaters as our first cornerstone tenant and received approval to move and reconstruct the Tin Building as part of the Minor Modification.”

“We continue to advance our plans at Ward Village where Waiea, our first residential tower, is nearing completion. We expect to start closing on condominium unit sales and welcoming new homeowners within the next couple of weeks. In addition, we celebrated the topping out of Anaha, our second building, which is on schedule for completion by mid-summer 2017. It is gratifying to see our vision for this vibrant community beginning to take shape.”

Third Quarter Financial Results

As we complete and place our developments into service, non-cash depreciation and amortization expense associated with these cash-generative commercial real estate properties is a material component of our net income. Adjusted net income is a non-GAAP measure that excludes depreciation and amortization expense, provision for impairment, non-cash warrant liability gains and losses, gain on acquisition of our joint venture partner’s interest and gains or losses on sales of operating properties. For additional information, please see the reconciliation of Adjusted Net Income to Net Income (loss) attributable to common stockholders in the Supplemental Information contained on page 11 of this earnings release.

Business Segment Operating Results

Operating Assets Segment Highlights

Net operating income (“NOI”) from our income-producing Operating Assets is presented in our Supplemental Information to this earnings release. For a reconciliation of Operating Assets NOI to Operating Assets real estate property earnings before taxes (“REP EBT”), Operating Assets REP EBT to GAAP-basis net income (loss) and Adjusted Net Income to Net Income, please refer to the Supplemental Information contained in this earnings release.

We calculate Adjusted Operating Assets REP EBT, which excludes depreciation and amortization and development-related demolition, marketing costs and provision for impairment, as they do not represent operating costs for stabilized real estate properties.

Operating assets REP EBT decreased $33.1 million to $(34.3) million, compared to $(1.2) million for the third quarter 2015. During the third quarter 2016, we implemented a plan to sell Park West, a 249,177 square foot open-air shopping, dining and entertainment destination in Peoria, Arizona that is one of our non-core operating assets. A sale will allow us to redeploy the net cash proceeds from this unleveraged property into our core six assets. As a result, we incurred a $35.7 million provision for impairment on this property.

The decrease in NOI from income-producing Operating Assets in the third quarter 2016 compared to the third quarter 2015 is primarily driven by headwinds in the Houston economy that have negatively impacted occupancy and conference business at The Woodlands Resort & Conference Center and our two recently opened hotels in The Woodlands. The increase in NOI from income-producing Operating Assets in the nine months ended September 30, 2016 compared to the same period in the prior year is primarily due to Downtown Summerlin and the openings of one Summerlin office and two multi-family properties in 2015.

On July 20, 2016, we purchased our joint venture partner’s 18.57% interest in Millennium Six Pines Apartments (formerly known as Millennium Woodlands Phase II) for $4.0 million which resulted in a gain of $27.1 million relating to the step-up to fair value of the assets acquired.

On September 26, 2016, we announced the signing of a 20-year ground lease for a to-be-built practice facility in Downtown Summerlin® for the newly awarded NHL franchise in Las Vegas. The two-rink practice facility will be built on a 4.6-acre parcel located in Downtown Summerlin. Groundbreaking on the new facility took place last month with an expected completion date of August 2017.

On September 8, 2016, we announced that iconic Italian fashion retailer 10 Corso Como will be coming to the Seaport District. Founded in Milan in 1991 by style visionary and former fashion editor Carla Sozzani, 10 Corso Como pioneered a new retail model as the world’s original concept store. 10 Corso Como New York will be located in the historic area of the Seaport District and contain approximately 13,000 square feet that will be designed by American artist Kris Ruhs. The New York store will be 10 Corso Como’s only U.S. location and is consistent with the other offerings curated to date that will include culinary experiences from renowned restaurateurs Jean-Georges Vongerichten and the Momofuku Group led by David Chang, iPic Theaters, McNally Jackson Books and the new Pier 17® highlighted by its 1.5-acre rooftop, overlooking the East River of Manhattan that will be programmed as a year-round destination, home to a seasonal summer concert series as well as a winter village and a cultural entertainment gathering for all New Yorkers and visitors. On October 13, 2016, iPic Theaters, the nation's ultimate movie going experience, opened as the first anchor in the revitalized Seaport District in their first New York location. The new iPic is Manhattan’s first new commercial multiplex movie theater opened in over a decade.

On October 19, 2016, we received approval for the Seaport District’s Pier 17 Minor Modification of the 2013 Uniform Land Use Review Procedure (“ULURP”) Approval which grants approval for the reconstruction of the Tin Building, the demolition of the Link Building and head house structure for the Pier 17 building, installation of the same façade treatment on the western elevation that was previously approved for the new Pier 17 Building, and the installation of a reconfigured service access drive.

Master Planned Communities Segment Highlights

Generally MPC revenues fluctuate during the year; therefore, a better measurement of performance is the full year impact instead of quarterly results.

