UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-34856

THE HOWARD HUGHES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		36-4673192
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

13355 Noel Road, 22^nd Floor, Dallas, Texas 75240

(214) 741-7744

N / A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þYes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þYes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

The number of shares of Common Stock, $0.01 par value, outstanding on November 5, 2011 was 37,942,107.

 

 

THE HOWARD HUGHES CORPORATION

INDEX

		PAGE
		NUMBER
Part I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010			3
Condensed Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2011 and 2010			4
Condensed Consolidated and Combined Statements of Equity for the nine months ended September 30, 2011 and 2010			5
Condensed Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, 2011 and 2010			6
Notes to Condensed Consolidated and Combined Financial Statements			7
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3: Quantitative and Qualitative Disclosures about Market Risk			48
Item 4: Controls and Procedures			48
Part II OTHER INFORMATION
Item 1: Legal Proceedings			49
Item 1A: Risk Factors			49
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3: Defaults Upon Senior Securities			49
Item 5: Other Information			49
Item 6: Exhibits			49
SIGNATURE			50
EXHIBIT INDEX			51
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		September 30,				December 31,
		2011				2010
		(In thousands, except share amounts)
Assets:
Investment in real estate:
Master Planned Community assets		$	1,611,125			$	1,350,648
Land			259,557				180,976
Buildings and equipment			523,871				343,006
Less accumulated depreciation			(94,771	)			(83,390	)
Developments in progress			190,287				293,403
Net property and equipment			2,490,069				2,084,643
Investment in Real Estate Affiliates			61,214				149,543
Net investment in real estate			2,551,283				2,234,186
Cash and cash equivalents			293,363				284,682
Accounts receivable, net			15,555				8,154
Municipal Utility District receivables			110,054				28,103
Notes receivable, net			39,141				38,954
Tax indemnity receivable, including interest			329,668				323,525
Deferred expenses, net			7,899				6,619
Prepaid expenses and other assets			130,013				98,484
Total assets		$	3,476,976			$	3,022,707
Liabilities:
Mortgages, notes and loans payable		$	708,172			$	318,660
Deferred tax liabilities			72,339				78,680
Warrant liabilities			128,586				227,348
Uncertain tax position liability			146,985				140,076
Accounts payable and accrued expenses			122,079				78,836
Total liabilities			1,178,161				843,600
Commitments and Contingencies
Equity:
Preferred stock: $.01 par value; 50,000,000 shares authorized, none issued			—				—
Common stock: $.01 par value; 150,000,000 shares authorized,			—				—
37,942,107 shares issued and outstanding as of September 30, 2011 and			—				—
37,904,506 shares issued and outstanding as of December 31, 2010			379				379
Additional paid-in capital			2,710,536				2,708,036
Accumulated deficit			(412,754	)			(528,505	)
Accumulated other comprehensive loss			(4,399	)			(1,627	)
Total stockholders’ equity			2,293,762				2,178,283
Noncontrolling interests			5,053				824
Total equity			2,298,815				2,179,107
Total liabilities and equity		$	3,476,976			$	3,022,707

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(Consolidated)				(Combined)				(Consolidated)				(Combined)
		(In thousands, except per share amounts)
Revenues:
Master Planned Community land sales		$	33,246			$	7,297			$	74,786			$	14,686
Builder price participation			2,145				1,148				3,263				3,343
Minimum rents			19,403				16,349				53,098				50,349
Tenant recoveries			5,399				4,637				14,538				13,891
Condominium unit sales			9,071				—				19,495				—
Resort and conference center revenues			7,200				—				7,200				—
Other land revenues			3,886				1,589				7,382				4,112
Other rental and property revenues			6,540				1,440				11,051				5,500
Total revenues			86,890				32,460				190,813				91,881
Operating Expenses:
Master Planned Community cost of sales			27,035				3,751				51,909				7,001
Master Planned Community operations			7,398				6,306				17,611				23,653
Rental property real estate taxes			1,639				4,131				8,064				11,161
Rental property maintenance costs			2,341				1,484				5,467				4,766
Condominium unit cost of sales			5,470				—				13,723				—
Resort and conference center operations			6,352				—				6,352				—
Other property operating costs			16,964				8,994				36,028				27,195
Provision for doubtful accounts			275				744				590				1,101
General and administrative			9,990				3,467				23,581				12,463
Provisions for impairment			—				92				—				578
Depreciation and amortization			7,208				4,109				13,592				12,535
Total operating expenses			84,672				33,078				176,917				100,453
Operating income (loss)			2,218				(618	)			13,896				(8,572	)
Interest income			2,341				59				7,097				118
Interest expense			—				(681	)			—				(1,888	)
Early extinguishment of debt			(11,305	)			—				(11,305	)			—
Warrant liability gain			169,897				—				100,762				—
Investment in real estate affiliate basis adjustment			(6,053	)			—				(6,053	)			—
Equity in earnings from Real Estate Affiliates			166				1,222				7,787				6,394
Income (loss) before taxes and reorganization items			157,264				(18	)			112,184				(3,948	)
Benefit (provision) for income taxes			7,760				350				4,344				(17,603	)
Reorganization items			—				(16,515	)			—				(43,129	)
Net income (loss)			165,024				(16,183	)			116,528				(64,680	)
Net income attributable to noncontrolling interests			(729	)			(47	)			(777	)			(121	)
Net income (loss) attributable to common stockholders		$	164,295			$	(16,230	)		$	115,751			$	(64,801	)
Basic Income (Loss) Per Share:		$	4.33			$	(0.43	)		$	3.05			$	(1.72	)
Diluted Income (Loss) Per Share:		$	(0.14	)		$	(0.43	)		$	0.38			$	(1.72	)
Comprehensive Income (Loss), Net of Tax:
Net income (loss)		$	165,024			$	(16,183	)		$	116,528			$	(64,680	)
Other comprehensive income (loss):
Interest rate swap (a)			(2,024	)			—				(2,772	)			—
Pension plan adjustment			—				88				—				188
Other comprehensive income (loss)			(2,024	)			88				(2,772	)			188
Comprehensive income (loss)			163,000				(16,095	)			113,756				(64,492	)
Comprehensive income attributable to noncontrolling interests			(729	)			(47	)			(777	)			(121	)
Comprehensive income (loss) attributable to common stockholders		$	162,271			$	(16,142	)		$	112,979			$	(64,613	)

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(UNAUDITED)

																		Accumulated				Noncontrolling
						Additional												Other				Interests in
		Common				Paid-In				Accumulated				GGP				Comprehensive				Consolidated				Total
(In thousands)		Stock				Capital				Deficit				Equity				Income (Loss)				Ventures				Equity
Balance, January 1, 2010		$	—			$	—			$	—			$	1,504,364			$	(1,744	)		$	900			$	1,503,520
Net income (loss)			—				—				—				(64,801	)			—				121				(64,680	)
Distributions to noncontrolling interests			—				—				—				—				—				(218	)			(218	)
Other comprehensive income			—				—				—				—				188				—				188
Contributions from GGP, net			—				—				—				101,294				—				—				101,294
Balance, September 30, 2010		$	—			$	—			$	—			$	1,540,857			$	(1,556	)		$	803			$	1,540,104
Balance, January 1, 2011		$	379			$	2,708,036			$	(528,505	)		$	—			$	(1,627	)		$	824			$	2,179,107
Net income			—				—				115,751				—				—				777				116,528
Adjustment to noncontrolling interests			—				—				—				—				—				3,452				3,452
Other comprehensive loss			—				—				—				—				(2,772	)			—				(2,772	)
Stock plan activity			—				2,500				—				—				—				—				2,500
Balance, September 30, 2011		$	379			$	2,710,536			$	(412,754	)		$	—			$	(4,399	)		$	5,053			$	2,298,815

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Nine Months Ended September 30,
		2011				2010
		(Consolidated)				(Combined)
		(In thousands)
Cash Flows from Operating Activities:
Net income (loss)		$	116,528			$	(64,680	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Equity in earnings from Real Estate Affiliates			(3,727	)			(6,394	)
Distributions received from Real Estate Affiliates			34				—
Investment in Real Estate Affiliate basis adjustment			6,053				—
Provision for doubtful accounts			590				1,101
Depreciation			11,235				11,012
Amortization			2,357				1,523
Amortization (accretion) of deferred financing costs and debt market rate adjustments			393				1,600
Amortization of intangibles other than in-place leases			(1,205	)			144
Straight-line rent amortization			(1,223	)			(574	)
Restricted stock and stock option amortization			2,500				—
Warrant liability adjustment			(100,762	)			—
Provisions for impairment			—				578
Real estate acquisition and development expenditures			(65,813	)			(39,115	)
Master Planned Community and condominium cost of sales			65,359				7,089
Reorganization items			—				(1,569	)
Net changes*:
Accounts and notes receivable			(1,822	)			9,383
Prepaid expenses and other assets			(5,754	)			4,132
Deferred expenses			(872	)			(1,426	)
Accounts payable and accrued expenses and deferred tax liabilities			(46	)			16,529
Other, net			(1,873	)			168
Cash provided by (used in) operating activities			21,952				(60,499	)
Cash Flows from Investing Activities:
Cash acquired from The Woodlands acquisition, net of cash consideration			5,493				—
Real estate and property expenditures			(25,015	)			(71,069	)
Reimbursement for infrastructure improvements from municipality			5,560				—
Proceeds from dispositions			1,130				—
Investments in Real Estate Affiliates			—				(10	)
Cash used in investing activities			(12,832	)			(71,079	)
Cash Flows from Financing Activities:
Change in GGP investment, net			—				137,411
Proceeds from issuance of mortgages, notes and loans payable			241,644				—
Principal payments on mortgages, notes and loans payable			(241,148	)			(4,697	)
Finance costs related to emerged entities			—				(1,311	)
Deferred financing costs			(2,935	)			—
Proceeds from issuance of Warrants			2,000				—
Distributions to noncontrolling interests			—				(218	)
Cash (used in) provided by financing activities			(439	)			131,185
Net change in cash and cash equivalents			8,681				(393	)
Cash and cash equivalents at beginning of period			284,682				3,204
Cash and cash equivalents at end of period		$	293,363			$	2,811
Supplemental Disclosure of Cash Flow Information:
Interest paid		$	15,272			$	14,831
Interest capitalized			16,687				15,443
Reorganization items paid			—				46,009
Non-Cash Investing and Financing Transactions:
Reduction in investments in Real Estate Affiliates due to The Woodlands’ acquisition			(128,764	)			—
Acquisition note related to The Woodlands (See Note 5)			96,500				—
Debt assumed from The Woodlands acquisition (See Note 1)			296,695				—
Prepetition liabilities funded by GGP			3,323				—
Mortgage debt market rate adjustment related to emerged entities			—				2,382
Other non-cash GGP equity transactions			—				(36,117	)

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED & COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the SEC. Such condensed consolidated and combined financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. In addition, readers of this Quarterly Report on Form 10-Q (“Quarterly Report”) should refer to the Company’s (as defined below) audited Consolidated and Combined Financial Statements for the year ended December 31, 2010 which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2010. Capitalized terms used, but not defined in this Quarterly Report have the same meanings as in the Annual Report.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results for the interim periods ended September 30, 2011 and 2010 are not necessarily indicative of the results to be expected for the full fiscal year. In addition, certain amounts in the 2010 Combined Financial Statements have been reclassified to conform to the current period presentation. Management has evaluated all material events occurring subsequent to the date of the consolidated financial statements up to the date and time this Quarterly Report is filed.

General

The Howard Hughes Corporation (“HHC” or the “Company”) is a Delaware corporation that was formed on July 1, 2010 to hold, after receipt via a tax-free distribution, certain assets of General Growth Properties, Inc. (“GGP”) and certain of its subsidiaries (collectively, the “Predecessors”) pursuant to their plans of reorganization (the “Plan”) under Chapter 11 of the United States Code (“Chapter 11”). We are a real estate company that specializes in the development and operation of master planned communities, operating rental properties and other strategic real estate opportunities across the United States. Pursuant to the Plan, certain of the assets and liabilities of the Predecessors (the “HHC Businesses”) were transferred to us and our common stock was distributed to the holders of GGP’s common stock and common units (the “Separation”) on a pro-rata basis (approximately 32.5 million shares of our common stock) on GGP’s date of emergence from bankruptcy, November 9, 2010 (the “Effective Date”). Also as part of the Plan, approximately 5.25 million shares of our common stock and 8.0 million warrants were purchased by certain of the investors sponsoring the Plan for $250 million. Unless the context otherwise requires, references to “we,” “us” and “our” refer to HHC and its subsidiaries.

The accompanying consolidated balance sheets at September 30, 2011 and December 31, 2010 reflect the consolidation of HHC and its subsidiaries, as of such date, with all significant intercompany balances and transactions eliminated. The accompanying combined financial statements for the periods prior to the Separation have been prepared in accordance with GAAP on a carve-out basis from the consolidated financial statements of GGP using the historical results of operations and the basis of the assets and liabilities of the transferred businesses as well as allocations from GGP. This presentation incorporates the same accounting principles used when preparing consolidated financial statements, including elimination of intercompany transactions. The presentation also includes the accounts of the HHC Businesses in which we have a controlling interest. The noncontrolling equity holders’ share of the assets, liabilities and operations are reflected in noncontrolling interests within permanent equity of the Company. The statement of equity and statement of cash flows for the nine months ended September 30, 2010 and the statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2010 are presented on a carve out basis. The statement of equity and statements of cash flows for the nine months ended September 30, 2011 and the statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2011 are presented on a consolidated basis.

As discussed above, we were formed for the purpose of receiving, via a tax-free distribution, certain assets and assuming certain liabilities of the Predecessors pursuant to the Plan. We conducted no business and had no separate material assets or liabilities until the Separation was consummated. No previous historical financial statements for the HHC Businesses have been prepared and, accordingly, our combined financial statements for the three and nine months ended September 30, 2010 were derived from the books and records of GGP and were carved-out from GGP at carrying values reflective of such historical cost. Our historical financial results reflect allocations for certain corporate expenses which include, but are not limited to, costs related to property management, human resources, security, payroll and benefits, legal, corporate communications, information services and restructuring and reorganizations. Costs of the services (approximately $1.7 million and $7.4 million, for the three and nine months ended September 30, 2010, respectively) that were allocated or charged to us were based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a number of factors, most significantly the Company’s percentage of GGP’s adjusted revenue and assets and the number of properties. We believe these allocations are reasonable; however, these results do not reflect what our expenses would have been had the Company been operating as a separate, stand-alone public company for such period. In addition, the HHC Businesses were operated as subsidiaries of GGP, which operated as a real estate investment trust during such period. We operate as a taxable corporation. The historical combined statement of equity and statement of cash flows presented for the nine months ended September 30, 2010, and the statement of operations and comprehensive income (loss) presented for the three and nine months ended September 30, 2010 therefore are not indicative of the results of operations, or cash flows that would have been obtained if we had been an independent, stand-alone entity during such period. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of results that can be expected for the full year.

As of September 30, 2011, our assets, including the assets associated with The Woodlands acquisition as discussed below, consisted of the following:

	•		four master planned communities (“MPCs”);
	•		twenty-six operating assets; and
	•		seventeen strategic developments.

Our ownership interests in properties in which we own a controlling interest are combined for the period from January 1, 2010 through September 30, 2010 and consolidated for the period from January 1, 2011 through September 30, 2011 under GAAP, with the non-controlling interests in such consolidated or combined ventures reflected as components of equity.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and goodwill, fair value of warrants and debt and cost ratios and completion percentages used for land sales. Actual results could differ from these and other estimates.

Acquisition

On July 1, 2011, we acquired for $117.5 million our partner’s 47.5% economic interest (represented by a 57.5% legal interest) in TWCPC Holdings, L.P., the Woodlands Operating Company, L.P. and TWLDC, Holdings, L.P. (collectively referred to as “The Woodlands”), located near Houston, Texas. The Company made the acquisition so that it can control attractive residential and commercial assets and to internalize The Woodlands platform to benefit our MPC business. As a result of the acquisition, we now consolidate The Woodlands operations and our consolidated financial statements are therefore not comparable to prior periods. Please refer to Note 12 — Segments, for a presentation of the results as if we owned 100% of the Woodlands, for all periods presented.

On its acquisition date, The Woodlands had approximately 1,324 acres of unsold residential land, representing approximately 4,395 lots, and approximately 962 acres of unsold land for commercial use. The Woodlands also has full or partial ownership interests in commercial properties totaling approximately 434,328 square feet of office space, 203,282 square feet of retail and service space, 865 rental apartment units, and also owns and operates a 440-room conference center facility and a 36-hole country club. We paid $20.0 million in cash at closing and the remaining $97.5 million of the purchase price is represented by a non-interest bearing

promissory note due December 1, 2011. There was no contingent consideration related to this acquisition. We intend to repay the note at maturity with cash on hand.

The assets and liabilities of The Woodlands were consolidated into our financial statements at fair value as of the acquisition date according to the following methodologies:

	•		The fair values of the Master Planned Community assets which consist of residential and commercial land held for development and sale were determined using a discounted cash flow analysis.
	•		The fair values of the commercial and retail assets acquired, consisting of land and buildings, were determined by valuing each property as if it were vacant, and the “as-if-vacant” value was then allocated between land and buildings. The ‘as-if-vacant” values were derived by estimating the value of each property assuming it was generating stabilized cash flows using market lease, capitalization and discount rates based on recent comparable market transactions, reduced by the estimated lease-up and carrying costs the Company would incur to achieve stabilized cash flow if the property were vacant. The buildings are depreciated over the estimated useful life of 40 years using the straight-line method.
	•		The values of above-market and below-market in-place leases of The Woodlands operating assets were based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates, measured over the remaining non-cancelable lease term. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the lease term.
	•		The estimated fair values of in-place leases included an estimate of carrying costs during the expected lease-up periods assuming the building was vacant, the estimated tenant improvement and leasing costs to acquire the leases, and an estimate of the lost net revenue during the lease-up period.
	•		The fair value of working capital items such as cash, Municipal Utility District receivables, prepaid expenses, accounts payable and accrued expenses was determined based on the carrying value due to the short term nature of such items.
	•		The debt assumed was primarily variable rate debt and fixed rate debt with short term maturities therefore, the carrying value was assumed to be the fair value.

On July 1, 2011, the acquisition date, we consolidated $591.5 million of assets and $342.7 million of liabilities relating to The Woodlands. Consolidation of The Woodlands net assets resulted in a $3.9 million after-tax loss on the remeasurement relating to our existing 52.5% economic interest which had a $134.8 million net book value at June 30, 2011. The loss is recorded in the Investment in real estate affiliate basis adjustment line on our consolidated and combined statements of operations and Comprehensive Income (Loss). For periods prior to July 1, 2011, our investment in The Woodlands was accounted for using the equity method. This business combination did not represent a significant acquisition of assets under the SEC rules.

The following table summarizes amounts recorded for the assets acquired and liabilities assumed at the acquisition date. Such amounts are subject to change pending completion of fair value allocations:

Master Planned Community Assets		$	274,638
Land			69,758
Buildings and Equipment			80,130
Investments in Real Estate Affiliates			42,932
Cash			25,492
Accounts receivable			7,661
Notes receivable			3,189
Municipal Utility District receivables			61,700
Other assets			25,968
Total assets			591,468
Mortgages, notes and loans payable			(296,695	)
Accounts payable and accrued expenses			(45,995	)
Noncontrolling interests			(3,515	)
Total liabilities and noncontrolling interests			(346,205	)
Total identifiable net assets		$	245,263

Included in the consolidated statement of operations since the acquisition date are revenues of $40.3 million and a net loss of $7.9 million for the quarter ended September 30, 2011. The net loss includes the impact of purchase accounting adjustments, including an $8.6 million increase in cost of sales to reflect the step-up in basis of finished lot inventory sold during the three months ended September 30, 2011.

Pro Forma Information

The following pro forma information for the nine months ended September 30, 2011 and 2010 was prepared as if The Woodlands acquisition had occurred as of the beginning of such period:

		Nine Months				Nine Months
		Ended				Ended
		September 30,				September 30,
		2011				2010
		(in thousands)
Total Revenues		$	276,240			$	203,734
Net income (loss)			112,393				(76,524	)

Pro forma adjustments were made for: (1) purchase accounting, including: (a) depreciation for the step-up in basis for property, plant and equipment; (b) amortization of in-place and above/below market leases; (c) increase in Land cost of sales for step-up in land basis for finished lots subsequently sold and (d) elimination of amortization of deferred financing costs, prepaid commissions and profits previously deferred and; (2) reductions in interest expense which is capitalizable in accordance with the Company’s interest capitalization policy.

The pro forma information is not necessarily indicative of the results that would have occurred had the acquisition occurred as of the beginning of the period presented, nor is it necessarily indicative of future results.

Investment in Real Estate

Real estate assets are stated at cost, including acquisition cost, less any provisions for impairments. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized. Real estate taxes and interest costs incurred during construction periods are also capitalized. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period. As of September 30, 2011, we have approximately 14,000 remaining saleable acres within our master planned communities, including The Woodlands.

Pre-development costs, that generally include legal and professional fees and other directly-related third-party costs associated with specific development properties, are capitalized as part of the property being developed. In the event that management no longer has the ability or intent to complete a development, the costs previously capitalized are expensed (see also our impairment policies below).

Tenant improvements relating to our operating assets, either paid directly or in the form of construction allowances paid to tenants, are capitalized and depreciated over the shorter of their economic lives or the lease term. Maintenance and repairs are charged to expense when incurred. Expenditures for significant improvements are capitalized.

Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives:

Asset Type		Years
Buildings and improvements			40-45
Equipment, tenant improvements and fixtures			5-10

Impairment

Generally accepted accounting principles related to accounting for the impairment or disposal of long-lived assets require that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset over its anticipated holding period are less than its carrying amount, the fair value of such assets should be estimated and an impairment provision should be recorded to write down the carrying amount of such asset to its estimated fair value. The impairment analysis does not consider the timing of future cash flows and whether the asset is expected to earn an above or below market rate of return. We review our real estate assets as well as our investments in Real Estate Affiliates for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flow during our expected holding period. 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, and estimated holding periods for the applicable assets. Although the estimated fair value of certain assets may be exceeded by the carrying amount, 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. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset. 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 Master Planned Communities, is expensed as a cost of sales when the asset is sold. Assets that have been impaired will in the future have lower depreciation and cost of sale expenses, but the impairment will have no impact on cash flow.

No impairment provisions were recorded in the three and nine months ended September 30, 2011 and approximately $0.1 million and $0.6 million, respectively, of impairment provisions, on predevelopment costs at certain of our Strategic Development properties, were recorded in the three and nine months ended September 30, 2010. As of September 30, 2011, no additional impairments were taken because we believe that the carrying amounts are recoverable. Despite this conclusion, additional impairment charges in the future could result if our plans regarding our assets change and/or economic conditions deteriorate. We can provide no assurance that material impairment charges with respect to Master Planned Community assets, Operating Assets, Strategic Developments, Real Estate Affiliates or Developments in progress will not occur in future periods. Accordingly, we will continue to monitor circumstances and events in future periods to determine whether additional impairments are warranted.

Municipal Utility District — Receivables

In Houston, Texas, certain development costs are reimbursable through the creation of Municipal Utility Districts (“MUD”s) and Water Control and Improvement Districts, which are separate political subdivisions authorized by Article 16, Section 59 of the Texas Constitution and governed by the Texas Commission on Environmental Quality (“TCEQ”). MUDs are formed to provide municipal water, waste water, drainage services, recreational facilities and roads to those areas where they are currently unavailable through the regular city services. Typically, the developer advances funds for the creation of the facilities, which must be designed, bid and constructed in accordance with the City of Houston’s and TCEQ requirements. The developer initiates the MUD process by filing the applications for the formation of the MUD, and once the applications have been approved, a board of directors is elected for the MUD and given the authority to issue ad valorem tax bonds and the authority to tax residents. The MUD board authorizes and approves all MUD development contracts and pay estimates. The Company estimates the costs it believes will be eligible for reimbursement and classifies them as MUD receivables. MUD bond sale proceeds are used to reimburse the developer for its construction costs, including interest. MUD taxes are used to pay the debt service on the bonds and the operating expenses of the MUD. The Company has not incurred any debt relating to the MUDs.

Warrants

As described above, on the Effective Date, we issued warrants to purchase 8.0 million shares of our common stock to certain of the sponsors of the Plan (the “Sponsors Warrants”) with an estimated initial value of approximately $69.5 million. The initial exercise price for the warrants of $50.00 per share is subject to adjustment for future stock dividends, splits or reverse splits of our common stock or certain other events. Approximately 6.1 million warrants are immediately exercisable and approximately 1.9 million warrants are exercisable upon 90 days prior notice for the first 6.5 years after issuance and exercisable without notice any time thereafter. The Sponsors Warrants expire on November 9, 2017.

In November 2010 and February 2011, the Company entered into certain warrant agreements (the “Management Warrants”) with David R. Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our Chief Financial Officer, in each case prior to his appointment to such position. The Management Warrants representing 2,862,687 underlying shares were issued pursuant to such agreements at fair value in exchange for approximately $19.0 million in cash from such executives at the commencement of their respective employment. Mr. Weinreb and Mr. Herlitz’s warrants have exercise prices of $42.23 per share and Mr. Richardson’s warrant has an exercise price of $54.50 per share. Generally, the Management Warrants become exercisable in November 2016 and expire by February 2018.

The aggregate estimated $128.6 million and $227.3 million fair values for the Sponsors Warrants and Management Warrants as of September 30, 2011 and December 31, 2010, respectively, have been recorded as a

liability because the holders of these warrants could require HHC to settle such warrants in cash upon a change of control. Such fair values were estimated using an option pricing model and level 3 inputs due to the unavailability of comparable market data. Changes in the fair value of the Sponsors Warrants and the Management Warrants are recognized in earnings and, accordingly, warrant liability gains reflecting decreases in value of approximately $169.9 million and $100.8 million, were recognized for the three and nine months ended September 30, 2011, respectively.

Revenue Recognition and Related Matters

Revenues from land sales are recognized using the full accrual method if certain criteria provided by GAAP relating to the terms of the transactions and our subsequent involvement with the land sold are met. Revenues relating to transactions that do not qualify for the full accrual method are deferred and recognized using the installment or cost recovery methods. Revenue related to builder participation rights is recognized when collected.

Cost of land sales is determined as a specified percentage of land sales revenues recognized for each community development project. These cost ratios are based on actual costs incurred and estimates of future development costs and sales revenues to completion of each project. The ratios are reviewed regularly and revised for changes in sales and cost estimates or development plans. Significant changes in these estimates or development plans, whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a specific project. For certain parcels of land, however, the specific identification method is used to determine cost of sales including acquired parcels that we do not intend to develop or for which development was complete at the date of acquisition. Expenditures in our MPC business to develop land for sale are classified as an operating activity under real estate acquisition and development expenditures in our condensed consolidated and combined statements of cash flows.

Nouvelle at Natick is a 215 unit residential condominium project, located in Natick, Massachusetts. Pursuant to the Plan, only the unsold units on the Effective Date were distributed to us and no deferred revenue or sales proceeds from unit closings prior to the Effective Date were allocated to us. As of September 30, 2011, nine units were unsold, of which four are under contract for sale. Income related to unit sales subsequent to the Effective Date is accounted for on a unit-by-unit full accrual method.

Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases. Minimum rent revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates and amortization related to above and below-market tenant leases on acquired properties. Certain leases require tenants to pay, as additional rent, the real estate taxes and property operating expenses, common area maintenance and insurance related to the leased space. This additional rent is recorded as tenant recoveries.

Straight-line rent receivables, which represents the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases, of $3.2 million and $2.0 million as of September 30, 2011 and December 31, 2010, respectively, are included in Accounts receivable, net in our condensed consolidated balance sheets.

Revenue for the resort and conference center is recognized as services are performed and primarily represents room rentals and food and beverage sales.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of options and nonvested stock issued under stock-based compensation plans is computed using the “treasury stock” method. The dilutive effect of the Sponsors Warrants and Management Warrants is computed using the if-converted method. Gains associated with the Sponsors Warrants and Management Warrants are excluded from the numerator in computing diluted earnings per share because inclusion of such gains in the computation would be anti-dilutive.

As defined and described in Note 8, certain HHC Replacement Options outstanding are required to be settled by GGP and therefore do not represent dilutive securities at any date presented. Of the HHC Replacement Options outstanding that are required to be settled by HHC, diluted EPS excludes options where the exercise price was higher than the average market price of our common stock and options for which vesting requirements were not satisfied. Such options totaled 2,522 shares as of September 30, 2011.

As discussed above, in connection with the Separation on November 9, 2010, GGP distributed to its stockholders 32.5 million shares of our common stock and approximately 5.25 million shares were purchased by certain investors sponsoring the Plan. This share amount is used in the calculation of basic and diluted EPS for the three and nine months ended September 30, 2010 as our common stock was not traded prior to November 9, 2010 and there were no dilutive securities in the prior periods.

Information related to our EPS calculations is summarized as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
(In thousands, except per share amounts)
Basic EPS:
Numerator:
Net income (loss) attributable to common stockholders		$	164,295			$	(16,230	)		$	115,751			$	(64,801	)
Denominator:
Weighted average number of common shares outstanding — basic			37,912				37,716				37,907				37,716
Diluted EPS:
Numerator:
Net income (loss) attributable to common stockholders		$	164,295			$	(16,230	)		$	115,751			$	(64,801	)
Warrant liability gain			(169,897	)			—				(100,762	)			—
Adjusted net income (loss) available to common stockholders		$	(5,602	)		$	(16,230	)		$	14,989			$	(64,801	)
Denominator:
Weighted average number of common shares outstanding — basic			37,912				37,716				37,907				37,716
Diluted effect:
Restricted stock and stock options			—				—				5				—
Warrants			843				—				1,585				—
Weighted average number of common shares outstanding — diluted			38,755				37,716				39,497				37,716
Anti-dilutive stock options and restricted stock, not included above			731				—				731				—
Basic Earnings (Loss) Per Share		$	4.33			$	(0.43	)		$	3.05			$	(1.72	)
Diluted Earnings (Loss) Per Share		$	(0.14	)		$	(0.43	)		$	0.38			$	(1.72	)

Reorganization Items

As certain of the HHC Businesses had filed for bankruptcy protection in April 2009 (the “HHC Debtors”), these entities were required by GAAP to separately present as Reorganization items elements of expense or income that were incurred or realized as a result of the bankruptcy filings. These items include professional fees and similar types of expenses and gains and interest earned on cash accumulated by certain of our subsidiaries, all as a result of the bankruptcy. Reorganization items specific to the HHC Debtors have been allocated to us from GGP and have been reflected in our combined statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2010. GGP agreed that it would reimburse HHC up to $5.0 million for liability claims related to periods prior to the HHC Debtors’ bankruptcy filings, $3.3 million of which has been paid as of September 30, 2011.

Reorganization items are as follows:

		Three Months Ended				Nine Months Ended
Reorganization Items		September 30, 2010				September 30, 2010
(In thousands)
Gains on liabilities subject to compromise — vendors (a)		$	(216	)		$	(498	)
Gains on liabilities subject to compromise, net — mortgage debt (b)			(2,747	)			(2,382	)
Interest income (c)			(13	)			(14	)
U.S. Trustee fees			142				412
Restructuring costs (d)			19,349				45,611
Total reorganization items		$	16,515			$	43,129

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued a new standard which changes the requirements for presenting comprehensive income in the financial statements. The new standard eliminates the option to present other comprehensive income (“OCI”) in the statement of stockholders’ equity and instead requires net income, components of OCI, and total comprehensive income to be presented in one continuous statement or two separate but consecutive statements. The standard will be effective for us beginning with our first quarter 2012 reporting and will be applied retrospectively. HHC had elected to present OCI in one continuous statement in all its previous filings and accordingly, the effective date of this standard will not have an effect on our results of operating, financial position, or cash flows in our consolidated financial statements.

In May 2011, the FASB issued “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The standard revises guidance for fair value measurement and expands the disclosure requirements. It is effective for fiscal years beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements.

NOTE 2 FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents, for each of the fair value hierarchy levels required under Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement,” the Company’s assets and liabilities that are measured at fair value on a recurring basis.

						September 30, 2011												December 31, 2010
						Fair Value Measurements Using												Fair Value Measurements Using
						Quoted																Quoted
						Prices in																Prices in
						Active				Signifiicant												Active				Signifiicant
						Markets for				Other				Signifiicant								Markets for				Other				Signifiicant
						Identical				Observable				Unobservable								Identical				Observable				Unobservable
						Assets				Inputs				Inputs								Assets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)				Total				(Level 1)				(Level 2)				(Level 3)
(In thousands)
Assets:
Interest rate swap		$	2			$	—			$	2			$	—			$	—			$	—			$	—			$	—
Liabilities:
Warrants			128,586				—				—				128,586				227,348				—				—				227,348
Interest rate swap			3,561				—				3,561				—				—				—				—				—

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves.

The valuation of warrants is based on an option pricing valuation model. The inputs to the model include the fair value of the stock related to the warrants, exercise price of the warrants, term, expected volatility, risk-free interest rate and dividend yield.

The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3)

(in thousands)
Balance as of December 31, 2010		$	227,348
Warrant liability gain			(100,762	)
Purchases			2,000
Balance as of September 30, 2011		$	128,586

The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis are as follows:

		September 30, 2011								December 31, 2010
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
(In thousands)
Fixed-rate debt		$	138,219			$	140,069			$	191,037			$	202,897
Variable-rate debt			512,609				512,609	(a)			65,518				65,629
SID bonds (b)			57,344				57,344				62,105				62,105
Total		$	708,172			$	710,022			$	318,660			$	330,631

The fair value of debt was estimated based on quoted market prices for publicly traded debt, recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, the current London Interbank Offered Rate (“LIBOR”), a widely quoted market interest rate which is frequently the index used to determine the rate at which we borrow funds, U.S. Treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assume that the debt is outstanding through maturity. We have utilized available market information or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any of such debt could be realized by immediate settlement of the obligation.

The carrying amounts of cash and cash equivalents and accounts and notes receivable approximate fair value because of the short-term maturity of these instruments.

NOTE 3 INTANGIBLE ASSETS AND LIABILITIES

The following table summarizes our intangible assets and liabilities:

						Accumulated				Net
		Gross Asset				(Amortization)				Carrying
		(Liability)				/ Accretion				Amount
(In thousands)
As of September 30, 2011
Tenant leases:
In-place value		$	24,037			$	(11,150	)		$	12,887
Above-market			3,185				(1,816	)			1,369
Ground leases:
Above-market			(3,545	)			961				(2,584	)
Below-market			23,096				(2,378	)			20,718
As of December 31, 2010
Tenant leases:
In-place value		$	11,824			$	(10,221	)		$	1,603
Above-market			1,820				(1,701	)			119
Below-market			(77	)			77				—
Ground leases:
Above-market			(3,545	)			638				(2,907	)
Below-market			23,096				(2,078	)			21,018

The gross asset balances of the in-place value of tenant leases are included in Buildings and equipment in our consolidated balance sheets. The above-market and below-market tenant and ground leases are included in Prepaid expenses and other assets and Accounts payable and accrued expenses in our consolidated balance sheets.

Amortization/accretion of these intangible assets and liabilities decreased our income (excluding the impact of noncontrolling interests and the provision for income taxes) by $0.8 million and $1.1 million, respectively, for the three and nine months ended September 30, 2011 and by $0.2 million and $0.6 million, respectively, for the three and nine months ended September 30, 2010.

Future amortization of these intangible assets and liabilities is estimated to decrease net income (excluding the impact of noncontrolling interests and the provision for income taxes) by approximately $1.2 million for the remainder of 2011 and $2.2 million in 2012, $2.1 million in 2013, $1.9 million in 2014 and $25.0 million thereafter.

NOTE 4 REAL ESTATE AFFILIATES

As of July 1, 2011, The Woodlands is consolidated and no longer a Real Estate Affiliate and The Woodlands Equity Investments (defined below) are considered Real Estate Affiliates (refer to Note 1). As of September 30, 2011, we own noncontrolling interests in Circle T (as defined below) and The Woodlands Equity Investments whereby, generally, we share in the profits and losses, cash flows and other matters relating to our investments in Real Estate Affiliates in accordance with our respective ownership percentages. As we have joint interest and joint control of these ventures with our venture partners, we account for these joint ventures using the equity method. For cost method investments (Note 1), we recognize earnings to the extent of dividends received from such investments, which are included, along with equity method earnings, in equity in earnings Real Estate Affiliates in our consolidated and combined statements of operations and comprehensive income (loss). In March 2011, we received approximately $3.9 million in dividends from our Summerlin Hospital Medical Center investment which is reported on the cost method.

Our interests in Westlake Retail Associates, Ltd (“Circle T Ranch”) and 170 Retail Associates Ltd (“Circle T Power Center”), and together with Circle T Ranch, (“Circle T”), located in Dallas/Fort Worth, Texas, are held through joint venture entities in which we own non-controlling interests and are unconsolidated and accounted for on the equity method. Waterway Ave Partners, L.L.C. (“Millenium Waterway Apartments”), FV-93 Limited and Timbermill-94 Limited (“Forest View and Timbermill Apartments”), Woodlands-Sarofim #1 Ltd. (“Woodlands Sarofim”) industrial buildings and Stewart Title of Montgomery County, Inc. (“Stewart Title”), all located in The Woodlands and collectively referred to as “The Woodlands Equity Investments”, are reflected in our financial statements as non-consolidated joint ventures and are accounted for on the equity method. The Woodlands (when referred to periods prior to July 1, 2011), Circle T,

The Woodlands Equity Investments (when referring to periods after June 30, 2011) and certain cost method investments (for example, our interest in the Summerlin Hospital Medical Center) are collectively referred to in this report as our “Real Estate Affiliates.”

As of September 30, 2011, approximately $60.2 million of indebtedness was secured by the properties owned by our Real Estate Affiliates, our share of which was approximately $43.8 million.

																		Share of Earnings
		Economic Ownership								Carrying Value								Three Months Ended								Nine Months Ended
		September 30,				December 31,				September 30,				December 31,				September 30,								September 30,
		2011				2010				2011				2010				2011				2010				2011				2010
		(in percentages)																(in thousands)
The Woodlands			—				52.50			$	—			$	131,090			$	—			$	1,226			$	3,727			$	6,398
Circle T			50.00				50.00				9,004				9,004				—				(4	)			—				(4	)
Stewart Title			50.00				—				3,714				—				85				—				85				—
Timbermill Apartments			50.00				—				5,161				—				1				—				1				—
Woodlands Sarofim			20.00				—				2,393				—				30				—				30				—
Millenium Waterway Apartments			83.55				—				21,316				—				14				—				14				—
Forest View Apartments			50.00				—				6,542				—				1				—				1				—
											48,130				140,094				131				1,222				3,858				6,394
Cost basis investments (a)											13,084				9,449				35				—				3,929				—
Investment in Real Estate Affiliates										$	61,214			$	149,543			$	166			$	1,222			$	7,787			$	6,394

NOTE 5 MORTGAGES, NOTES AND LOANS PAYABLE

Mortgages, notes and loans payable are summarized as follows:

		September 30,				December 31,
(In thousands)		2011				2010
Fixed-rate debt:
Fixed-rate debt		$	138,219			$	191,037
Variable-rate debt			512,609	(a)			65,518
Special Improvement District bonds			57,344				62,105
Total mortgages, notes and loans payable		$	708,172			$	318,660

The following table presents our mortgages, notes, and loans payable by property:

		Maximum				Carrying Value
		Facility				September 30,				Interest
Property (In thousands)		Amount				2011				Rate				Final Maturity
Mortgages, notes and loans payable
110 N. Wacker						$	29,000				5.21	%(a)		November 2019
Bridgeland
Note #1							15,295				6.50	%		May 2026
Note #2							3,288				6.50	%		December 2017
Note #3							2,062				6.50	%		June 2033
Note #4							253				6.50	%		December 2021
Bridgeland Total							20,898
Special Improvement District bonds
Summerlin South — S108							1,424				5.95	%		December 2016
Summerlin South — S124							436				5.95	%		December 2019
Summerlin South — S128							898				7.30	%		December 2020
Summerlin South — S128C							6,060				6.05	%		December 2030
Summerlin South — S132							5,604				7.88	%		December 2020
Summerlin South — S151							12,772				6.00	%		June 2025
Summerlin West — S808							1,013				5.71	%		April 2021
Summerlin West — S809							1,476				6.65	%		April 2023
Summerlin West — S810							22,771				7.13	%		April 2031
The Shops @ Summerlin Centre — S128							4,005				6.05	%		December 2030
The Shops @ Summerlin Centre — S108							885				5.95	%		December 2016
Total Special Improvement District bonds							57,344
The Woodlands
Master credit facility		$	270,000				235,000				5.00	%(b)		March 2015
Acquisition note							96,500				—	(c)		December 2011
Resort and Conference Center							36,100				5.50	%(d)		October 2012
9303 New Trails							13,142				1.37	%		December 2011
WCA Building							4,875				6.50	%(e)		November 2011
Weiner Tract							1,520				6.25	%		January 2013
Land in Montgomery Co.							683				6.00	%		December 2012
Land in Harris Co.							393				6.00	%		January 2013
Capital lease obligation							107
CVS							101				3.25	%		upon sale
The Woodlands Total							388,421
Ward Centers		$	250,000				212,509				3.46	%(f)		September 2016
						$	708,172

The weighted average interest rate on our mortgages, notes and loans payable, inclusive of interest rate hedges but excluding the acquisition note and capital lease obligation, was 4.65% and 5.14% as of September 30, 2011 and December 31, 2010, respectively.

The following table summarizes the principal payment obligations relating to our long-term debt:

		Long-term debt
		principal payments
		(In thousands)
4th Quarter 2011		$	115,109
2012			48,211
2013			27,966
2014			201,391
2015			4,241
Thereafter			311,254
Total		$	708,172

Collateralized Mortgages, Notes and Loans Payable

As of September 30, 2011, we had $708.2 million of collateralized mortgages, notes and loans payable. Approximately $388.4 million of the debt included in the table above, including the $97.5 million Acquisition note, is related to The Woodlands, which was consolidated on July 1, 2011. All of the debt is non-recourse and is secured by the individual properties as listed in the table above, except for The Woodlands Master Credit Facility and Resort and Conference Center Loan which is recourse to the partnerships that directly own The Woodlands operations, and a $7.0 million corporate recourse guarantee associated with the 110 N. Wacker mortgage, which is more fully discussed below. The Bridgeland MPC loan is secured by approximately 7,615 acres of land within the Bridgeland MPC and a security interest in its Municipal Utility District receivables. In addition, certain of our loans contain provisions which grant the lender a security interest in the operating cash flow of the property that represents the collateral for the loan. Such provisions are not expected to impact our operations in 2011. Certain mortgage notes may be prepaid, but may be subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.

The Acquisition note has a $97.5 million outstanding principal balance, is non-interest bearing and matures on December 1, 2011. The note was recorded at its approximate $96.5 million fair value on July 1, 2011, is non-recourse to us and is secured by the acquired Woodlands interests acquired on July 1, 2011. We intend to repay the note at maturity with cash on hand.

The Woodlands Master Credit Facility is a $270 million facility consisting of a $170 million term loan and a $100 million revolving credit line (together, the “TWL Facility”). As of September 30, 2011, the facility had an outstanding balance of $235.0 million. The TWL Facility bears interest at one-month LIBOR plus 4.0% with a 1.0% LIBOR floor, has a March 29, 2014 initial maturity date and a one-year extension at borrower’s option. The TWL Facility also contains certain restrictions that, among other things, require the maintenance of specified financial ratios, restrict the incurrence of additional indebtedness at The Woodlands, and limit distributions from The Woodlands to us. Until The Woodlands leverage, as defined by the credit agreement, is less than a 40.0% loan to value ratio, we must amortize the debt on a dollar for dollar basis for any distributions that we make from The Woodlands. As of September 30, 2011, leverage was approximately 51.9% and there was $35.0 million of undrawn and available borrowing capacity under TWL Facility.

The TWL Facility also requires mandatory principal amortization payments during its initial term and during the extension period, if exercised. Repayments of $10.0 million, $25.0 million and $30.0 million are required on March 29 of 2012, 2013 and, if extended, 2014, respectively. Furthermore, $10.0 million is due on each of June 29, September 29 and December 29, 2014 during the extension period.

The Woodlands Resort and Conference Center loan has a $36.1 million outstanding balance as of September 30, 2011, matures on October 30, 2012 and has an option for a one year extension. The loan bears interest at one-month LIBOR plus 4.5% as of September 30, 2011 and has a 1.0% LIBOR floor. The interest rate increased by 0.5% on September 23, 2011 and increases by 0.5% every six months thereafter until maturity. The loan is secured by a 440 room and 40 acre conference center and resort located within The Woodlands, and requires the maintenance of specified financial ratios.

On September 30, 2011, the Company closed on a $250.0 million first mortgage financing secured by the Ward Centers in Honolulu, Hawaii, that bears interest at LIBOR plus 2.50%. The loan matures on September 29,

2016, and $143.0 million of the principal balance was swapped to a 3.81% fixed rate for the term of the loan. The loan proceeds were used to repay approximately $209.5 million of mortgage debt and to fund closing costs. The loan may be drawn to a maximum $250.0 million to fund capital expenditures at the property, provided that the outstanding principal balance cannot exceed 65% of the property’s appraised value and the borrowers are required to have a minimum 10.0% debt yield in order to draw additional loan proceeds under the facility. The loan also permits partial repayment during its term in connection with property releases for development. The repayment of three mortgages previously secured by Ward Centers resulted in an $11.3 million pre-tax loss on early repayment of debt. The mortgages had been recorded at discounts to their outstanding principal balances because they were recorded at their fair values as part of the reorganization transactions in 2010.

On May 10, 2011, the Company closed a $29.0 million first mortgage financing secured by its office building located at 110 N. Wacker Drive in Chicago, Illinois and bearing interest at LIBOR plus 2.25%. At closing, the interest rate on the loan was swapped to a 5.21% fixed rate for the term of the loan. The loan matures on October 31, 2019 and its term is coterminous with the expiration of the first term of the existing tenant’s lease (Note 9). The loan has an interest-only period through April 2015 and, thereafter, amortizes ratably to $12.0 million through maturity. The proceeds from the financing were used to repay the existing $28.2 million mortgage and to pay closing costs and other expenses. The Company provided a $7.0 million repayment guarantee for the loan, which is reduced on a dollar for dollar basis during the amortization period.

Special Improvement District Bonds

The Summerlin master planned community uses Special Improvement District bonds to finance certain common infrastructure. These bonds are issued by the municipalities and, although unrated, are secured by the assessments on the land and approximately 1,971 acres of land within the Summerlin MPC. The majority of proceeds from each bond issued is held in a construction escrow and dispersed to us as infrastructure projects are completed, inspected by the municipalities and approved for reimbursement. Accordingly, the cash raised but not yet spent related to the Special Improvement District bonds has been classified as a receivable within Prepaid and other assets. We pay the debt service on the bonds semi-annually, but typically receive reimbursement of all principal amortization paid by us from certain purchasers of our land; therefore, the Special Improvement District receivable (included in Prepaid expenses and other assets) and Special Improvement District bonds (included in Mortgages, notes and loans payable) largely offset (Note 7). In addition, as the Summerlin master planned community sells land, the purchasers assume a proportionate share of the bond obligation.

As of September 30, 2011, the Company was in compliance with all of the financial covenants related to its debt agreements.

Letters of Credit and Surety Bonds

We had outstanding letters of credit and surety bonds of $36.8 million as of September 30, 2011 and $38.7 million as of December 31, 2010. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

NOTE 6 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to certain risks arising from business operations and economic conditions. We seek to manage certain economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding through the use of derivative financial instruments. Specifically, the Company enters into interest rate swap and cap instruments to manage exposures that arise from future uncertain debt service payments principally related to floating rate borrowings.

Our objectives in using interest rate derivatives are to add stability to interest costs by reducing our exposure to interest rate movements. To accomplish this objective and predictability, we primarily use interest rate swaps and caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2011, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion

of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2011 and 2010 there was no ineffectiveness recorded in earnings.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Over the next 12 months, the Company estimates that an additional $1.5 million will be reclassified as an increase to interest expense.

As of September 30, 2011, the Company had gross notional amounts of $172.0 million of interest rate swaps and a $100.0 million interest rate cap that were designated as cash flow hedges of interest risk. The fair value of the interest rate cap derivative was immaterial.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2011 and December 31, 2010:

		As of September 30, 2011								As of December 31, 2010
		Balance Sheet								Balance Sheet
		Location				Fair Value				Location				Fair Value
(in thousands)
Interest Rate Swaps
Assets		Other Assets				$	2			Other Assets				$	—
Liabilities		Other Liabilities					(3,561	)		Other Liabilities					—
Total derivatives designated as hedging instruments						$	(3,559	)						$	—