A Summary of our MPC segment is shown below. For additional detail, please refer to the Supplemental Information section of this release.

Land sales closed in our MPC segment for the three months ended September 30, 2016 decreased $27.6 million or 46.5% to $31.8 million, compared to $59.4 million for the same period in 2015 primarily due to a $20.5 million commercial land sale at Bridgeland in 2015. Land sales revenue of $44.1 million recognized for three months ended September 30, 2016 included $10.2 million in revenue from closings in prior periods that was previously deferred and that met criteria for recognition in the current quarter. Land sales closed in our MPC segment for the nine months ended September 30, 2016 decreased $26.0 million or 17.2% to $124.9 million compared to $150.9 million for the same period in 2015. Land sales revenue of $147.2 million recognized for nine months ended September 30, 2016 included $16.4 million in revenue from closings in prior periods which was previously deferred and that met criteria for recognition in the current year.

Bridgeland’s residential land sales for the three and nine months ended September 30, 2016 were substantially higher compared to the same periods in 2015 due to increased demand from homebuilders, offset by a $20.5 million decrease in commercial land sales from 2015. For the nine months ended September 30, 2016, residential land sales at Bridgeland are 62.4% higher than the same period in the prior year, and we believe this trend will continue through the end of the year. While the broader Houston market remains impacted by moderated oil prices, particularly affecting the sales of higher priced homes, the Bridgeland submarket has shown improvement in the mid-range of the residential market. In October, Bridgeland reached a significant milestone and celebrated its 10th year anniversary.

Summerlin’s land sales for the three months ended September 30, 2016 were lower compared to the same period in 2015 due to the sale of one superpad in the third quarter 2016 compared to two superpads in the third quarter 2015. However, residential land sales in Summerlin for the nine months ended September 30, 2016 increased slightly to $86.2 million, compared to $85.3 million for the same period in 2015. The average price per superpad acre for the nine months ended September 30, 2016 of $408,000 is not comparable to the average price per acre of $544,000 for the same period in 2015 due to a $40.0 million bulk sale to a homebuilder for a large parcel in the first quarter 2016. This sale was unique as the homebuilder will be responsible for installing power and drainage facilities to the village, and unlike a typical sale, Summerlin is not obligated to incur any development costs within the boundaries of the parcel. Gross margin increased for the nine months ended September 30, 2016 compared to 2015 due to this sale of undeveloped land for which we incurred much lower development costs. In addition, as part of the transaction we negotiated a favorable adjustment to the builder price participation on the land we sold to the same homebuilder in 2006.

Land development began at The Summit, our joint venture with Discovery Land in our Summerlin MPC, in the second quarter 2015 and continues to progress on schedule based upon the initial plan. For the three months ended September 30, 2016, 38 custom residential lots had closed resulting in the recognition of $13.7 million Equity in earnings in Real Estate and Other Affiliates. As of September 30, 2016, contracted sales since inception are $204.6 of which $119.8 million had closed.

The Woodlands decrease in total land sales for the three months ended September 30, 2016 compared to the same period in 2015 is primarily due to a 3.3-acre medical office building land sale in the third quarter 2015 for $6.8 million. The $8.8 million decrease in total land sales for the nine months ended September 30, 2016 compared to the same period in 2015 is due to reduced residential sales of $10.3 million due to fewer closings, offset by a $1.5 million increase in commercial land sales. The reduced sales pace is due primarily to the downturn in the Houston economy resulting from moderated oil prices and the disproportionate impact this has had on the upper end of the housing market. Also contributing to the reduced price per acre and slower lot sales pace is the build-up of homebuilder vacant lot inventory levels.

Strategic Developments Segment Highlights

We have condominiums for sale in Ward Village across five condominium projects, four of which are under construction: Waiea, Anaha, Ae‘o and Ke Kilohana. These four projects have a total unit count of 1,381, of which 1,101 were under contract as of September 30, 2016, including 35 units placed under contract in the third quarter, reducing the total number of unsold units under construction to 280.

The increase in condominium rights and unit sales for the three and nine months ended September 30, 2016 as compared to the same periods in 2015 is primarily related to revenue recognition at our Anaha condominium project for which we began recognizing revenue in the second quarter 2015. As condominium projects advance towards completion, revenue is recognized on qualifying sales contracts under the percentage of completion method of accounting. All development cost estimates presented herein are exclusive of land costs.

On August 17, 2016, along with our joint-venture partner, we announced the launch of a 130-acre, mixed-use development at Circle T Ranch, a scenic, 2,500-acre, master planned community in Westlake, Texas, that is located within the 18,000-acre AllianceTexas development. The development, which is situated at the junction of SH 114 and SH 170, will include more than two million square feet of mixed-use office, retail and entertainment space and will be anchored by the recently announced 500,000-square-foot corporate campus for the Charles Schwab Corporation, one of the nation’s largest financial service providers.

We began construction of Two Merriweather, a Class A mixed-use office building, in the third quarter 2016. Two Merriweather will consist of 100,000 square feet of office and 30,000 square feet of retail space. Total estimated development costs are approximately $41 million. As of September 30, 2016, we have incurred $3.3 million of development costs. As of October 20, 2016, 57.7% of the total project and 75.0% of the office space is pre-leased.

For a more complete description of the status of our developments, please refer to “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 33 of our Form 10-Q for the three and nine months ended September 30, 2016.

Balance Sheet and Other Quarterly Activity

Simultaneously with the buyout of our partner’s interest in Millennium Six Pines Apartments (formerly known as Millennium Woodlands Phase II) on July 20, 2016, we secured a new $42.5 million fixed rate loan at 3.39% maturing August 1, 2028. This new loan replaced the joint venture’s existing $37.7 million loan and funded the purchase of our partner’s interest.

On September 29, 2016, we completed a $238.7 million refinancing of the debt maturing September 29, 2016 for Ward Village®. The new non-recourse term loan bears interest at one-month LIBOR plus 2.50% and has an initial maturity of September 12, 2021 with two, one-year extension options. We swapped $119.4 million of the loan to a fixed rate of 3.64% through its initial maturity date, representing an all-in interest rate of approximately 3.33% based on the current one-month LIBOR rate. The financing is secured by the existing Ward Village commercial properties, excluding condominium towers currently under development, and allows for the future release of collateral to develop additional residential condominium towers and retail properties across the master planned community.

In connection with starting construction of Two Merriweather, on October 7, 2016 we closed on a $33.2 million non-recourse construction loan for this project, bearing interest at one-month LIBOR plus 2.50% with an initial maturity date of October 7, 2020 and a one-year extension option.

*Non-recourse debt means that the debt is non-recourse to The Howard Hughes Corporation but is collateralized by a real estate asset and/or is recourse to the subsidiary entity owning such asset.

About The Howard Hughes Corporation®

The Howard Hughes Corporation owns, manages and develops commercial, residential and mixed-use real estate throughout the U.S. Our properties include master planned communities, operating properties, development opportunities and other unique assets spanning 16 states from New York to Hawai‘i. The Howard Hughes Corporation is traded on the New York Stock Exchange under HHC with major offices in New York, Columbia, MD, Dallas, Houston, Las Vegas and Honolulu. For additional information about HHC, visit www.howardhughes.com or find us on Facebook, Twitter, Instagram, and LinkedIn.

Safe Harbor Statement

Statements made in this press release that are not historical facts, including statements accompanied by words such as “will,” “believe,” “expect,” “enables,” “realize”, “plan,” “intend,” “assume,” “transform” and other words of similar expression, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s expectations, estimates, assumptions, and projections as of the date of this release and are not guarantees of future performance. Actual results may differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ materially are set forth as risk factors in The Howard Hughes Corporation’s filings with the Securities and Exchange Commission, including its Quarterly and Annual Reports. The Howard Hughes Corporation cautions you not to place undue reliance on the forward-looking statements contained in this release. The Howard Hughes Corporation does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this release.

Supplemental Information

September 30, 2016

As our three segments, Master Planned Communities, Operating Assets and Strategic Developments, are managed separately, we use different operating measures to assess operating results and allocate resources among these three segments. The one common operating measure used to assess operating results for our business segments is real estate property earnings before taxes (“REP EBT”). REP EBT, as it relates to our business, is defined as net income (loss) excluding general and administrative expenses, corporate other income, corporate interest income, and corporate interest and depreciation expense, provision for income taxes, warrant liability gain (loss), gains or losses on sales of operating properties, and gain on acquisition of joint venture partner interest. We present REP EBT because we use this measure, among others, internally to assess the core operating performance of our assets. However, REP EBT should not be considered as an alternative to GAAP net income (loss).

We also adjust GAAP net income (loss) for non-cash warrant liability gains and losses and depreciation and amortization. The presentation of Adjusted net income is consistent with other companies in the real estate business who also typically report an earnings measure that excludes depreciation and amortization and other non-operating related items.

When a development property is placed in service, depreciation is calculated for the property ratably over the estimated useful lives of each of its components; however, most of our recently developed properties do not reach stabilization for 12 to 36 months after being placed in service due to the timing of tenants taking occupancy and subsequent leasing of remaining unoccupied space during that period. As a result, operating income, earnings before taxes (EBT) and net income will not reflect the ongoing earnings potential of newly placed in service operating assets during this transition period to stabilization. Accordingly, we calculate Adjusted Operating Assets REP EBT, which excludes depreciation and amortization and development-related demolition and marketing costs and provision for impairment, as they do not represent operating costs for stabilized real estate properties.

The following table reconciles Adjusted Operating Assets REP EBT to Operating Assets REP EBT: