Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended September 30,2010**

 

**or**

 

**o****         Transition reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the Transition Periodfrom                      to                      **

 

**Commission file number 1-11656**

 

**THE HOWARD HUGHES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                     | ** ** | **36-4673192**         |
|----------------------------------|------------|------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer       |
| incorporation or  organization)  |       | Identification Number) |

 

**13355 Noel Road, Suite 950, Dallas, Texas 75240**

(Address of principal executive offices,including Zip Code)

 

**(214) 741-7744**

(Registrant’s telephone number, includingarea code)

 

**N / A**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. o Yes  x No

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

 

The registrant commenced operations on November 9,2010.

 

As of November 10, 2010, there were 37,716,453shares of the registrant’s common stock outstanding.

 

 

 

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**The Howard HughesCorporation**

 

**INDEX**

 
| ** **       | ** **                                                                                                               | **PAGE  NUMBER** |
|------------------|--------------------------------------------------------------------------------------------------------------------------|------------------|
| **Part I**  | **FINANCIAL INFORMATION**                                                                                                |             |
|             | Item 1: Combined Financial Statements (Unaudited)                                                                        |             |
|             |                                                                                                                     |             |
|             | Combined Balance Sheets  as of September 30, 2010 and December 31, 2009                                        | 3                |
|             |                                                                                                                     |             |
|             | Combined Statements of Loss and Comprehensive Loss  for the three and nine months ended September 30, 2010 and 2009 | 4                |
|             |                                                                                                                     |             |
|             | Combined Statements of Equity  for the nine months ended September 30, 2010 and 2009                                | 5                |
|             |                                                                                                                     |             |
|             | Combined Statements of Cash Flows  for the nine months ended September 30, 2010 and 2009                            | 6                |
|             |                                                                                                                     |             |
|             | Notes to Combined  Financial Statements                                                                                  | 7                |
|             | Note 1:  Organization                                                                                                    | 7                |
|             | Note 2: Intangible Assets and Liabilities                                                                                | 17               |
|             | Note  3: Real Estate Affiliates                                                                                          | 18               |
|             | Note 4: Mortgages, Notes and Loans Payable                                                                               | 20               |
|             | Note 5:  Income Taxes                                                                                                    | 21               |
|             | Note 6: Transactions with GGP and Other GGP  Subsidiaries                                                                | 22               |
|             | Note 7: Other Assets and Liabilities                                                                                     | 22               |
|             | Note 8: Commitments and Contingencies                                                                                    | 23               |
|             | Note 9: Recently Issued Accounting Pronouncements                                                                        | 24               |
|             | Note 10: Segments                                                                                                        | 24               |
|             | Note 11: Management Appointments on November 22, 2010                                                                    | 28               |
|             | Item 2: Management’s Discussion and Analysis of Financial  Condition and Results of Operations                      | 28               |
|             | Liquidity and Capital Resources                                                                                          | 36               |
|             | Item 3: Quantitative and Qualitative Disclosures about  Market Risk                                                      | 37               |
|             | Item  4: Controls and Procedures                                                                                         | 38               |
|             |                                                                                                                     |             |
| **Part II** | **OTHER INFORMATION**                                                                                                    |             |
|             | Item 1: Legal Proceedings                                                                                                | 38               |
|             | Item 1A: Risk Factors                                                                                                    | 38               |
|             | Item 2: Unregistered Sales of Equity Securities and  Use of Proceeds                                                     | 38               |
|             | Item 3: Defaults Upon Senior Securities                                                                                  | 38               |
|             | Item 5: Other Information                                                                                                | 38               |
|             | Item  6: Exhibits                                                                                                        | 38               |
|             | SIGNATURE                                                                                                                | 39               |
|             | EXHIBIT INDEX                                                                                                       | 40               |

 

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**THE HOWARD HUGHES CORPORATION**

 

**COMBINED BALANCE SHEETS**

**(UNAUDITED)**

 
| ** **                                                      | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                                                      | ** ** | **(In thousands)** | ** ** |
| **Assets:**                                                     |       |                    |       |                  |       |
| Investment in real estate:                                      |       |                    |       |                  |       |
| Land                                                            |       | $                       | 194,181    |                  | $          | 194,700 |   |
| Buildings and equipment                                         |       | 447,696                 |       | 451,279               |       |
| Less accumulated  depreciation                                  |       | (94,697                 | )          | (85,639               | )          |
| Developments in progress                                        |       | 266,216                 |       | 258,807               |       |
| Net property and equipment                                      |       | 813,396                 |       | 819,147               |       |
| Investment in Real Estate  Affiliates                           |       | 146,537                 |       | 140,558               |       |
| Investment property and  property held for development and sale |       | 1,775,904               |       | 1,782,470             |       |
| Net investment in real  estate                                  |       | 2,735,837               |       | 2,742,175             |       |
| Cash and cash equivalents                                       |       | 2,811                   |       | 3,204                 |       |
| Accounts and notes  receivable, net                             |       | 14,055                  |       | 17,359                |       |
| Deferred expenses, net                                          |       | 6,894                   |       | 7,444                 |       |
| Prepaid expenses and other  assets                              |       | 132,824                 |       | 135,045               |       |
| Total assets                                                    |       | $                       | 2,892,421  |                  | $          | 2,905,227 |   |
|                                                            |       |                    |       |                  |       |
| **Liabilities  and Equity:**                                    |       |                    |       |                  |       |
| Liabilities not subject to  compromise:                         |       |                    |       |                  |       |
| Mortgages, notes and loans  payable                             |       | $                       | 272,825    |                  | $          | 208,860 |   |
| Deferred tax liabilities                                        |       | 715,516                 |       | 782,817               |       |
| Accounts payable and  accrued expenses                          |       | 225,883                 |       | 134,191               |       |
| Liabilities not subject to  compromise                          |       | 1,214,224               |       | 1,125,868             |       |
| Liabilities subject to  compromise                              |       | 138,093                 |       | 275,839               |       |
| Total liabilities                                               |       | 1,352,317               |       | 1,401,707             |       |
|                                                            |       |                    |       |                  |       |
| **Equity:**                                                     | ** ** | ** **              | ** ** | ** **            | ** ** |
| GGP Equity                                                      |       | 1,540,857               |       | 1,504,364             |       |
| Accumulated other  comprehensive loss                           |       | (1,556                  | )          | (1,744                | )          |
| Total GGP equity                                                |       | 1,539,301               |       | 1,502,620             |       |
| Noncontrolling interests  in Combined Real Estate Affiliates    |       | 803                     |       | 900                   |       |
| Total equity                                                    |       | 1,540,104               |       | 1,503,520             |       |
| Total liabilities and  equity                                   |       | $                       | 2,892,421  |                  | $          | 2,905,227 |   |

 

The accompanying notes are an integral partof these combined financial statements.

 

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**THE HOWARD HUGHES CORPORATION**

 

**COMBINED STATEMENTS OFLOSS AND COMPREHENSIVE LOSS**

**(UNAUDITED)**

 
| ** **                                                                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                       | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                                                       | ** ** | **(In thousands)**          | ** ** |
| **Revenues:**                                                                                                                    | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minimum rents                                                                                                                    |       | $                                | 16,349     |                            | $          | 15,873 |   | $ | 50,349 |   | $ | 49,390 |   |
| Tenant recoveries                                                                                                                |       | 4,637                            |       | 5,045                           |       | 13,891 |   | 14,827 |   |
| Overage rents                                                                                                                    |       | 826                              |       | 615                             |       | 1,738 |   | 1,465 |   |
| Land sales                                                                                                                       |       | 10,034                           |       | 7,409                           |       | 22,141 |   | 38,843 |   |
| Other                                                                                                                            |       | 614                              |       | 1,318                           |       | 3,762 |   | 855 |   |
| Total revenues                                                                                                                   |       | 32,460                           |       | 30,260                          |       | 91,881 |   | 105,380 |   |
| **Expenses:**                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Real estate taxes                                                                                                                |       | 4,131                            |       | 3,829                           |       | 11,161 |   | 10,111 |   |
| Property maintenance costs                                                                                                       |       | 1,484                            |       | 1,389                           |       | 4,766 |   | 3,617 |   |
| Marketing                                                                                                                        |       | 248                              |       | 278                             |       | 755 |   | 738 |   |
| Other property operating  costs                                                                                                  |       | 8,746                            |       | 9,224                           |       | 26,440 |   | 25,244 |   |
| Land sales operations                                                                                                            |       | 10,057                           |       | 8,124                           |       | 30,654 |   | 40,578 |   |
| Provision for doubtful  accounts                                                                                                 |       | 744                              |       | —                          |       | 1,101 |   | 1,212 |   |
| Property management and  other costs                                                                                             |       | 3,467                            |       | 4,561                           |       | 12,463 |   | 12,992 |   |
| Strategic initiatives                                                                                                            |       | —                           |       | 266                             |       | — |   | 5,380 |   |
| Provisions for impairment                                                                                                        |       | 92                               |       | 40,582                          |       | 578 |   | 180,762 |   |
| Depreciation and  amortization                                                                                                   |       | 4,109                            |       | 4,434                           |       | 12,535 |   | 15,221 |   |
| Total expenses                                                                                                                   |       | 33,078                           |       | 72,687                          |       | 100,453 |   | 295,855 |   |
| Operating loss                                                                                                                   |       | (618                             | )          | (42,427                         | )          | (8,572 | ) | (190,475 | ) |
|                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                                                                                  |       | 59                               |       | 155                             |       | 118 |   | 487 |   |
| Interest expense                                                                                                                 |       | (681                             | )          | (186                            | )          | (1,888 | ) | (768 | ) |
| Loss before income taxes,  equity in income (loss) of Real Estate Affiliates, reorganization items and  noncontrolling interests |       | (1,240                           | )          | (42,458                         | )          | (10,342 | ) | (190,756 | ) |
| Benefit from (provision  for) income taxes                                                                                       |       | 350                              |       | 21,897                          |       | (17,603 | ) | 24,810 |   |
| Equity in income (loss) of  Real Estate Affiliates                                                                               |       | 1,222                            |       | (2,004                          | )          | 6,394 |   | 2,117 |   |
| Reorganization items                                                                                                             |       | (16,515                          | )          | (1,814                          | )          | (43,129 | ) | (3,831 | ) |
| Net  loss                                                                                                                        |       | (16,183                          | )          | (24,379                         | )          | (64,680 | ) | (167,660 | ) |
| Allocation to  noncontrolling interests                                                                                          |       | (47                              | )          | (35                             | )          | (121 | ) | (100 | ) |
| Net loss attributable to  GGP                                                                                                    |       | $                                | (16,230    | )                               | $          | (24,414 | ) | $ | (64,801 | ) | $ | (167,760 | ) |
|                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| **Comprehensive  Income (loss), Net:**                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                                                                                         |       | $                                | (16,183    | )                               | $          | (24,379 | ) | $ | (64,680 | ) | $ | (167,660 | ) |
| Other comprehensive income                                                                                                       |       | 88                               |       | 163                             |       | 188 |   | 489 |   |
| Comprehensive loss                                                                                                               |       | (16,095                          | )          | (24,216                         | )          | (64,492 | ) | (167,171 | ) |
| Comprehensive loss  allocated to noncontrolling interests                                                                        |       | (47                              | )          | (35                             | )          | (121 | ) | (100 | ) |
| Comprehensive loss  attributable to GGP                                                                                          |       | $                                | (16,142    | )                               | $          | (24,251 | ) | $ | (64,613 | ) | $ | (167,271 | ) |

 

The accompanying notes are an integral partof these combined financial statements.

 

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**THE HOWARD HUGHES CORPORATION**

 

**COMBINED STATEMENTS OFEQUITY**

**(UNAUDITED)**

** **
| ** **                                 | ** ** | ** **              | ** ** | **Accumulated**        | ** ** | **Noncontrolling**         | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                 | ** ** | ** **              | ** ** | **Other**              | ** ** | **Interests in**      | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **GGP**                 | ** ** | **Comprehensive**      | ** ** | **Combined Real**     | ** ** | **Total**  | ** ** |
| ** **                                 | ** ** | **Equity**              | ** ** | **Income (Loss)** | ** ** | **Estate Affiliates** | ** ** | **Equity** | ** ** |
| ** **                                 | ** ** | **(In thousands)** | ** ** |
| ** **                                 | ** ** | ** **              | ** ** | ** **             | ** ** | ** **                 | ** ** | ** ** | ** ** |
| **Balance,  January 1, 2009**         |       | $                       | 1,986,938  |                   | $          | (2,926                     | )          | $          | 1,803      |   | $ | 1,985,815 |   |
|                                       |       |                    |       |                   |       |                       |       |       |       |
| Net income (loss)                          |       | (167,760                | )          | —                 |       | 100                        |       | (167,660   | )          |
| Distributions to  noncontrolling interests |       | —                  |       | —                 |       | (103                       | )          | (103       | )          |
| Other comprehensive income                 |       | —                  |       | 489                    |       | —                     |       | 489        |       |
| Contributions from GGP,  net               |       | 26,716                  |       | —                 |       | —                     |       | 26,716     |       |
|                                       |       |                    |       |                   |       |                       |       |       |       |
| **Balance,  September 30, 2009**      |       | $                       | 1,845,894  |                   | $          | (2,437                     | )          | $          | 1,800      |   | $ | 1,845,257 |   |
|                                       |       |                    |       |                   |       |                       |       |       |       |
| **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 |   |

 

Theaccompanying notes are an integral part of these combined financial statements.

 

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**THE HOWARD HUGHES CORPORATION**

 

**COMBINED STATEMENTS OFCASH FLOWS**

**(UNAUDITED)**

** **
| ** **                                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                    | ** ** | **September 30,**          | ** ** |
| ** **                                                                                    | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **                                                                                    | ** ** | **(In thousands)**         | ** ** |
| **Cash  Flows from Operating Activities:**                                                    |       |                            |       |   |   |
| Net loss                                                                                      |       | $                               | (64,680    | ) | $ | (167,660 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                  |       |                            |       |   |   |
| Equity in income of Real  Estate Affiliates                                                   |       | (6,394                          | )          | (2,117 | ) |
| Provision for doubtful  accounts                                                              |       | 1,101                           |       | 1,212 |   |
| Distributions received  from Real Estate Affiliates                                           |       | —                          |       | 1,406 |   |
| Depreciation                                                                                  |       | 11,012                          |       | 13,071 |   |
| Amortization                                                                                  |       | 1,523                           |       | 2,150 |   |
| Amortization (accretion) of  deferred financing costs and debt market rate adjustments        |       | 1,600                           |       | 756 |   |
| Amortization of  intangibles other than in-place leases                                       |       | 144                             |       | 167 |   |
| Straight-line rent  amortization                                                              |       | (574                            | )          | (459 | ) |
| Provisions for impairment                                                                     |       | 578                             |       | 180,762 |   |
| Land/residential  development and acquisitions expenditures                                   |       | (39,115                         | )          | (33,377 | ) |
| Cost of land sales                                                                            |       | 7,089                           |       | 20,147 |   |
| Reorganization items -  finance costs related to emerged entities                             |       | 1,311                           |       | — |   |
| Non-cash reorganization  items                                                                |       | (2,880                          | )          | (260 | ) |
| Net changes:                                                                                  |       |                            |       |   |   |
| Accounts and notes  receivable                                                                |       | 3,306                           |       | (836 | ) |
| Prepaid expenses and other  assets                                                            |       | 10,209                          |       | (1,926 | ) |
| Deferred expenses                                                                             |       | (1,426                          | )          | (1,531 | ) |
| Accounts payable and  accrued expenses and deferred taxes                                     |       | 16,529                          |       | (29,119 | ) |
| Other, net                                                                                    |       | 168                             |       | 711 |   |
| Net cash used in operating  activities                                                        |       | (60,499                         | )          | (16,903 | ) |
|                                                                                          |       |                            |       |   |   |
| **Cash  Flows from Investing Activities:**                                                    |       |                            |       |   |   |
| Development of real estate  and property additions/improvements, primarily previously accrued |       | (71,069                         | )          | (23,760 | ) |
| Proceeds from sales of  investment properties                                                 |       | —                          |       | 6,392 |   |
| Increase in investments in  Real Estate Affiliates                                            |       | (10                             | )          | (1,247 | ) |
| Decrease in restricted  cash                                                                  |       | —                          |       | 202 |   |
| Net cash used in investing  activities                                                        |       | (71,079                         | )          | (18,413 | ) |
|                                                                                          |       |                            |       |   |   |
| **Cash  Flows from Financing Activities:**                                                    |       |                            |       |   |   |
| Change in GGP investment,  net                                                                |       | 137,411                         |       | 41,698 |   |
| Principal payments on  mortgages, notes and loans payable                                     |       | (4,697                          | )          | (7,556 | ) |
| Finance costs related to  emerged entities                                                    |       | (1,311                          | )          | — |   |
| Distributions to  noncontrolling interests                                                    |       | (218                            | )          | (103 | ) |
| Net cash provided by  financing activities                                                    |       | 131,185                         |       | 34,039 |   |
| Net change in cash and  cash equivalents                                                      |       | (393                            | )          | (1,277 | ) |
| Cash and cash equivalents  at beginning of period                                             |       | 3,204                           |       | 4,963 |   |
| Cash and cash equivalents  at end of period                                                   |       | $                               | 2,811      |   | $ | 3,686 |   |
|                                                                                          |       |                            |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                                        | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Interest paid                                                                                 |       | $                               | 14,831     |   | $ | 15,036 |   |
| Interest capitalized                                                                          |       | 15,443                          |       | 15,284 |   |
| Reorganization items paid                                                                     |       | 46,009                          |       | 4,091 |   |
|                                                                                          |       |                            |       |   |   |
| **Non-Cash  Transactions:**                                                                   |       |                            |       |   |   |
| Change in accrued capital  expenditures included in accounts payable and accrued expenses     |       | $                               | (64,454    | ) | $ | (11,467 | ) |
| Change in CSA contingent  liability                                                           |       | (15,000                         | )          | — |   |
| Mortgage debt market rate  adjustment related to emerged entities                             |       | 2,382                           |       | — |   |
| Other non-cash GGP equity  transactions                                                       |       | (36,117                         | )          | (14,982 | ) |
| Recognition of note  payable in conjunction with land held for development and sale           |       | —                          |       | 6,520 |   |

 

The accompanying notes are an integral part ofthese combined financial statements.

 

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**THE HOWARD HUGHES CORPORATION**

 

**NOTE 1         ORGANIZATION**

 

Readersof this Quarterly Report should refer to the Company’s (as defined below)audited Combined Financial Statements for the year ended December 31, 2009which are included in the Company’s Registration Statement on Form 10 forthe fiscal year ended December 31, 2009 (Commission File No. 001-34856),as certain footnote disclosures which would substantially duplicate thosecontained in our Registration Statement have been omitted from thisreport.  Capitalized terms used, but notdefined, in this Quarterly Report have the same meanings as in our RegistrationStatement.

 

**General**

The Howard HughesCorporation (‘‘HHC’’ or the ‘‘Company’’) is a newly formed Delaware corporationthat was created to hold certain assets and liabilities of General GrowthProperties, Inc. (‘‘GGP’’) and its subsidiaries (collectively, the ‘‘Predecessors’’).On April 16, 2009 and April 22, 2009 (collectively, the ‘‘PetitionDate’’), GGP and certain of its subsidiaries (the ‘‘Debtors’’) filed voluntarypetitions under Chapter 11 of Title 11 of the United States Code (the ‘‘Chapter11 Cases’’) with the Bankruptcy Court for the Southern District of New York(the ‘‘Bankruptcy Court’’). On October 21, 2010, the Bankruptcy Courtentered an order confirming the plan of reorganization (the “Plan”) of GGP andcertain of the Debtors still remaining in the Chapter 11 Cases (the “TopCoDebtors”). Pursuant to the Plan, the TopCo Debtors emerged from bankruptcy andHHC received certain of the assets and liabilities of the Predecessors (the ‘‘Separation’’),which we refer to as our business or ‘‘the HHC Businesses”. The reorganizationof GGP was completed on November 9, 2010 (such time of completion beingreferred to as the ‘‘Effective Date’’) as described in “Transactions on theEffective Date”, below.

 

As of September 30,2010, we had not conducted any business as a separate company and had no separatematerial assets or liabilities. The operations of the business transferred tous by the Predecessors is presented as if the transferred business was ourbusiness for all historical periods described and at the historical cost/carryingvalue of such assets and liabilities reflected in GGP’s books and records.Unless the context otherwise requires, references to ‘‘we,’’ ‘‘us’’ and ‘‘our’’refer to HHC and its combined subsidiaries after giving effect to the transferof assets and liabilities from the Predecessors.

 

On the Effective Date, ourassets consisted of the following:

 

·      fourmaster planned communities with an aggregate of 14,653 remaining saleableacres;

 

·      ninemixed-use development opportunities comprised of 1,129 acres;

 

·      four malldevelopmental projects comprised of 647 acres;

 

·                  sevenredevelopment-opportunity retail malls with approximately 1 million square feetof existing gross leasable space; and

 

·      interestsin eleven other real estate assets or projects.

 

Our ownership interests in propertiesin which we own a majority or controlling interest are combined underaccounting principles generally accepted in the United States of America (‘‘GAAP’’).  Our interests in TWCPC Holdings, L.P., (‘‘TheWoodlands Commercial’’), the Woodlands Operating Company, L.P. (‘‘The WoodlandsOperating’’) and the Woodlands Land Development Company, L.P. (‘‘The WoodlandsMPC’’), all located in Houston, Texas and, collectively, the ‘‘WoodlandsPartnerships’’, and our interests in Westlake Retail Associates, Ltd (‘‘CircleT 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-controllinginterests and are accounted for on the equity method. The WoodlandsPartnerships, Circle T and certain cost method investments (see Note 3) arecollectively referred to in this report as our ‘‘Real Estate Affiliates’’.

 

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**THE HOWARD HUGHES CORPORATION**

 

**Principlesof Combination and Basis of Presentation**

The accompanying combinedfinancial statements include the accounts of the HHC Businesses in which wehave a controlling interest and are presented on a combined basis as all suchHHC Businesses have common control and ownership by GGP. The noncontrollingequity holders’ share of the assets, liabilities and operations are reflectedin noncontrolling interests within permanent equity of the Company. Allsignificant intercompany balances and transactions between the HHC Businesseshave been eliminated.

 

As discussed above, we wereformed for the purpose of receiving, via a tax-free distribution, certainassets and assuming certain liabilities of GGP pursuant to the Plan. Weconducted no business and had no separate material assets or liabilities untilthe Separation was consummated. No previous historical financial statements forthe HHC Businesses have been prepared and, accordingly, our combined financialstatements are derived from the books and records of GGP and were carved-outfrom GGP at a carrying value reflective of such historical cost in such GGPrecords.  Our historical financialresults reflect allocations for certain corporate expenses which include, butare not limited to, costs related to property management, human resources,security, payroll and benefits, legal, corporate communications, informationservices and restructuring and reorganizations. Costs of the services that were allocated or charged to us were based oneither actual costs incurred or a proportion of costs estimated to beapplicable to us based on a number of factors, most significantly the Company’spercentage of GGP’s adjusted revenue and assets and the number ofproperties.  We believe these allocationsare reasonable; however, these results do not reflect what our expenses wouldhave been had the Company been operating as a separate, stand-alone publiccompany. In addition, the HHC Businesses were operated as subsidiaries of GGP,which operates as a real estate investment trust (‘‘REIT’’). We will operate asa taxable corporation. The historical combined financial information presentedwill therefore not be indicative of the results of operations, financialposition or cash flows that would have been obtained if we had been anindependent, stand-alone entity during the periods shown or of our futureperformance as an independent, stand-alone entity.

 

**The Debtors’ Bankruptcy**

As the Debtors hadsignificant past due, or imminently due, and cross-collateralized orcross-defaulted debt, on the Petition Date, GGP, on behalf of itself andcertain of its domestic subsidiaries including certain wholly-owned HHCBusinesses, filed voluntary petitions for the Chapter 11 Cases. The Debtorsthat sought protection under Chapter 11 that are part of HHC are collectivelyreferred to as the ‘‘HHC Debtors’’ and on the Petition Date comprised 33entities with approximately $268.4 million of secured mortgage loans. However,the entities that own our Bridgeland and Columbia master planned communities,the entities that own substantially all of our eight undeveloped land parcelsand our joint ventures, The Woodlands Partnerships and Circle T, among others(collectively, the ‘‘HHC Non-Debtors’’), did not seek such relief.

 

During the pendency of theChapter 11 Cases, the Debtors operated as Debtors-in-Possession.  A debtor is afforded certain protection againstits creditors and creditors are prohibited from taking certain actions (such aspursuing collection efforts or proceeding to foreclose on secured obligations)related to debts that were owed prior to the commencement of the Chapter 11Cases. Accordingly, although the commencement of the Chapter 11 Cases triggereddefaults on substantially all debt obligations of the Debtors, creditors werestayed from taking any action as a result of such defaults.

 

During December 2009,three of the HHC Debtors (the ‘‘Emerged Debtors’’) with $215.3 million ofsecured mortgage loans filed consensual plans of reorganization (the ‘‘EmergedPlans’’). As of December 31, 2009, two of the Emerged Debtors with $146.8million secured debt had emerged from bankruptcy. The plan of reorganizationand emergence from bankruptcy of the remaining Emerged Debtor occurred on July 23,2010. The HHC Debtors that remained in Chapter 11 at September 30, 2010(the ‘‘Remaining HHC Debtors’’) emerged from bankruptcy pursuant to the Plan onthe Effective Date.

 

**Transactions on the EffectiveDate**

On the Effective Date,approximately 32.5 million shares of common stock of HHC were distributed tothe common and preferred unit holders of GGPLP, which includes GGP, and thenGGP distributed its portion of such shares pro-rata to holders of GGP common stock(the ‘‘Distribution’’). GGP has not retained any ownership interest in HHC. ThePlan generally provided for the payment/settlement or reinstatement of claimsagainst the TopCo Debtors, funded with new equity capital provided by investorssponsoring the Plan (the 

 

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**THE HOWARD HUGHES CORPORATION**

 

‘‘Plan Sponsors’’). As partof the Plan, approximately 5.3 million shares of our common stock werepurchased by certain of the investors sponsoring the Plan for $250 million.  Additionally as part of the Plan, on theEffective Date, we issued warrants to purchase up to approximately 8 millionshares of our common stock to the Plan Sponsors.  The warrants have an initial exercise priceof $50.00 per share. Approximately 6.08 million warrants are immediatelyexercisable and approximately 1.92 million warrants are exercisable upon 90days prior notice for the first 6.5 years after issuance and exercisablewithout notice any time thereafter.  Eachwarrant has a term of seven years from the closing date of the investments.

 

**UnauditedPro Forma Condensed Combined Balance Sheet**

The following unaudited proforma condensed combined balance sheet has been developed based on currentlyavailable information by applying certain pro forma adjustments which reflectthe Separation of HHC from the Predecessors and other transactions provided bythe Plan, to the September 30, 2010 historical combined balance sheet thatappears elsewhere in this Quarterly Report. The unaudited pro forma condensedcombined balance sheet gives effect to such transactions as if they hadoccurred on September 30, 2010 and are described more fully in the notesto the unaudited pro forma combined balance sheet which should be read inconjunction with such pro forma condensed combined balance sheet.  The unaudited pro forma condensed combinedbalance sheet presented below is for illustrative purposes only and is notnecessarily indicative of the financial position that would have actually beenreported had the transactions reflected in the pro forma adjustments occurredas of September 30, 2010.  Inaddition, the unaudited pro forma condensed combined balance sheet should beread in conjunction with the combined financial statements and related notes.

 

The accounting by HHC toreflect the emergence from bankruptcy of the Emerged Debtors is limited torecording the liabilities of such Debtors that are impacted by confirmed plansof reorganization at the estimated present values of the amounts expected to bepaid upon emergence from bankruptcy since the provisions of the Plan do notmeet the criteria for fresh-start reporting under generally accepted accountingprinciples (ASC 852-10-45-29). Historical liability amounts presented in theunaudited pro forma balance sheet for debtors which have emerged frombankruptcy at September 30, 2010 reflect these fair value adjustments inmortgages, notes and loans payable not subject to compromise. However, ascertain of the HHC Debtors remain in bankruptcy at September 30, 2010, theirliabilities remain subject to compromise and, therefore, the HHC historicalbalance sheet at September 30, 2010 has no such present value adjustment.

 

Fresh-start reporting doesnot apply to HHC because existing holders of GGP common stock received greaterthan 50% (approximately 79.7%) of the voting shares of HHC and thereorganization value of HHC’s assets exceeds the total of all post-petitionliabilities and allowed claims (ASC 852-10-45-19). Further, the acquisitionmethod of accounting does not apply to HHC at emergence because the criteriafor application of the acquisition method of accounting, specifically, atransaction or event yielding a change of control, that is, a businesscombination, has not occurred. Since the provisions of the Plan provide thatthe Distribution occurs such that all members with each class of equity aretreated equally, the Distribution is treated as a pro-rata spin-off and suchnon-monetary transaction is accounted for at the recorded or historicalcarrying values (ASC 505-60 and ASC 845-10-30-10).

 

In addition to the impact ofthe debt and equity recapitalization events described above, the significanttransactions included in this pro forma balance sheet also occurred on theEffective Date in accordance with the Plan, and will be recorded by GGP, and/orHHC, as applicable in the fourth quarter of 2010.

 

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| ** **                                                                                      | ** ** | **September 30, 2010** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                      | ** ** | **Historical**                   | ** ** | **Adjustments** | ** ** | **Footnote** | ** ** | **Pro forma** | ** ** |
| ** **                                                                                      | ** ** | **(In thousands)**          | ** ** |
| **Assets:**                                                                                     |       |                             |       |   |   |   |   |   |   |
| Investment in real estate:                                                                      |       |                             |       |   |   |   |   |   |   |
| Net property and equipment                                                                      |       | $                                | 813,396    |   | $ | — |   |   |   | $ | 813,396 |   |
| Investment in and loans to/from Real Estate Affiliates                                          |       | 146,537                          |       | — |   |   |   | 146,537 |   |
| Investment property and property held for development and sale                                  |       | 1,775,904                        |       | — |   |   |   | 1,775,904 |   |
| Net investment in real estate                                                                   |       | 2,735,837                        |       | — |   |   |   | 2,735,837 |   |
| Cash and cash equivalents                                                                       |       | 2,811                            |       | 253,303 |   | (1) (2) |   | 256,114 |   |
| Accounts and notes receivable and deferred expenses, net and prepaid  expenses and other assets |       | 153,773                          |       | 340,105 |   | (3) (4) |   | 493,878 |   |
| Total assets                                                                                    |       | $                                | 2,892,421  |   | $ | 593,408 |   |   |   | $ | 3,485,829 |   |
|                                                                                            |       |                             |       |   |   |   |   |   |   |
| **Liabilities and Equity:**                                                                     |       |                             |       |   |   |   |   |   |   |
| Liabilities not subject to compromise:                                                          |       |                             |       |   |   |   |   |   |   |
| Mortgages, notes and loans payable                                                              |       | $                                | 272,825    |   | $ | 47,951 |   | (5) (6) |   | $ | 320,776 |   |
| Deferred tax liabilities                                                                        |       | 715,516                          |       | (537,912 | ) | (7) |   | 177,604 |   |
| Accounts payable and accrued expenses                                                           |       | 225,883                          |       | 13,821 |   | (5) (8) |   | 239,704 |   |
| Liabilities not subject to compromise                                                           |       | 1,214,224                        |       | (476,140 | ) |   |   | 738,084 |   |
| Liabilities subject to compromise                                                               |       | 138,093                          |       | (138,093 | ) | (5) |   | — |   |
| Total liabilities                                                                               |       | 1,352,317                        |       | (614,233 | ) |   |   | 738,084 |   |
| **Equity:**                                                                                     |       |                             |       |   |   |   |   |   |   |
|                                                                                            |       |                             |       |   |   | (1) (2) (3) |   |   |   |
|                                                                                            |       |                             |       |   |   | (4) (5) (6) |   |   |   |
| Total equity                                                                                    |       | 1,540,104                        |       | 1,207,641 |   | (7) (8) |   | 2,747,745 |   |
| Total liabilities and equity                                                                    |       | $                                | 2,892,421  |   | $ | 593,408 |   |   |   | $ | 3,485,829 |   |

 

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*Notesto Pro Forma Condensed Combined Balance Sheet*

 

(1) Reflects theinitial $250 million investment by the Plan Sponsors (approximately 5,250,000shares of our common stock).

 

(2) Reflects thewithdrawal by GGP of all permitted cash or cash equivalent balances from theHHC Accounts totaling $2.8 million, excluding $6.1 million of net proceeds fromsales at our Summerlin Master Planned Community closing in October, 2010, inaccordance with the Separation Agreement.

 

(3) Reflects the rightto receive payments approximating the capital lease revenue that GGP receivesfrom the Arizona 2 Office in Phoenix, Arizona totaling $31.4 million inaccordance with the Plan.

 

(4) Reflectsestablishment of the Tax Indemnity Cap of $303.8 million based upon our currentestimates of the components of the Indemnity Cap in the Investment Agreements (SeeNote 5- Income Taxes). Also includes the establishment of an obligation of GGPto pay up to $5.0 million of pre-petition liabilities.

 

(5) Reflects thereclassification of $64.0 million of mortgages, notes and loans payable and $74.1million of accounts payable and accrued expenses subject to compromise to theappropriate categories of liabilities not subject to compromise. The adjustmentalso eliminates $27.7 million of pre-petition mechanics and materialmens’ lienspayable included in the historical combined balance sheet because any remainingamounts due relating to these liabilities at the Effective Date were retained byGGP in accordance with the Plan. The amount of liens to be retained by GGP atemergence was substantially lower than the historical amount at September 30,2010 due to settlement activity since such date.

 

(6) Reflects theprepayment of a portion of the loan obligation on the 110 N. Wacker propertytotaling $16.0 million by GGP.

 

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**THE HOWARD HUGHES CORPORATION**

 

(7) Reflects anadjustment of $537.9 million for the re-measurement of the deferred taxliability utilizing the pro forma carrying amounts of HHC assets andliabilities, and the current taxable and non-taxable entities to be held byHHC.

 

(8) Reflects thesettlement/or conversion to equity of intercompany balances in accordance withthe Separation Agreement.

 

**Accounting for Reorganization**

The accompanying combinedfinancial statements and the combined condensed financial statements of the HHCDebtors presented below have been prepared in accordance with GAAP related tofinancial reporting by entities in reorganization under the Bankruptcy Code,and on a going concern basis, which contemplates the realization of assets andthe satisfaction of liabilities in the normal course of business. Suchaccounting guidance also provides that if a debtor, or group of debtors, hassignificant combined assets and liabilities of entities which have not soughtChapter 11 bankruptcy protection, the debtors and non-debtors should continue tobe combined. However, separate disclosure of financial statement informationsolely relating to the debtor entities should be presented. Therefore, thecombined condensed financial statements presented below solely reflect thefinancial position and results of operations for the HHC Debtors which had notemerged from bankruptcy as of September 30, 2010.

 

**UnauditedCombined Condensed Balance Sheets**

 
| ** **                              | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **(In thousands)**          | ** ** |
| Net investment in real  estate          |       | $                                | 1,783,738  |                            | $          | 1,805,287 |   |
| Cash and cash equivalents               |       | 1,087                            |       | 1,285                           |       |
| Accounts and notes  receivable, net     |       | 4,911                            |       | 7,488                           |       |
| Other                                   |       | 114,014                          |       | 111,213                         |       |
| Total assets                            |       | $                                | 1,903,750  |                            | $          | 1,925,273 |   |
|                                    |       |                             |       |                            |       |
| Liabilities not subject to  compromise: |       |                             |       |                            |       |
| Deferred tax liabilities                |       | $                                | 759,311    |                            | $          | 827,264 |   |
| Accounts payable and  accrued expenses  |       | 212,665                          |       | 121,247                         |       |
| Liabilities subject to  compromise      |       | 138,093                          |       | 206,952                         |       |
| Equity                                  |       | 793,681                          |       | 769,810                         |       |
| Total liabilities and  equity           |       | $                                | 1,903,750  |                            | $          | 1,925,273 |   |

 

Asdescribed above, certain of the HHC Debtors had emerged from bankruptcyprotection as of September 30, 2010. The unaudited combined condensedstatements of operations, for the three months ended September 30, 2010and 2009 and the nine months ended September 30, 2010, as well as theunaudited combined condensed statements of cash flows for the nine months endedSeptember 30, 2010 presented below include the Topco Debtors that are HHCBusinesses, and exclude Emerged Debtors. Since the HHC Debtors commenced their respective Chapter 11 Cases on twodifferent dates in April 2009, the unaudited combined condensed statementsof operations and cash flows of the Topco Debtors that are HHC Businesses havebeen prepared for the period May 1, 2009 to September 30, 2009.

 

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**UnauditedCombined Condensed Statements of Operations**

 
| ** **                                         | ** ** | **Three Months  Ended  September 30,  2010** | ** ** | **Three Months  Ended  September 30,  2009** | ** ** | **Nine Months  Ended  September 30,  2010** | ** ** | **May 1, 2009 to  September 30,  2009** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                         | ** ** | **(In thousands)**                                | ** ** |
| Operating revenues                                 |       | $                                                      | 14,533     |                                                   | $          | 14,458                                                |       | $                                                           | 42,198     |   | $ | 24,002 |   |
| Operating expenses                                 |       | 20,605                                                 |       | 21,770                                                 |       | 68,320                                                |       | 94,447                                                      |       |
| Provision for impairment                           |       | 92                                                     |       | 40,582                                                 |       | 578                                                   |       | 40,816                                                      |       |
| Operating loss                                     |       | (6,164                                                 | )          | (47,894                                                | )          | (26,700                                               | )          | (111,261                                                    | )          |
| Interest income, net                               |       | 1,561                                                  |       | 2,367                                                  |       | 4,489                                                 |       | 3,024                                                       |       |
| (Provision) for benefit  from income taxes         |       | 361                                                    |       | 9,183                                                  |       | (17,078                                               | )          | 10,139                                                      |       |
| Equity in income (loss) of  Real Estate Affiliates |       | 274                                                    |       | (708                                                   | )          | 889                                                   |       | (774                                                        | )          |
| Reorganization items                               |       | (15,328                                                | )          | (1,866                                                 | )          | (41,428                                               | )          | (3,883                                                      | )          |
| Net loss                                           |       | (19,296                                                | )          | (38,918                                                | )          | (79,828                                               | )          | (102,755                                                    | )          |
| Allocation to  noncontrolling interests            |       | (82                                                    | )          | (52                                                    | )          | (271                                                  | )          | (409                                                        | )          |
| Net loss attributable to  GGP                      |       | $                                                      | (19,378    | )                                                      | $          | (38,970                                               | )          | $                                                           | (80,099    | ) | $ | (103,164 | ) |

 

**UnauditedCombined Condensed Statements of Cash Flows**

 
| ** **                                      | ** ** | **Nine Months Ended  September 30, 2010** | ** ** | **May 1, 2009 to  September 30, 2009** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**                                       | ** ** |
| **Net cash used in:**            |       |                                                          |       |                                                            |       |
| Operating activities                            |       | $                                                             | (198       | )                                                               | $          | (3,751 | ) |
| Investing activities                            |       | —                                                        |       | —                                                          |       |
| Financing activities                            |       | —                                                        |       | —                                                          |       |
| Net decrease in cash and  cash equivalents      |       | (198                                                          | )          | (3,751                                                          | )          |
| Cash and cash equivalents,  beginning of period |       | 1,285                                                         |       | 6,065                                                           |       |
| Cash and cash equivalents,  end of period       |       | $                                                             | 1,087      |                                                            | $          | 2,314 |   |
|                                            |       |                                                          |       |                                                            |       |
| Cash paid for  reorganization items             |       | $                                                             | (1,707     | )                                                               | $          | — |   |

 

**Classification of Liabilities Not Subject to Compromise**

Liabilitiesnot subject to compromise include: (1) liabilities held by HHCNon-Debtors; (2) liabilities incurred after the Petition Date; (3) pre-Petition Date liabilities the Emerged Debtors expect to pay in full, eventhough certain of these amounts may not be paid until a plan of reorganizationis effective; and (4) liabilities related to pre-petition contracts thataffirmatively have not been rejected.

 

Allliabilities incurred by the Debtors prior to the Petition Date other than thosespecified above are considered liabilities subject to compromise. The amountsof the various categories of liabilities that are subject to compromise are setforth below. These amounts represent the Company’s estimates of known orpotential pre-Petition Date claims that are likely to be resolved in connectionwith the bankruptcy filings. Such claims remain subject to future adjustments.Adjustments may result from negotiations, actions of the Bankruptcy Court,rejection of executory contracts and unexpired leases, the determination as tothe value of any collateral securing claims, proofs of claim, or other events.  The amounts subject to compromise consistedof the following items:

 
| ** **                                | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **(In thousands)**          | ** ** |
| Mortgages and secured  notes              |       | $                                | 63,951     |                            | $          | 133,973 |   |
| Accounts payable and  accrued liabilities |       | 74,142                           |       | 141,866                         |       |
| Total liabilities subject  to compromise  |       | $                                | 138,093    |                            | $          | 275,839 |   |

 

Theclassification of liabilities “not subject to compromise” versus liabilities “subjectto compromise” is based on currently available information and analysis. Debtorssubject to the remaining Chapter 11 Cases had their plans of reorganizationconfirmed as of October 21, 2010, and the Plan provides that these Debtorswill pay 100% of allowed pre-petition liability claims, including thoserelating to the HHC assets. However, additional analysis remains to becompleted and the Bankruptcy Court may be requested to rule onpre-petition liabilities to be allowed and paid pursuant to

 

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thePlan.  Accordingly, the amounts in thesetwo categories ultimately paid may change. The amount of any such changes could be significant.

 

**Reorganization Items**

Reorganizationitems under the Chapter 11 Cases are expense or income items that were incurredor realized by the HHC Debtors as a result of the Chapter 11 Cases and arepresented separately in the Combined Statements of Loss and Comprehensive Lossand in the combined condensed statements of operations of the HHC Debtorspresented above. These items include professional fees and similar types ofexpenses and gains and interest earned on cash accumulated by the HHC Debtors,all as a result of the Chapter 11 Cases. Reorganization items specific to the HHC Businesses have been allocatedto us and have been reflected in our combined financial statements and in thetables presented below.

 

Thekey employee incentive program (the “KEIP”) was intended to retain certain keyemployees of GGP during the pendency of the Chapter 11 Cases and provided forpayment (in two installments) to these GGP employees upon successful emergencefrom bankruptcy.  The first KEIP paymentwas made on November 12, 2010. As certain of these employees became ouremployees on the Effective Date, a portion of the KEIP has been deemed torelate to us and therefore, we are recognizing our estimated KEIP expense inthe period from the date the KEIP was approved by the Bankruptcy Court to November 9,2010, our date of emergence from bankruptcy. We accrued a liability for the KEIP in Accounts payable and accruedexpenses on the Combined Balance Sheets of $11.7 million as of September 30,2010 and $2.3 million as of December 31, 2009.  In addition, we recognized the resultingexpense in Reorganization items on the Combined Statements of Loss andComprehensive Loss of $3.6 million for the three months ended September 30,2010 and $9.4 million for the nine months ended September 30, 2010.  No expense was recognized during the ninemonths ended September 30, 2009 as the KEIP was approved by the BankruptcyCourt in October 2009.

 

Reorganizationitems are as follows:

 
| **Reorganization Items**                                             | ** ** | **Three Months  Ended  September 30,  2010** | ** ** | **Three Months  Ended  September 30,  2009** | ** ** | **Nine Months  Ended  September 30,  2010** | ** ** | **Nine Months  Ended  September 30,  2009** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                | ** ** | **(In thousands)**                                | ** ** |
| Gains on liabilities  subject to compromise - vendors (1)                 |       | $                                                      | (216       | )                                                      | $          | (138                                                  | )          | $                                                     | (498       | ) | $ | (214 | ) |
| Gains on liabilities  subject to compromise, net - mortgage debt (2) |       | (2,747                                                 | )          | (46                                                    | )          | (2,382                                                | )          | (46                                                   | )          |
| Interest income (3)                                                       |       | (13                                                    | )          | (2                                                     | )          | (14                                                   | )          | (3                                                    | )          |
| U.S. Trustee fees (4)                                                     |       | 142                                                    |       | 93                                                     |       | 412                                                   |       | 93                                                    |       |
| Restructuring costs (5)                                                   |       | 19,349                                                 |       | 1,907                                                  |       | 45,611                                                |       | 4,001                                                 |       |
| Total reorganization items                                                |       | $                                                      | 16,515     |                                                   | $          | 1,814                                                 |       | $                                                     | 43,129     |   | $ | 3,831 |   |

 

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(1)   This amount includes gains from repudiation, rejection ortermination of contracts or guarantee of obligations.  Such gains reflect agreements reached withcertain critical vendors, which were authorized by the Bankruptcy Court and forwhich payments on an installment basis began in July 2009.

 

(2)   Such net gains include the Fair Value adjustments of mortgage debtrelating to entities that emerged from bankruptcy.

 

(3)   Interest income primarily reflects amounts earned on cashaccumulated as a result of our Chapter 11 cases.

 

(4)   Estimate of fees due remains subject to confirmation and review bythe Office of the United States Trustee (“U.S. Trustee”).

 

(5)   Restructuring costs primarily include professional fees incurredrelated to the bankruptcy filings, our allocated share of the estimated KEIPpayment, finance costs incurred by the Emerged Debtors and the write off ofunamortized deferred finance costs related to the Emerged Debtors.

 

**Impairment**

*Properties, developments in progress and land held for development orredevelopment, including assets to be sold after such development orredevelopment*

GAAPrelated to the accounting for the impairment or disposal of long-lived assetsrequires that if impairment indicators exist and the undiscounted cash flowsexpected to be generated by an asset are less than its carrying amount, animpairment provision should be recorded to write down the carrying amount ofsuch asset to its Fair Value (defined in Fair Value Measurements below). Wereview our combined and uncombined real estate

 

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assets,including operating properties, land held for development and sale anddevelopments in progress, for potential impairment indicators whenever eventsor changes in circumstances indicate that the carrying amount may not berecoverable.

 

Impairmentindicators for our Master Planned Communities segment (defined in Note 10) areassessed separately for each community and include, but are not limited to,significant decreases in sales pace or average selling prices, significantincreases in expected land development and construction costs or cancellationrates, and projected losses on expected future sales.

 

Impairmentindicators for our Strategic Development segment (defined in Note 10) areassessed separately for each property and include, but are not limited to,significant decreases in comparable property sale prices, in real estateproperty net operating income and occupancy percentages.

 

Impairmentindicators for pre-development costs, which are typically costs incurred duringthe beginning stages of a potential development, and developments in progressare assessed by project and include, but are not limited to, significantchanges in projected completion dates, revenues or cash flows, developmentcosts, market factors and sustainability of development projects.

 

Ifan indicator of potential impairment exists, the asset is tested forrecoverability by comparing its carrying amount to the estimated futureundiscounted cash flows.  The cash flowestimates used both for determining recoverability and estimating Fair Valueare inherently judgmental and reflect current and projected trends indevelopment costs, land sales prices, rental, occupancy and capitalizationrates, and estimated holding periods for the applicable assets.  Although the estimated Fair Value of certainassets may be exceeded by the carrying amount, a real estate asset is onlyconsidered to be impaired when its carrying amount cannot be recovered throughestimated future undiscounted cash flows. To the extent an impairment provisionis necessary; the excess of the carrying amount of the asset over its estimatedFair Value is expensed to operations.  Inaddition, the impairment provision is allocated proportionately to reduce thecarrying amount of the asset.  Theadjusted carrying amount, which represents the new cost basis of the asset, isdepreciated over the remaining useful life of the asset.

 

Werecorded impairment charges related to our properties held for development,redevelopment and sale and developments in progress of $0.1 million and $0.6million for the three and nine months ended September 30, 2010 and $40.6million and $180.8 million for the three and nine months ended September 30,2009, respectively, as presented in the General section below.  All of these impairment charges are includedin provisions for impairment in our combined financial statements.

 

*Investment in Real EstateAffiliates*

Inaccordance with GAAP related to the equity method of accounting forinvestments, a series of operating losses of an investee or other factors mayindicate that a decrease in value of our investment in the Real EstateAffiliates has occurred which is other-than-temporary. The investment in eachof the Real Estate Affiliates is evaluated periodically and as deemed necessaryfor recoverability and valuation declines that are other than temporary.Accordingly, in addition to the property-specific impairment analysis that weperform on the investment properties, land held for development and sale anddevelopments in progress owned by such joint ventures (as part of ourinvestment property impairment process described above), we also considered theownership and distribution preferences and limitations and rights to sell andrepurchase our ownership interests. Based on such evaluations, no provisionsfor impairment were recorded for the three and nine months ended September 30,2010 and 2009 related to our investments in Real Estate Affiliates.  See Note 3 for further disclosure of theprovisions for impairment related to certain properties within our Real EstateAffiliates.

* *

*General*

Althoughall of the properties in our Master Planned Communities segment and two of ouroperating properties in our Strategic Development segment had impairmentindicators and carrying values in excess of estimated Fair Value at September30, 2010, aggregate undiscounted cash flows for such master planned communitiesproperties and the two strategic development properties exceeded theirrespective aggregate book values. Based on the Company’s plans with respect tothose properties, we believe that the carrying amounts are recoverable andtherefore, under applicable GAAP guidance, no additional impairments were taken.  Nonetheless, if our plans regarding ourassets change, additional impairment charges in the future could result.    In addition, we have a new Board ofDirectors and a new HHC management team, a group independent of GGP, as of theEffective Date, and our ability to execute our long-term development strategieswill be dependent upon our ability to generate cash flows and additionalcapital as a separate, publicly-traded company. Such new

 

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**THEHOWARD HUGHES CORPORATION**

 

boardand management team may change existing plans for the assets, which may resultin future impairment provisions being required. Therefore, we can provide noassurance that material impairment charges with respect to our properties heldfor development, redevelopment and sale and development in progress and ourinvestment in Real Estate Affiliates will not occur in future periods.  Accordingly, we will continue to monitorcircumstances and events in future periods to determine whether additionalimpairments are warranted.

 
| **Impaired Asset**             | ** ** | **Location** | ** ** | **Method of Determining Fair Value** | ** ** | **Three Months  Ended  September 30,  2010** | ** ** | **Nine Months  Ended  September 30,  2010** | ** ** |
|-------------------------------------|------------|--------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                          | ** ** | ** **   | ** ** | ** **                                               | ** ** | **(In thousands)**                                | ** ** |
| ** **                          | ** ** | ** **   | ** ** | ** **                                               | ** ** | ** **                                             | ** ** | ** **                                            | ** ** |
| **Strategic Development:**          | ** ** | ** **   | ** ** | ** **                                               | ** ** | ** **                                             | ** ** | ** **                                            | ** ** |
| Various pre-development costs       |       |         |       | (2)                                                      |       | $                                                      | 92         |                                                  | $          | 578 |   |
|                                |       |         |       |                                                     |       |                                                   |       |                                                  |       |
| **Impaired Asset**             | ** ** | **Location** | ** ** | **Method of Determining Fair Value** | ** ** | **Three Months  Ended  September 30,  2009** | ** ** | **Nine Months  Ended  September 30,  2009** | ** ** |
| ** **                          | ** ** | ** **   | ** ** | ** **                                               | ** ** | **(In thousands)**                                | ** ** |
| **Master Planned Communities:**     |       |         |       |                                                     |       |                                                   |       |                                                  |       |
| Maryland- Fairwood Community        |       | Columbia, MD |       | Projected sales  price analysis (1) (3)             |       | $                                                      | —     |                                                  | $          | 52,767 |   |
|                                |       |         |       |                                                     |       |                                                   |       |                                                  |       |
| **Strategic Development:**          | ** ** | ** **   | ** ** | ** **                                               | ** ** | ** **                                             | ** ** | ** **                                            | ** ** |
| Allen                               |       | Allen, TX    |       | Projected sales  price analysis (1) (3)             |       | —                                                 |       | 24,166                                                |       |
| Nouvelle at Natick                  |       | Natick, MA   |       | Discounted cash  flow analysis (3)                       |       | —                                                 |       | 55,923                                                |       |
| Redlands Promenade                  |       | Redlands, CA |       | Projected sales  price analysis (1) (3)             |       | —                                                 |       | 6,667                                                 |       |
| The Village at Redlands             |       | Redlands, CA |       | Projected sales  price analysis (1) (3)             |       | 5,492                                                  |       | 5,492                                                 |       |
| Kendall                             |       | Miami, FL    |       | Projected sales  price analysis (1) (3)             |       | 35,090                                                 |       | 35,090                                                |       |
| Various pre-development costs       |       |         |       | (2)                                                      |       | —                                                 |       | 657                                                   |       |
| **Total Strategic Development**     |       |         |       |                                                     |       | 40,582                                                 |       | 127,995                                               |       |
| **Total Provisions for impairment** |       |         |       |                                                     |       | $                                                      | 40,582     |                                                  | $          | 180,762 |   |

 

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(1)          Projected sales priceanalysis incorporates available market information and other managementassumptions.

(2)          Related to the write down ofvarious pre-development costs that were determined to be non-recoverable due tothe related projects being terminated.

(3)          These impairments wereprimarily driven by the carrying value of the assets, including costs expectedto be incurred, not being recoverable by the projected sales price of suchassets.

 

**Fair Value Measurements**

FairValue is defined as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsas of the measurement date.

 

Theaccounting principles for Fair Value measurements establish a three-tier FairValue hierarchy, which prioritizes the inputs used in measuring FairValue.  These tiers include:

 

·                  Level 1 - defined asobservable inputs such as quoted prices for identical assets or liabilities inactive markets;

·                  Level 2 - defined as inputsother than quoted prices in active markets that are either directly orindirectly observable; and

·                  Level 3 - defined asunobservable inputs in which little or no market data exists, thereforerequiring an entity to develop its own assumptions.

 

Theasset or liability Fair Value measurement level within the Fair Value hierarchyis based on the lowest level of any input that is significant to the Fair Valuemeasurement.  Valuation techniques usedneed to maximize the use of observable inputs and minimize the use ofunobservable inputs.  Any Fair Valuesutilized or disclosed in our combined financial statements were developed forthe purpose of complying with the accounting principles established for FairValue measurements.  The Fair Values ofour assets or liabilities for enterprise value in our

 

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Chapter11 Cases or as a component of our reorganization plan (see Note 1) reflecteddiffering assumptions and methodologies. These estimates were subject to anumber of approvals and reviews and therefore may have been materiallydifferent.

 

Thefollowing table summarizes our significant assets that were measured at FairValue on a nonrecurring basis as of September 30, 2009.

 
| ** **                    | ** ** | ** **                              | ** ** | ** **                                                                                          | ** ** | **Significant**                               | ** ** | ** **                                            | ** ** | **Total (Loss) Gain**                        | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                    | ** ** | **Total Fair  Value  Measurement** | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Three Months  Ended  September 30,  2009** | ** ** | **Nine Months  Ended  September 30,  2009** | ** ** |
| ** **                    | ** ** | **(In thousands)**                 | ** ** |
| Village at Redlands           |       | $                                       | 7,500      |                                                                                                | $          | —                                        |       | $                                                     | —     |                                                   | $          | 7,500 |   | $ | (5,492 | ) | $ | (5,492 | ) |
| Allen                         |       | 29,511                                  |       | —                                                                                              |       | 29,511                                        |       | —                                                |       | —                                                 |       | (24,166 | ) |
| Redlands Promenade            |       | 6,727                                   |       | —                                                                                              |       | —                                        |       | 6,727                                                 |       | —                                                 |       | (6,667 | ) |
| Kendall                       |       | 13,931                                  |       | —                                                                                              |       | —                                        |       | 13,931                                                |       | (35,090                                                | )          | (35,090 | ) |
| Maryland - Fairwood Community |       | 12,629                                  |       | —                                                                                              |       | 12,629                                        |       | —                                                |       | —                                                 |       | (52,767 | ) |
| Nouvelle At Natick (1)        |       | 64,661                                  |       | —                                                                                              |       | —                                        |       | 64,661                                                |       | —                                                 |       | (55,923 | ) |
| Total                         |       | $                                       | 134,959    |                                                                                                | $          | —                                        |       | $                                                     | 42,140     |                                                   | $          | 92,819 |   | $ | (40,582 | ) | $ | (180,105 | ) |

 

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(1) The Fair Value is based on estimated sales value.

 

**Fair Value of Financial Instruments**

TheFair Values of our financial instruments approximate their carrying amount inour financial statements except for debt. GAAP guidance requires that management estimate the Fair Value of ourdebt. However, as a result of the HHC Debtors Chapter 11 cases, the Fair Valuefor the outstanding debt that is included in liabilities subject to compromisein our Combined Balance Sheets cannot be reasonably determined at September 30,2010 as the Plan was not effective as of such date.  Such debt will be adjusted to Fair Value onthe Effective Date, with such adjustment not expected to be material.  For the $272.8 million of mortgages, notesand loans payable outstanding that are not subject to compromise at September 30,2010, management’s required estimates of Fair Value are presented below.  This Fair Value was estimated solely forfinancial statement reporting purposes and should not be used for any otherpurposes, including to estimate the value of any of the Company’s securities orto estimate the appropriate interest rate for consensual and non-consensualrestructuring of secured debt in our Chapter 11 Cases. We estimated the FairValue of this debt based on quoted market prices for publicly-traded debt,recent financing transactions (which may not be comparable), estimates of theFair Value of the property that serves as collateral for such debt, historicalrisk premiums for loans of comparable quality, current London Interbank OfferedRate (“LIBOR”), a widely quoted market interest rate which is frequently theindex used to determine the rate at which we borrow funds and US treasuryobligation interest rates, and on the discounted estimated future cash paymentsto be made on such debt.  The discountrates estimated reflect our judgment as to what the approximate current lendingrates for loans or groups of loans with similar maturities and credit quality wouldbe if credit markets were operating efficiently and assume that the debt isoutstanding through maturity. We have utilized market information as availableor present value techniques to estimate the amounts required to be disclosed,or, in the case of the debt of the Emerged Debtors, recorded due to GAAPbankruptcy emergence guidance.  Sincesuch amounts are estimates that are based on limited available marketinformation for similar transactions and do not acknowledge transfer or otherrepayment restrictions that may exist in specific loans, it is unlikely thatthe estimated Fair Value of any of such debt could be realized by immediatesettlement of the obligation.

 
| ** **          | ** ** | **September 30, 2010** | ** **    | **December 31, 2009** | ** ** |
|---------------------|------------|----------------------------------|---------------|---------------------------------|------------|
| ** **          | ** ** | **Carrying  Amount**             | ** **    | **Estimated Fair  Value**  | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
| ** **          | ** ** | **(In thousands)**          | ** **    |
| Fixed-rate debt     |       | $                                | 207,117       |                            | $          | 221,722 |   | $ | 208,860 |   | $ | 205,406 |   |
| Variable-rate  debt |       | 65,708                           |          | 66,207                          |       | — |   | — |   |
|                |       | $                                |  272,825 |                            | $          | 287,929 |   | $ | 208,860 |   | $ | 205,406 |   |

 

**Revenue Recognition and Related Matters**

Revenuesfrom land sales are recognized using the full accrual method provided thatvarious criteria relating to the terms of the transactions and our subsequentinvolvement with the land sold are met. Criteria include the consummation of the sale, demonstration of thecollectability of the sales price, the transfer of usual risks and

 

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**THEHOWARD HUGHES CORPORATION**

 

rewardsof ownership to the buyer and absence of substantial continuing involvementfrom the seller.  Revenues relating totransactions that do not meet the established criteria are deferred andrecognized when the criteria are met or using the installment or cost recoverymethods, as appropriate in the circumstances. Revenues and cost of sales are recognized on a percentage of completionbasis for land sale transactions in which we are required to perform additionalservices and incur significant costs after title has passed.

 

Nouvelleat Natick is a 215 unit residential condominium project, located in Natick,Massachusetts.  Pursuant to the Plan,only the unsold units at Nouvelle at Natick on the Effective Date weredistributed to us and no deferred revenue or sales proceeds from unit closingsprior to the Effective Date were allocated to us.  As of the Effective Date, 60 units wereunsold at Nouvelle at Natick, six of which were under contract to close atvarious dates subsequent to the Effective Date through January 2011.  Income related to unit sales subsequent tothe Effective Date is expected to be accounted for on the full accrual methodon a unit by unit basis.

 

Minimumrent revenues are recognized on a straight-line basis over the terms of therelated leases. Minimum rent revenues also include amounts collected fromtenants to allow the termination of their leases prior to their scheduledtermination dates and accretion related to above and below-market tenant leaseson acquired properties.

 

Straight-linerent receivables, which represent the current net cumulative rents recognizedprior to when billed and collectible as provided by the terms of the leases,of $2.5 million as of September 30, 2010 and $3.2 million as of December 31,2009, are included in Accounts and notes receivable, net in our combinedfinancial statements.  Percentage rent inlieu of fixed minimum rent received from tenants was $0.8 million and $2.6  million for the three and nine months ended September 30,2010 and $0.7 million and $2.3 million for the three and nine months ended September 30,2009, and is included in Minimum Rents in our combined financial statements.

 

**Use of Estimates**

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions. These estimates and assumptions affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting periods. For example,estimates and assumptions have been made with respect to useful lives ofassets, capitalization of development and leasing costs, provision for incometaxes, recoverable amounts of receivables and deferred taxes, initialvaluations and related amortization periods of deferred costs and intangibles,impairment of long-lived assets, Fair Value of debt of the Emerged Debtors andcost ratios and completion percentages used for land sales. Actual resultscould differ from these and other estimates.

 

**Earnings Per Share (“EPS”)**

Presentation of EPSinformation is not applicable as all of our common stock, since the date of ourformation on July 1, 2010, is owned by GGP.

 

**Debt Market Rate Adjustments**

Werecord market rate adjustments related to our mortgages, notes and loanspayable primarily for debt held by the HHC Debtors upon emergence frombankruptcy.  Such debt market rate adjustments are recorded based on theestimated Fair Value of the debt at the time of emergence and are recordedwithin mortgages, notes and loans payable on our Combined Balance Sheets. The debt market rate adjustments are amortized as interest expense over theremaining term of the loans using the effective interest method.

 

**NOTE 2         INTANGIBLE ASSETSAND LIABILITIES**

 

The following table summarizesour intangible assets and liabilities:

 

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| ** **                         | ** ** | **Gross Asset  (Liability)** | ** ** | **Accumulated  (Amortization)  / Accretion** | ** ** | **Net  Carrying  Amount** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **(In thousands)**           | ** ** |
| **As of  September 30, 2010** |       |                              |       |                                              |       |                      |       |
| Tenant leases:                     |       |                              |       |                                              |       |                      |       |
| In-place value                     |       | $                                 | 11,824     |                                              | $          | (10,092                   | )          | $ | 1,732 |   |
| Above-market                       |       | 1,820                             |       | (1,634                                            | )          | 186                       |       |
| Below-market                       |       | (78                               | )          | 73                                                |       | (5                        | )          |
| Ground leases:                     |       |                              |       |                                              |       |                      |       |
| Above-market                       |       | (16,968                           | )          | 2,778                                             |       | (14,190                   | )          |
| Below-market                       |       | 23,096                            |       | (1,993                                            | )          | 21,103                    |       |
|                               |       |                              |       |                                              |       |                      |       |
| **As of  December 31, 2009**  |       |                              |       |                                              |       |                      |       |
| Tenant leases:                     |       |                              |       |                                              |       |                      |       |
| In-place value                     |       | $                                 | 13,063     |                                              | $          | (10,875                   | )          | $ | 2,188 |   |
| Above-market                       |       | 2,323                             |       | (1,883                                            | )          | 440                       |       |
| Below-market                       |       | (86                               | )          | 72                                                |       | (14                       | )          |
| Ground leases:                     |       |                              |       |                                              |       |                      |       |
| Above-market                       |       | (16,968                           | )          | 2,425                                             |       | (14,543                   | )          |
| Below-market                       |       | 23,096                            |       | (1,739                                            | )          | 21,357                    |       |

 

Thegross asset balances of the in-place value of tenant leases are included inBuildings and equipment in our Combined Balance Sheets. The above-market andbelow-market tenant and ground leases are included in Prepaid expenses andother assets and Accounts payable and accrued expenses (Note 7) in our CombinedBalance Sheets.  The decrease in thegross asset (liability) accounts at September 30, 2010 compared to December 31,2009 is primarily due to the write-off of fully amortized assets andliabilities in the nine months ended September 30, 2010.

 

**NOTE 3         REAL ESTATEAFFILIATES**

 

Weown non-controlling investments in The Woodlands Partnerships and Circle Twhereby, generally, we share in the profits and losses, cash flows and othermatters relating to our investments in such Real Estate Affiliates inaccordance with our respective ownership percentages. Our unaffiliated jointventure partners manage the properties owned by these joint ventures. As wehave joint interest and control of these ventures with our venture partners, weaccount for these joint ventures using the equity method.

 

Asof September 30, 2010, approximately $372.4 million of indebtedness wassecured by the properties owned by our Real Estate Affiliates, our share ofwhich was approximately $195.5 million. There can be no assurance that we will be able to refinance orrestructure such debt (including the $9.6 million of debt maturing in 2010 and$184.4 million of debt maturing in 2011) on acceptable terms or otherwise, orthat joint venture operations or contributions by us and/or our partners willbe sufficient to repay such loans.

 

**Condensed Combined Financial Information of Certain Real EstateAffiliates**

AsThe Woodlands Partnerships and Circle T are accounted for on the equity method,the following summarized financial information as of September 30, 2010and December 31, 2009 and for the three and nine months ended September 30,2010 and 2009 is presented below:

 

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| ** **                                                      | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                                                      | ** ** | **(In thousands)** | ** ** |
| **Condensed  Combined Balance Sheets - Real Estate Affiliates** |       |                    |       |                  |       |
| **Assets:**                                                     |       |                    |       |                  |       |
| Land                                                            |       | $                       | 31,077     |                  | $          | 31,077 |   |
| Buildings and equipment                                         |       | 239,696                 |       | 207,051               |       |
| Less accumulated  depreciation                                  |       | (79,557                 | )          | (73,866               | )          |
| Developments in progress                                        |       | 26,490                  |       | 55,996                |       |
| Net property and equipment                                      |       | 217,706                 |       | 220,258               |       |
| Investment property and  property held for development and sale |       | 242,746                 |       | 266,253               |       |
| Net investment in real  estate                                  |       | 460,452                 |       | 486,511               |       |
| Cash and cash equivalents                                       |       | 47,970                  |       | 35,569                |       |
| Accounts and notes  receivable, net                             |       | 57,751                  |       | 66,460                |       |
| Deferred expenses, net                                          |       | 1,291                   |       | 1,189                 |       |
| Prepaid expenses and other  assets                              |       | 66,529                  |       | 40,561                |       |
| Total assets                                                    |       | $                       | 633,993    |                  | $          | 630,290 |   |
|                                                            |       |                    |       |                  |       |
| **Liabilities  and Owners’ Equity:**                       |       |                    |       |                  |       |
| Mortgages, notes and loans  payable                             |       | $                       | 372,385    |                  | $          | 377,964 |   |
| Accounts payable, accrued  expenses and other liabilities       |       | 110,657                 |       | 107,700               |       |
| Owners’ equity                                             |       | 150,951                 |       | 144,626               |       |
| Total liabilities and  owners’ equity                      |       | $                       | 633,993    |                  | $          | 630,290 |   |
|                                                            |       |                    |       |                  |       |
| **Investment  in Real Estate Affiliates, Net:**                 |       |                    |       |                  |       |
| Owners’ equity                                             |       | $                       | 150,951    |                  | $          | 144,626 |   |
| Less joint venture  partners’ equity                       |       | (72,152                 | )          | (69,147               | )          |
| Capital or basis  differences and loans                         |       | 67,738                  |       | 65,079                |       |
|                                                            |       |                    |       |                  |       |
| Investment in Real Estate  Affiliates, net                      |       | $                       | 146,537    |                  | $          | 140,558 |   |

** **
| ** **                                                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                            | ** ** | **(In thousands)**                                  | ** ** |
| **Condensed  Combined Statements of Income - Real Estate Affiliates** | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Minimum rents                                                         |       | $                                                        | 2,563      |                                                    | $          | 5,546 |   | $ | 7,104 |   | $ | 16,339 |   |
| Land sales                                                            |       | 20,617                                                   |       | 14,858                                                  |       | 70,088 |   | 50,134 |   |
| Other                                                                 |       | 13,417                                                   |       | 12,390                                                  |       | 43,596 |   | 46,397 |   |
| Total revenues                                                        |       | 36,597                                                   |       | 32,794                                                  |       | 120,788 |   | 112,870 |   |
|                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| **Expenses:**                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Real estate taxes                                                     |       | 503                                                      |       | 373                                                     |       | 1,489 |   | 1,097 |   |
| Property maintenance costs                                            |       | 454                                                      |       | 713                                                     |       | 922 |   | 1,933 |   |
| Other property operating  costs                                       |       | 14,281                                                   |       | 16,027                                                  |       | 42,827 |   | 54,843 |   |
| Land sales operations                                                 |       | 17,376                                                   |       | 11,856                                                  |       | 55,020 |   | 39,456 |   |
| Depreciation and  amortization                                        |       | 1,976                                                    |       | 1,988                                                   |       | 5,652 |   | 5,819 |   |
| Total expenses                                                        |       | 34,590                                                   |       | 30,957                                                  |       | 105,910 |   | 103,148 |   |
| Operating income                                                      |       | 2,007                                                    |       | 1,837                                                   |       | 14,878 |   | 9,722 |   |
|                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest income                                                       |       | 627                                                      |       | 107                                                     |       | 1,966 |   | 457 |   |
| Interest expense                                                      |       | (2,943                                                   | )          | (1,682                                                  | )          | (8,575 | ) | (5,034 | ) |
| Provision for income taxes                                            |       | 448                                                      |       | 239                                                     |       | (689 | ) | 109 |   |
| Net income attributable to  joint venture partners                    |       | $                                                        | 139        |                                                    | $          | 501 |   | $ | 7,580 |   | $ | 5,254 |   |
|                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| **Equity In  Income of Real Estate Affiliates:**                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income attributable to  joint venture partners                    |       | $                                                        | 139        |                                                    | $          | 501 |   | $ | 7,580 |   | $ | 5,254 |   |
| Less joint venture  partners’ share of income                    |       | (70                                                      | )          | (234                                                    | )          | (3,604 | ) | (2,489 | ) |
| Amortization of capital or  basis differences                         |       | 1,153                                                    |       | (2,271                                                  | )          | 2,418 |   | (648 | ) |
| Equity in income (loss) of  Real Estate Affiliates                    |       | $                                                        | 1,222      |                                                    | $          | (2,004 | ) | $ | 6,394 |   | $ | 2,117 |   |

 

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**NOTE 4         MORTGAGES, NOTESAND LOANS PAYABLE**

 

Mortgages,notes and loans payable are summarized as follows:

 
| ** **                                                          | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                                                          | ** ** | **(In thousands)** | ** ** |
| **Fixed-rate debt:**                                           |       |                    |       |                  |       |
| Collateralized mortgages,  notes and loans payable                  |       | $                       | 271,068    |                  | $          | 342,833 |   |
|                                                                |       |                    |       |                  |       |
| **Variable-rate  debt:**                                            |       |                    |       |                  |       |
| Collateralized mortgages,  notes and loans payable                  |       | 65,708                  |       | —                |       |
| Total mortgages, notes and  loans payable                           |       | 336,776                 |       | 342,833               |       |
| Less: Mortgages, notes and  loans payable subject to compromise     |       | (63,951                 | )          | (133,973              | )          |
| Total mortgages, notes and  loans payable not subject to compromise |       | $                       | 272,825    |                  | $          | 208,860 |   |

 

Asdescribed in Note 1, on April 16 and 22, 2009, the Debtors filed voluntarypetitions for relief under Chapter 11, which triggered defaults onsubstantially all debt obligations of the Debtors. However, under section 362of Chapter 11, the filing of a bankruptcy petition automatically stays mostactions against the debtor’s estate. Absent an order of the Bankruptcy Court,these pre-petition liabilities are subject to settlement under a plan ofreorganization, and therefore are presented as Liabilities subject tocompromise on the Combined Balance Sheets as of September 30, 2010 and December31, 2009.  Of the total amount of debtpresented above, $272.8 million and $208.9 million is not subject tocompromise, consisting of the collateralized mortgages of the HHC Debtors thathave emerged from bankruptcy as of September 30, 2010 and December 31, 2009,respectively, and the debt of the HHC Non-Debtors.

 

Asof December 31, 2009, as described in Note 1, plans of reorganization for theEmerged Debtors, with approximately $146.8 million of mortgage debt, had beendeclared effective. The Emerged Plans for such Emerged Debtors provided for, inexchange for payment of certain extension fees and cure of previously unpaidamounts due on the applicable mortgage loans (primarily, principal amortizationotherwise scheduled to have been paid since the Petition Date), the extensionof the secured mortgage loans at previously existing non-default interest rates.  In addition, one HHC Debtor emerged frombankruptcy in July 2010.  The interestrate on this loan, with a carrying amount of $65.7 million, changed from afixed rate of 5.523% to a floating rate of LIBOR (such LIBOR rate no lower than1.0%) plus 2.50%, capped at 5.523%, and the maturity date was extended by fiveyears to October, 2016.  As a result ofthe extensions, weighted average remaining duration of the secured loansassociated with these properties is 5.27 years as of September 30, 2010. Inconjunction with these extensions, certain financial and operating covenantsand guarantees were created or reinstated.

 

Withrespect to the loans of the HHC Debtors that remain in bankruptcy at September30, 2010, we are currently recognizing interest expense based on contract ratesin effect prior to bankruptcy as the Bankruptcy Court has ruled that interestpayments based on such contract rates constitute adequate protection to thesecured lenders.  The debt that remainssubject to compromise at September 30, 2010 was reinstated pursuant to thePlan.

 

The weighted average interest rate on our mortgages,notes and loans payable was 5.14% and 5.54% at September 30, 2010 and December31, 2009, respectively. The interest rate used in the calculation at September30, 2010 for the loan that converted to a variable rate in July, 2010 was3.50%.

 

**Collateralized Mortgages, Notesand Loans Payable**

Asof September 30, 2010, $337.1 million of land, buildings and equipment anddevelopments in progress (before accumulated depreciation) have been pledged ascollateral for our mortgages, notes and loans payable. Certain of these propertiesare cross-collateralized with other properties. Substantially all of the $336.8 million of fixed and variable ratesecured mortgage notes and loans payable are non-recourse.  In addition, certain mortgage loans as ofSeptember 30, 2010 contain other credit enhancement provisions which have beenprovided by the TopCo Debtors. These security or credit enhancement provisionswere modified pursuant to the Plan, including, among other things, tosubstitute us for GGP as guarantor for certain HHC Debtor mortgage loans.  Certain mortgage notes payable may be prepaidbut are generally subject to a prepayment penalty equal to a yield-maintenancepremium, defeasance or a percentage of the loan balance.

 

**Letters of Credit and Surety Bonds**

Wehad outstanding letters of credit and surety bonds of $66.0 million as ofSeptember 30, 2010 and $76.5 million as of December 31, 2009. These letters ofcredit and bonds were issued primarily in connection with insurancerequirements, special real estate assessments and construction obligations.

 

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**THEHOWARD HUGHES CORPORATION**

 

**NOTE 5         INCOME TAXES**

 

AlthoughGGP operated as a REIT prior to the Effective Date, certain of the HHCBusinesses operated as taxable REIT subsidiaries.  After the Effective Date, we will not electto be treated as a REIT and thus will generally be taxed as a Ccorporation.  However, one of ourcombined entities, Victoria Ward, Ltd. (“Ward”, substantially all of which isowned by us) elected to be taxed as a REIT under sections 856-860 of theInternal Revenue Code of 1986, as amended (the “Code”), commencing with thetaxable year beginning January 1, 2002 and currently intends to maintain REITstatus and operate as a REIT after the Effective Date.  To qualify as a REIT, Ward must meet a numberof organizational and operational requirements, including requirements todistribute at least 90% of its ordinary taxable income and to distribute tostockholders or pay tax on 100% of capital gains and to meet certain asset andincome tests.  Ward has satisfied suchREIT distribution requirements for 2009 and we intend to satisfy suchrequirements for 2010.

 

The most significantcomponent of the deferred tax liability is associated with the master plannedcommunities and largely attributable to the difference between the basis andvalue determined as of the date of the acquisition by the Predecessors of TheRouse Company (“TRC”) in 2004 adjusted for sales that have occurred since thattime.  The cash cost and timing ofpayment related to this deferred tax liability is dependent upon the salesprice of future land sales and the method of accounting used for income taxpurposes.  The deferred tax liabilityalso includes an amount related to deferred income reflecting the differencebetween the income tax method of accounting and the financial statement methodof accounting for prior sales of land in our master planned communities.

 

Unrecognized tax benefitsrecorded pursuant to uncertain tax positions were $124.9 million and $57.0million as of September 30, 2010 and December 31, 2009, respectively, excludinginterest, of which none would impact our future tax rate as of September 30,2010 and December 31, 2009. Accrued interest related to these unrecognized taxbenefits amounted to $27.5 million as of September 30, 2010 and $9.1 million asof December 31, 2009. We recognized an increase of interest expense related tothe unrecognized tax benefits of $2.6 million for the three months endedSeptember 30, 2010; $18.3 million for the nine months ended September 30, 2010;zero for the three months ended September 30, 2009 and $1.0 million for thenine months ended September 30, 2009.

 

Generally, we are currentlyopen to audit under the statute of limitations by the Internal Revenue Servicefor the years ending December 31, 2005 through 2009 and are open to audit bystate taxing authorities for the years ending December 31, 2004 through 2009.

 

Twoof our subsidiaries are being audited by the IRS for the years ended December31, 2007 and December 31, 2008, and in connection with such audits, the IRS hasproposed changes resulting in $148.2 million of additional tax. We havedisputed the proposed changes and it is the Company’s position that the tax lawin question has been properly applied and reflected in the 2007 and 2008returns for these two subsidiaries.  We rejected a settlement offer fromthe IRS and cannot predict when these audits will be resolved.  We have previously provided for the additionaltaxes sought by the IRS, through our uncertain tax position liability ordeferred tax liabilities.  Although webelieve our tax returns are correct, the final determination of taxexaminations and any related litigation could be different than what wasreported on the returns.  In the opinionof management, we have made adequate tax provisions for the years subject toexamination. In addition, pursuant to the Tax Matters Agreement, we have agreedwith GGP that interest and penalties, if any, that are ultimately due relatedto this matter will remain a GGP obligation.

 

Basedon our assessment of the expected outcome of these examinations or examinationsthat may commence, or as a result of the expiration of the statute oflimitations for specific jurisdictions, it is reasonably possible that therelated unrecognized tax benefits, excluding accrued interest, for taxpositions taken regarding previously filed tax returns will materially changefrom those recorded at September 30, 2010. A material change in unrecognizedtax benefits could have a material effect on our statements of income andcomprehensive income. As of September 30, 2010, there are not any unrecognizedtax benefits, excluding accrued interest, which due to the reasons above, couldsignificantly increase or decrease during the next twelve months.

 

Pursuantto the Investment Agreements, reorganized GGP will indemnify us from andagainst 93.75% of any and all losses, claims, damages, liabilities andreasonable expenses to which we and our subsidiaries become subject, in eachcase solely to the extent attributable to certain taxes related to sales ofcertain assets in our Master Planned Communities segment prior to March 31,2010, in an amount up to the Indemnity Cap. The Indemnity Cap is calculated as the lesser of $303.75 million and theExcess Surplus Amount.  The ExcessSurplus Amount is determined using a complex formula described in theInvestment Agreements.  Due to,

 

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**THEHOWARD HUGHES CORPORATION**

 

amongother things, the completion of an approximate $2.0 billion common stockoffering by GGP on November 19, 2010, the Indemnity Cap will equal $303.75million.  Such Indemnity Cap is notreflected as an asset of the Company at September 30, 2010.

 

**NOTE 6         TRANSACTIONS WITHGGP AND OTHER GGP SUBSIDIARIES**

 

**Intercompany Transactions**

Asdescribed in Note 1, the accompanying combined financial statements present theoperations of the HHC Businesses as carved-out from the consolidated financialstatements of GGP. Transactions between the HHC Businesses have been eliminatedin the combined presentation. Also as described in Note 1, an allocation ofcertain centralized GGP costs incurred for activities such as employee benefitprograms, property management and asset management functions, centralizedtreasury, payroll and administrative functions has been made to the propertyoperating costs of HHC Businesses. Accordingly, transactions between the HHC Businesses and GGP or otherGGP subsidiaries have not been eliminated except that end-of-periodintercompany balances between GGP and the HHC Businesses have been consideredelements of HHC equity.

 

**Incentive Stock Plans**

Priorto the Chapter 11 Cases, the Predecessors granted qualified and non-qualifiedstock options and restricted stock to certain GGP officers and key employeeswhose compensation costs related specifically to our assets.  Accordingly, stock-based compensation costspertaining to such employees have been reflected in our combined financialstatements for the applicable periods.  Asimilar stock option and restricted stock plan is in place for our employeesafter the Effective Date.

 

Pursuantto the Plan, each outstanding option to acquire shares of GGP stock (the ‘‘GGPOption’’) was converted into (i) an option to acquire the same number of sharesof common stock of reorganized GGP and (ii) a separate option to acquireapproximately 0.098344 shares of our common stock (the ‘‘HHC Option’’) for eachexisting option for one share of GGP common stock. The replacement optionsgenerally have the same terms and conditions as the outstanding GGP Optionswith the exercise price adjusted for the conversion ratio of GGP common stockto HHC common stock and the relative trading values of such common stock. As ofthe Effective Date, 507,307 shares of common stock were issuable upon exerciseof the HHC Options.

 

Notwithstandingthe foregoing, pursuant to the terms of GGP’s 1998 Incentive Stock Plan,holders of any outstanding GGP Option issued thereunder shall have the right toelect, within sixty days after the Effective Date, to surrender such option asof the Effective Date for a cash payment. Accordingly, the number of shares of HHC common stock that will beissuable as a result of converted GGP options will be less than 507,307 sharesto the extent such alternative is elected.

 

**Stock-Based Compensation Expense**

ThePredecessors evaluated stock-based compensation expense in accordance with GAAPrelated to share-based payments, which requires companies to estimate the FairValue of share-based payment awards on the date of grant using an option-pricingmodel.  The value of the portion of anaward to our employees that is ultimately expected to vest is recognized asexpense over the requisite service periods in the Combined Statements of Lossand Comprehensive Loss.  The compensationexpense for employees specifically attributed to the HHC Businesses have beenincluded in the accompanying combined financial statements.

 

**NOTE 7         OTHER ASSETS ANDLIABILITIES**

 

The following table summarizes the significantcomponents of prepaid expenses and other assets.

 

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| ** **                               | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                               | ** ** | **(In thousands)** | ** ** |
| Special Improvement  District receivable |       | $                       | 48,584     |                  | $          | 48,713 |   |
| Receivables - other                      |       | 29,764                  |       | 37,355                |       |
| Prepaid expenses                         |       | 16,850                  |       | 9,465                 |       |
| Below-market ground leases  (Note 2)     |       | 21,103                  |       | 21,357                |       |
| Security and escrow  deposits            |       | 6,589                   |       | 9,487                 |       |
| Taxes  receivable                        |       | 5,208                   |       | —                |       |
| Other                                    |       | 4,726                   |       | 8,668                 |       |
|                                     |       | $                       | 132,824    |                  | $          | 135,045 |   |

 

Thefollowing table summarizes the significant components of accounts payable,accrued expenses and other liabilities.

 
| ** **                                                       | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                                                       | ** ** | **(In thousands)** | ** ** |
| Uncertain tax position  liability                                |       | $                       | 152,400    |                  | $          | 66,129 |   |
| Construction payable                                             |       | 44,063                  |       | 108,437               |       |
| Payables to GGP                                                  |       | 32,639                  |       | 30,359                |       |
| Accounts payable and  accrued expenses                           |       | 19,525                  |       | 23,087                |       |
| Above-market ground leases  (Note 2)                             |       | 14,190                  |       | 14,543                |       |
| Deferred gains/income                                            |       | 6,458                   |       | 9,045                 |       |
| Accrued interest                                                 |       | 6,286                   |       | 3,816                 |       |
| Accrued real estate taxes                                        |       | 6,239                   |       | 4,548                 |       |
| Tenant and other deposits                                        |       | 4,240                   |       | 4,322                 |       |
| Insurance reserve                                                |       | 4,192                   |       | 5,640                 |       |
| Accrued payroll and other  employee liabilities                  |       | 2,452                   |       | 2,754                 |       |
| Other                                                            |       | 7,341                   |       | 3,377                 |       |
| Total accounts payable and  accrued expenses                     |       | 300,025                 |       | 276,057               |       |
| Less: amounts subject to  compromise (Note 1)                    |       | (74,142                 | )*         | (141,866              | )          |
| Accounts payable and  accrued expenses not subject to compromise |       | $                       | 225,883    |                  | $          | 134,191 |   |

 

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* As of the Effective Date,accounts payable and accrued expenses subject to compromise were substantially paidpursuant to the Plan.  In addition,pursuant to the Separation Agreement, certain remaining construction payablesremained a GGP obligation after the Effective Date.

 

**NOTE 8         COMMITMENTS ANDCONTINGENCIES**

 

In the normal course of business, from time to time,we are involved in legal proceedings relating to the ownership and operationsof our properties.  In management’sopinion, the liabilities, if any, that may ultimately result from such legal actionsare not expected to have a material adverse effect on our combined financialposition, results of operations or liquidity.

 

We lease land or buildings at certain propertiesfrom third parties. The leases generally provide us with a right offirst refusal in the event of a proposed sale of the property by the landlord.Rental payments are expensedas incurred and have, to the extent applicable, been straight-lined over theterm of the lease. Contractual rentalexpense, including participation rent, was $0.9 million for the three monthsended September 30, 2010; $2.2 million for the nine months ended September30, 2010; $0.5 million for the three months ended September 30, 2009 and $2.1million for the nine months ended September 30, 2009.  The same rent expense excludingamortization of above and below-market ground leases and straight-line rentswas $0.9 million for the three months ended September 30, 2010; $2.2million for the nine months ended September 30, 2010; $0.6 million for thethree months ended September 30, 2009 and $2.1 million for the nine monthsended September 30, 2009.

 

SeeNote 5 for our obligations related to uncertain tax positions for disclosure ofadditional contingencies.

 

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**THE HOWARD HUGHES CORPORATION**

 

**Contingent Stock Agreement**

Inconjunction with GGP’s acquisition of The Rouse Company (“TRC”) in November2004, GGP assumed TRC’s obligations under the Contingent Stock Agreement, (the “CSA”).TRC entered into the CSA in 1996 when it acquired The Hughes Corporation (“Hughes”).This acquisition included various assets, including Summerlin (the “CSA Assets”),a development in our Master Planned Communities segment.  The CSA was anunsecured obligation of GGP and therefore GGP’s obligations to the formerHughes owners or their successors (the “Beneficiaries”) under the CSA wassubject to treatment in accordance with the Plan.

 

ThePlan provides that the final payment and settlement of all other claims underthe CSA will be a total of $230 million (down from the $245 million estimate atDecember 31, 2009), and such amount will be distributed by GGP after theEffective Date.  Accordingly, during2010, we reduced our carrying value of the CSA assets, and the related GGPequity, by $15 million for this revised estimate.

 

**NOTE 9         RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS**

 

OnJune 12, 2009, the FASB issued new generally accepted accounting guidance thatamends the consolidation guidance applicable to variable interestentities.  The amendments to theconsolidation guidance affect all entities and enterprises currently within thescope of the previous guidance and were effective on January 1, 2010.  We have adopted this new pronouncement and itdid not have a material impact on our combined financial statements.

** **

**NOTE 10       SEGMENTS**

 

Wehave two business segments which offer different products and services. Oursegments are managed separately because each requires different operatingstrategies or management expertise.  Wedo not distinguish or group our combined operations on a geographic basis.  Further, all operations are within the UnitedStates and no customer or tenant comprises more than 10% of combined revenues.Our reportable segments are as follows:

 

·                  Master Planned Communities (“MPC”)- includes the development and sale of land, primarily in large-scale,long-term community development projects in and around Columbia, Maryland;Summerlin, Nevada; and Houston, Texas

 

·                  Strategic Development -includes all properties held for development and redevelopment, including thecurrent rental property operations (primarily retail and other interests inreal estate at such locations) as well as our one residential condominiumproject located in Natick (Boston), Massachusetts

 

Theoperating measure used to assess operating results for the business segments isadjusted earnings before interest, income taxes, depreciation and amortization(“Adjusted EBITDA”).  Adjusted EBITDAalso excludes reorganization items, strategic initiatives, provisions forimpairment and allocation to noncontrolling interest and, accordingly,management believes that Adjusted EBITDA provides useful information about abusiness segment’s or property’s operating performance.

 

Theaccounting policies of the segments are the same as those described in Note 1,except that we report the operations of our Real Estate Affiliates using theproportionate share method rather than the equity method.  Under the proportionate share method, ourshare of the revenues and expenses of our Real Estate Affiliates are aggregatedwith the revenues and expenses of combined properties. Under the equity method,our share of the net revenues and expenses of our Real Estate Affiliates arereported as a single line item, Equity in income (loss) of Real EstateAffiliates, in our Combined Statements of Loss and Comprehensive Loss. Thisdifference affects only the reported revenues and operating expenses of thesegments and has no effect on our reported net earnings.

 

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**THE HOWARD HUGHES CORPORATION**

 

Thetotal cash expenditures for additions to long-lived assets for the MasterPlanned Communities segment was $39.1 million for the nine months endedSeptember 30, 2010 and $33.4 million for the nine months ended September 30,2009. Similarly, cash used for long-lived assets for the Strategic Developmentsegment were $71.1 million for the nine months ended September 30, 2010 and$23.8 million for the nine months ended September 30, 2009. Such amounts forthe Master Planned Communities segment and the Strategic Development segmentare included in the amounts listed as Land/residential development andacquisitions expenditures and Development of real estate and propertyadditions/improvements, primarily previously accrued, respectively, in ourCombined Statements of Cash Flows.

 

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**THE HOWARD HUGHES CORPORATION**

 

Segmentoperating results are as follows:

 
| ** **                                  | ** ** | **Three Months Ended September 30, 2010** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Combined**                                                       | ** ** | **Real Estate** | ** ** | **Segment** | ** ** |
| ** **                                  | ** ** | **Properties**                                                     | ** ** | **Affiliates** | ** ** | **Basis** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                                            | ** ** |
| **Master  Planned Communities**             |       |                                                               |       |   |   |   |   |
| Land sales                                  |       | $                                                                  | 10,034     |   | $ | 10,824 |   | $ | 20,858 |   |
| Land sales operations                       |       | (10,057                                                            | )          | (8,080 | ) | (18,137 | ) |
| Master Planned Communities  Adjusted EBITDA |       | (23                                                                | )          | 2,744 |   | 2,721 |   |
|                                        |       |                                                               |       |   |   |   |   |
| **Strategic  Development**                  |       |                                                               |       |   |   |   |   |
| Property revenues:                          |       |                                                               |       |   |   |   |   |
| Minimum rents                               |       | 16,349                                                             |       | 1,345 |   | 17,694 |   |
| Tenant recoveries                           |       | 4,637                                                              |       | — |   | 4,637 |   |
| Overage rents                               |       | 826                                                                |       | — |   | 826 |   |
| Other                                       |       | 614                                                                |       | 7,044 |   | 7,658 |   |
| Total property revenues                     |       | 22,426                                                             |       | 8,389 |   | 30,815 |   |
| Property operating  expenses:               |       |                                                               |       |   |   |   |   |
| Real estate taxes                           |       | 4,131                                                              |       | 264 |   | 4,395 |   |
| Property maintenance costs                  |       | 1,484                                                              |       | 238 |   | 1,722 |   |
| Marketing                                   |       | 248                                                                |       | — |   | 248 |   |
| Other property operating  costs             |       | 8,746                                                              |       | 7,495 |   | 16,241 |   |
| Provision for doubtful  accounts            |       | 744                                                                |       | — |   | 744 |   |
| Property management and  other costs        |       | 3,467                                                              |       | — |   | 3,467 |   |
| Total property operating  expenses          |       | 18,820                                                             |       | 7,997 |   | 26,817 |   |
| Strategic Development  Adjusted EBITDA      |       | 3,606                                                              |       | 392 |   | 3,998 |   |
| Total Segments Adjusted  EBITDA             |       | $                                                                  | 3,583      |   | $ | 3,136 |   | $ | 6,719 |   |

 
| ** **                                  | ** ** | **Three Months Ended September 30, 2009** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Combined**                                                       | ** ** | **Real Estate** | ** ** | **Segment** | ** ** |
| ** **                                  | ** ** | **Properties**                                                     | ** ** | **Affiliates** | ** ** | **Basis** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                                            | ** ** |
| **Master  Planned Communities**             |       |                                                               |       |   |   |   |   |
| Land sales                                  |       | $                                                                  | 7,409      |   | $ | 7,800 |   | $ | 15,209 |   |
| Land sales operations                       |       | (8,124                                                             | )          | (8,656 | ) | (16,780 | ) |
| Master Planned Communities  Adjusted EBITDA |       | (715                                                               | )          | (856 | ) | (1,571 | ) |
|                                        |       |                                                               |       |   |   |   |   |
| **Strategic  Development**                  |       |                                                               |       |   |   |   |   |
| Property revenues:                          |       |                                                               |       |   |   |   |   |
| Minimum rents                               |       | 15,873                                                             |       | 2,911 |   | 18,784 |   |
| Tenant recoveries                           |       | 5,045                                                              |       | — |   | 5,045 |   |
| Overage rents                               |       | 615                                                                |       | — |   | 615 |   |
| Other                                       |       | 1,318                                                              |       | 6,505 |   | 7,823 |   |
| Total property revenues                     |       | 22,851                                                             |       | 9,416 |   | 32,267 |   |
| Property operating  expenses:               |       |                                                               |       |   |   |   |   |
| Real estate taxes                           |       | 3,829                                                              |       | 194 |   | 4,023 |   |
| Property maintenance costs                  |       | 1,389                                                              |       | 374 |   | 1,763 |   |
| Marketing                                   |       | 278                                                                |       | — |   | 278 |   |
| Other property operating  costs             |       | 9,224                                                              |       | 8,414 |   | 17,638 |   |
| Provision for doubtful  accounts            |       | —                                                             |       | — |   | — |   |
| Property management and  other costs        |       | 4,561                                                              |       | — |   | 4,561 |   |
| Total property operating  expenses          |       | 19,281                                                             |       | 8,982 |   | 28,263 |   |
| Strategic Development  Adjusted EBITDA      |       | 3,570                                                              |       | 434 |   | 4,004 |   |
| Total Segments Adjusted  EBITDA             |       | $                                                                  | 2,855      |   | $ | (422 | ) | $ | 2,433 |   |

 

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| ** **                                  | ** ** | **Nine Months Ended September 30, 2010** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Combined**                                                      | ** ** | **Real Estate** | ** ** | **Segment** | ** ** |
| ** **                                  | ** ** | **Properties**                                                    | ** ** | **Affiliates** | ** ** | **Basis** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                                           | ** ** |
|                                        |       |                                                              |       |   |   |   |   |
| **Master  Planned Communities**             |       |                                                              |       |   |   |   |   |
| Land sales                                  |       | $                                                                 | 22,141     |   | $ | 36,796 |   | $ | 58,937 |   |
| Land sales operations                       |       | (30,654                                                           | )          | (26,821 | ) | (57,475 | ) |
| Master Planned Communities  Adjusted EBITDA |       | (8,513                                                            | )          | 9,975 |   | 1,462 |   |
|                                        |       |                                                              |       |   |   |   |   |
| **Strategic  Development**                  |       |                                                              |       |   |   |   |   |
| Property revenues:                          |       |                                                              |       |   |   |   |   |
| Minimum rents                               |       | 50,349                                                            |       | 3,729 |   | 54,078 |   |
| Tenant recoveries                           |       | 13,891                                                            |       | — |   | 13,891 |   |
| Overage rents                               |       | 1,738                                                             |       | — |   | 1,738 |   |
| Other                                       |       | 3,762                                                             |       | 22,888 |   | 26,650 |   |
| Total property revenues                     |       | 69,740                                                            |       | 26,617 |   | 96,357 |   |
| Property operating  expenses:               |       |                                                              |       |   |   |   |   |
| Real estate taxes                           |       | 11,161                                                            |       | 781 |   | 11,942 |   |
| Property maintenance costs                  |       | 4,766                                                             |       | 484 |   | 5,250 |   |
| Marketing                                   |       | 755                                                               |       | — |   | 755 |   |
| Other property operating  costs             |       | 26,440                                                            |       | 22,483 |   | 48,923 |   |
| Provision for doubtful  accounts            |       | 1,101                                                             |       | — |   | 1,101 |   |
| Property management and  other costs        |       | 12,463                                                            |       | — |   | 12,463 |   |
| Total property operating  expenses          |       | 56,686                                                            |       | 23,748 |   | 80,434 |   |
| Strategic Development  Adjusted EBITDA      |       | 13,054                                                            |       | 2,869 |   | 15,923 |   |
| Total Segments Adjusted  EBITDA             |       | $                                                                 | 4,541      |   | $ | 12,844 |   | $ | 17,385 |   |

 
| ** **                                  | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Combined**                                                      | ** ** | **Real Estate** | ** ** | **Segment** | ** ** |
| ** **                                  | ** ** | **Properties**                                                    | ** ** | **Affiliates** | ** ** | **Basis** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                                           | ** ** |
| **Master  Planned Communities**             |       |                                                              |       |   |   |   |   |
| Land sales                                  |       | $                                                                 | 38,843     |   | $ | 26,320 |   | $ | 65,163 |   |
| Land sales operations                       |       | (40,578                                                           | )          | (23,129 | ) | (63,707 | ) |
| Master Planned Communities  Adjusted EBITDA |       | (1,735                                                            | )          | 3,191 |   | 1,456 |   |
|                                        |       |                                                              |       |   |   |   |   |
| **Strategic  Development**                  |       |                                                              |       |   |   |   |   |
| Property revenues:                          |       |                                                              |       |   |   |   |   |
| Minimum rents                               |       | 49,390                                                            |       | 9,865 |   | 59,255 |   |
| Tenant recoveries                           |       | 14,827                                                            |       | — |   | 14,827 |   |
| Overage rents                               |       | 1,465                                                             |       | — |   | 1,465 |   |
| Other                                       |       | 855                                                               |       | 24,358 |   | 25,213 |   |
| Total property revenues                     |       | 66,537                                                            |       | 34,223 |   | 100,760 |   |
| Property operating  expenses:               |       |                                                              |       |   |   |   |   |
| Real estate taxes                           |       | 10,111                                                            |       | 570 |   | 10,681 |   |
| Property maintenance costs                  |       | 3,617                                                             |       | 1,015 |   | 4,632 |   |
| Marketing                                   |       | 738                                                               |       | — |   | 738 |   |
| Other property operating  costs             |       | 25,244                                                            |       | 28,811 |   | 54,055 |   |
| Provision for doubtful  accounts            |       | 1,212                                                             |       | — |   | 1,212 |   |
| Property management and  other costs        |       | 12,992                                                            |       | — |   | 12,992 |   |
| Total property operating  expenses          |       | 53,914                                                            |       | 30,396 |   | 84,310 |   |
| Strategic Development  Adjusted EBITDA      |       | 12,623                                                            |       | 3,827 |   | 16,450 |   |
| Total Segments Adjusted  EBITDA             |       | $                                                                 | 10,888     |   | $ | 7,018 |   | $ | 17,906 |   |

 

Thefollowing reconciles Adjusted EBITDA to GAAP-basis operating loss:

 

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**THEHOWARD HUGHES CORPORATION**

 
| ** **                                                                                                                    | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                    | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                                                                                                                    | ** ** | **2010**                          | ** ** | **2009**                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                                                    | ** ** | **(In thousands)**           | ** ** |
| **Reconciliation  of Segment Basis Adjusted EBITDA (“AEBITDA”) and EBITDA to GAAP Net (Loss) Attributable  to GGP** |       |                              |       |                              |       |   |   |   |   |
|                                                                                                                          |       |                              |       |                              |       |   |   |   |   |
| AEBITDA                                                                                                                       |       | $                                 | 6,719      |                              | $          | 2,433 |   | $ | 17,385 |   | $ | 17,906 |   |
| Strategic Initiatives                                                                                                         |       | —                            |       | (266                              | )          | — |   | (5,380 | ) |
| Provisions for impairment                                                                                                     |       | (92                               | )          | (40,582                           | )          | (578 | ) | (180,762 | ) |
| Debt extinguishment costs                                                                                                     |       | —                            |       | —                            |       | — |   | (9 | ) |
| Reorganization items                                                                                                          |       | (16,515                           | )          | (1,814                            | )          | (43,129 | ) | (3,831 | ) |
| EBITDA                                                                                                                        |       | (9,888                            | )          | (40,229                           | )          | (26,322 | ) | (172,076 | ) |
| Depreciation and  amortization                                                                                                |       | (5,189                            | )          | (5,485                            | )          | (15,613 | ) | (18,291 | ) |
| Amortization of deferred  finance costs                                                                                       |       | (149                              | )          | (171                              | )          | (454 | ) | (723 | ) |
| Interest income                                                                                                               |       | 388                               |       | 212                               |       | 1,150 |   | 727 |   |
| Interest expense                                                                                                              |       | (1,929                            | )          | (728                              | )          | (5,478 | ) | (2,164 | ) |
| Provision for income taxes                                                                                                    |       | 584                               |       | 22,022                            |       | (17,963 | ) | 24,867 |   |
| Allocation to  noncontrolling interests                                                                                       |       | (47                               | )          | (35                               | )          | (121 | ) | (100 | ) |
| Net loss attributable to  GGP                                                                                                 |       | $                                 | (16,230    | )                                 | $          | (24,414 | ) | $ | (64,801 | ) | $ | (167,760 | ) |

 

Thefollowing reconciles segment revenues to GAAP-basis combined revenues:

 
| ** **                                                     | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                                                     | ** ** | **2010**                          | ** ** | **2009**                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                     | ** ** | **(In thousands)**           | ** ** |
| **Reconciliation  of Segment Basis Revenues to GAAP Revenues** |       |                              |       |                              |       |   |   |   |   |
|                                                           |       |                              |       |                              |       |   |   |   |   |
| Master Planned Communities  - Total Segment                    |       | $                                 | 20,858     |                              | $          | 15,209 |   | $ | 58,937 |   | $ | 65,163 |   |
| Strategic Development -  Total Segment                         |       | 30,815                            |       | 32,267                            |       | 96,357 |   | 100,760 |   |
| Total Segment revenues                                         |       | 51,673                            |       | 47,476                            |       | 155,294 |   | 165,923 |   |
| less:                                                          |       |                              |       |                              |       |   |   |   |   |
| MPC Real Estate Affiliates  land sales revenues                |       | (10,824                           | )          | (7,800                            | )          | (36,796 | ) | (26,320 | ) |
| Strategic Development Real  Estate Affiliates revenues         |       | (8,389                            | )          | (9,416                            | )          | (26,617 | ) | (34,223 | ) |
| Total combined revenues -  GAAP basis                          |       | $                                 | 32,460     |                              | $          | 30,260 |   | $ | 91,881 |   | $ | 105,380 |   |

 

**NOTE 11       MANAGEMENT APPOINTMENTS ON NOVEMBER 22,2010**

** **

OnNovember 22, 2010, the Company’s Board of Directors appointed David R. Weinrebas Chief Executive Officer and a director of the Company and Grant Herlitz asPresident of the Company.  In connectionwith the officer appointments, the Company entered into employment agreementswith Mr. Weinreb and Mr. Herlitz.  Inaddition, the Company entered into warrant agreements with Mr. Weinreb and Mr.Herlitz pursuant to which (a) Mr. Weinreb purchased a warrant to acquire 2.37million shares of Company common stock for a purchase price of $15 million and(b) Mr. Herlitz purchased a warrant to acquire 315,731 shares of Company commonstock for a purchase price of $2 million. The warrants have an exercise price of $42.23 per share and became fullyvested at the time of purchase.  Thewarrants will generally become exercisable in November 2016 and will expire inNovember 2017.

 

**ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

All references to numbered Notes are to specificfootnotes to our Combined Financial Statements included in this QuarterlyReport and which descriptions are incorporated into the applicable response byreference. The following discussion should be read in conjunction with suchCombined Financial Statements and related Notes. Capitalized terms used, butnot defined, in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations (“MD&A”) have the same meanings as insuch Notes or in our Form 10.

 

**Forward-looking information**

We may make forward-looking statements in thisQuarterly Report and in other reports that we file with the SEC. In addition,our senior management may make forward-looking statements orally to analysts,investors, creditors, the media and others.

 

Forward-lookingstatements include:

·                  Projections of our revenues,net operating income, earnings per share, Adjusted EBITDA, capitalexpenditures, income tax and other contingent liabilities, dividends, leverage,capital structure or other financial items

·                  Forecasts of our futureeconomic performance

·                  Descriptions of assumptionsunderlying or relating to any of the foregoing

 

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Inthis Quarterly Report, for example, we make forward-looking statementsdiscussing our expectations about:

·                  Capital required for ouroperations and development opportunities for the properties in our StrategicDevelopment segment following the Distribution

·                  Expected performance of ourMaster Planned Communities segment and other current income producingproperties

·                  Future management,liquidity, development opportunities, expenses we expect to incur as astand-alone entity, development spending and management plans

 

Forward-lookingstatements discuss matters that are not historical facts.  Because they discuss future events orconditions, forward-looking statement often include words such as “anticipate,”“believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,”“may,” “should,” “will,” “would,” or similar expressions.  Forward-looking statements should not beunduly relied upon.  They give ourexpectations about the future and are not guarantees.  Forward-looking statements speak only as ofthe date they are made and we might not update them to reflect changes thatoccur after the date they are made.

 

Thereare several factors, many beyond our control, which could cause results todiffer materially from our expectations. Some of these factors are described in our Form 10, which factorsare incorporated herein by reference. Any factor could by itself, or together with one or more other factors,adversely affect our business, results of operations or financialcondition.  There are also other factorsthat we have not described in this Quarterly Report or in our Form 10 thatcould cause results to differ from our expectations.

 

**Overview — Basis of Presentation**

We were formed in July 2010 for the purpose ofholding certain assets and assuming certain liabilities of the Predecessorspursuant to the Plan as discussed in Note 1. Following the Distribution, wewill operate our business as a stand-alone real estate development company. Thefinancial information included in this Quarterly Report was carved-out from thefinancial information of GGP, has been presented on a combined basis as theentities presented are under common control and ownership, and only propertymanagement and other costs and property specific overhead items, as discussedbelow, have been allocated or reflected in the accompanying combined financialstatements.

 

The historical combined financial informationincluded in this Quarterly Report does not necessarily reflect the financialcondition, results of operations or cash flows that we would have achieved as aseparate, publicly-traded company during the periods presented or those that wewill achieve in the future primarily as a result of the following factors:

 
| · |   | Prior to the Separation, our business was operated by GGP as part of  its broader corporate organization, rather than as a separate,  publicly-traded company. GGP or one of its affiliates performed various  corporate functions for us, including, but not limited to, property  management, human resources, security, payroll and benefits, legal, corporate  communications, information services and restructuring and reorganization.  Costs of the services 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 our  percentage of GGP’s adjusted revenue and assets and the number of properties.  Our historical financial results reflect allocations for certain corporate  costs and we believe such allocations are reasonable; however, such results  do not reflect what our expenses would have been had we been operating as a  separate, stand-alone public company. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Currently, portions of our business are integrated with the other  businesses of GGP. Historically, we have shared economies of scope and scale  in costs, employees, vendor relationships and certain customer relationships.  While we have entered into a Transition Services Agreement that governs  certain commercial and other relationships between us and GGP, those  contractual arrangements may not capture the benefits our business has  enjoyed as a result of being integrated with GGP. The loss of these benefits  of scope and scale may have an adverse effect on our business, results of  operations and financial condition following the completion of the  Separation.                                                                                                                                                                                                                                                                                                                                        |

 

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In addition, GGP operates as a REIT in which ourbusinesses, except for the Master Planned Community segment, are generallyexempt from tax. We intend to operate as a taxable corporation subsequent tothe Effective Date; other than, one of our subsidiaries, Victoria Ward, Limited,which is and intends to continue to elect REIT status.

 

We operate our business in two segments: MasterPlanned Communities and Strategic Development.

 

**Overview—MasterPlanned Communities Segment**

Our Master Planned Communities segment consists ofthe development and sale of residential and commercial land, primarily inlarge-scale projects in and around Columbia, Maryland; Houston, Texas; andSummerlin, Nevada. Residential land sales include standard, custom and high-densityparcels. Standard residential lots are designated for detached and attachedsingle- and multi-family homes, ranging from entry-level to luxury homes. Atour Summerlin project, certain residential parcels are considered custom lotsas their premium price reflects their larger size and other distinguishingfeatures including gated communities, golf course access and higher elevations.Commercial land sales include parcels designated for retail, office, servicesand other for-profit activities, as well as those parcels designated for use bygovernment, schools and other not-for-profit entities.

 

On May 10, 2010, certain of the Debtors enteredinto purchase agreements with two proposed purchasers, Richmond American Homesof Nevada, Inc. (“Richmond”) and PN II, Inc., dba Pulte Homes ofNevada (“Pulte”), for the sale of certain lots in our Summerlin master plannedcommunity.  The purchase agreement withRichmond is for parcels comprising 115 and 117 lots representing 32 acres inthe aggregate for purchase prices of $8,510,000 and $9,477,000, respectively.The purchase agreement with Pulte is for parcels comprising 109 and 162 lotsrepresenting 31.5 acres in the aggregate for purchase prices of $7,739,000 and$12,231,000, respectively.  On October 4,2010, the applicable Debtors closed on the sale of 50 finished lots to Pulteand 20 finished lots to Richmond with gross purchase prices of $4,219,000 and$2,133,000, respectively.  Pursuant tothe Separation Agreement, the net sales proceeds from these October 4closings were distributed to us on the Effective Date.  Both purchase agreements provide for closingsof the remaining lots in stages through 2011.

 

Based on the results of our evaluations forimpairment (Note 1), we recognized no impairment charges related to our MasterPlanned Communities segment for the nine months ended September 30, 2010 and$52.8 million for the nine months ended September 30, 2009.

 

The following table summarizes thestatus of residential and commercial sales for all communities as well as the currentlyexpected sell-out date as of September 30, 2010:

 
| ** **            | ** ** | ** **                             | ** ** | ** **        | ** ** | ** **   | ** ** | ** **       | ** ** | **Projected** | ** ** |
|-----------------------|------------|----------------------------------------|------------|-------------------|------------|--------------|------------|------------------|------------|---------------|------------|
| ** **            | ** ** | ** **                             | ** ** | ** **        | ** ** | ** **   | ** ** | ** **       | ** ** | **Community** | ** ** |
| ** **            | ** ** | **Remaining Saleable Acres** | ** ** | **Redevelopment** | ** ** | **Sell-Out** | ** ** |
| **Community**         | ** ** | **Residential**                        | ** ** | **Commercial**    | ** ** | **Total**    | ** ** | **Acres *** | ** ** | **Date**      | ** ** |
| Bridgeland            |       | 3,964                                  |       | 1,246             |       | 5,210        |       | —           |       | 2036          |       |
| Summerlin             |       | 6,558                                  |       | 625               |       | 7,183        |       | —           |       | 2039          |       |
| The Woodlands         |       | 1,048                                  |       | 1,000             |       | 2,048        |       | —           |       | 2017          |       |
| Maryland Communities: |       |                                   |       |              |       |         |       |             |       |          |       |
| Columbia              |       | —                                 |       | —            |       | —       |       | 136              |       | 2035          |       |
| Gateway               |       | —                                 |       | 121               |       | 121          |       | —           |       | 2013          |       |
| Emerson               |       | 12                                     |       | 68                |       | 80           |       | —           |       | 2013          |       |
| Fairwood              |       | —                                 |       | 11                |       | 11           |       | —           |       | 2013          |       |
|                  |       | 11,582                                 |       | 3,071             |       | 14,653       |       | 136              |       |          |       |

 

----

* Reflects the number ofacres we expect to redevelop

 

The following table summarizes theaverage sales price per acre sold for residential and commercial property bycommunity:

 

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| ** **           | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------|------------|---------------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| **Community**        | ** ** | **Residential**                                         | ** ** | **Commercial** | ** ** | **Residential** | ** ** | **Commercial** | ** ** |
| ** **           | ** ** | **(In thousands)**                                 | ** ** |
| Bridgeland           |       | $                                                       | 252        |   | $ | — |   | $ | 248 |   | $ | 50 |   |
| Summerlin            |       | 1,418                                                   |       | — |   | — |   | 999 |   |
| The Woodlands        |       | 362                                                     |       | 417 |   | 423 |   | 370 |   |
| Maryland Communities |       | —                                                  |       | — |   | 73 |   | — |   |
|                      |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

Although the average sales price peracre can fluctuate widely depending on the location and type of the parcelswithin a community and the density of what is sold, the average sales pricesduring the nine months ended September 30, 2010 continue to reflect theweak overall demand for lots.

 

We expect continued weakness in landsales given the continuing sluggish economic recovery from the recentrecession.  However, only Bridgeland,Summerlin and The Woodlands have significant remaining acres available for saleand, therefore, are the only communities within our MPC portfolio positioned totake significant advantage of any rebound in the economic environment.

 

**Overview—StrategicDevelopment Segment**

Our Strategic Development segment is made up ofnear, medium and long-term real estate properties and development projects,some of which we believe have the potential to create meaningful value. All ofthese assets generally share the fundamental characteristic of requiringsubstantial future development to achieve its highest and best use.  Our Strategic Development segment includesnine mixed-use development opportunities, four mall development projects, sevenredevelopment projects and eleven other property interests, including ownershipof various land parcels and certain profit interests.

 

We have a total of eleven properties that arecurrently producing more than incidental rental revenue. These propertiesconsist of Landmark Mall, South Street Seaport, Ward Centers, Cottonwood Mall,Alameda Plaza, Century Plaza Mall, Cottonwood Square, Park West, Rio West,Riverwalk Marketplace and Village at Redlands.

 

At September 30, 2010, we had approximately 2.5million square feet of regional mall space currently available for lease, ofwhich 87.0% was occupied. Our trailing twelve month total tenant sales persquare foot at such regional malls were approximately $401, also at September 30,2010.  Based on impairment evaluations ofthe properties in our Strategic Development segment (as described in Note 1) werecorded impairment provisions of $0.6 million and $128.0 million for the ninemonths ended September 30, 2010 and 2009, respectively.

 

**Results of Operations**

Our revenues are primarily received from the sale ofindividual lots at our master planned communities to home builders and fromtenants at our rental properties in the form of fixed minimum rents, overagerent and recoveries of operating expenses. We have presented thefollowing discussion of our results of operations on a segment basis under theproportionate share method. Under the proportionate share method, ourshare of the revenues and expenses of theproperties owned by our Real Estate Affiliates are combined with the revenuesand expenses of the Combined Properties. Other revenues are reduced by theadjusted EBITDA attributable to noncontrolling interests.   See Note 10 for additionalinformation including reconciliations of our segment basis results to GAAPbasis results.

 

The operating measure used to assess operatingresults for our business segments is adjusted earnings before interest, incometaxes, depreciation and amortization (‘‘Adjusted EBITDA’’). Adjusted EBITDAalso excludes reorganization items, strategic initiatives, provisions forimpairment and allocation to noncontrolling interests. Management believes thatAdjusted EBITDA provides useful information about our operating performance.

 

In addition, the HHC businesses were operated priorto the Effective Date as subsidiaries of GGP, which operates as a real estateinvestment trust (‘‘REIT’’). We will operate as a taxable corporation.

 

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**Three Months Ended September 30, 2010 and 2009**

 

**Master Planned Communities Segment**

 
| ** **                                              | ** ** | **Three Months Ended September 30,** | ** ** | **$ Increase** | ** ** | **% Increase** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                                 | ** ** | **2009**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| Land sales                                              |       | $                                                        | 20,858     |                | $          | 15,209              |       | $ | 5,649 |   | 37.1 | % |
| Land sales operations                                   |       | (18,137                                                  | )          | (16,780             | )          | 1,357               |       | 8.1 |   |
| **Master  Planned Communities Segment Adjusted EBITDA** |       | $                                                        | 2,721      |                | $          | (1,571              | )          | $ | 4,292 |   | 273.2 | % |

 

Adjusted EBITDA for the MPC segmentincreased $4.3 million in the three months ended September 30, 2010compared to the prior year period primarily due to the sale of 11.3 commercialacres at The Woodlands community in 2010, up from 0.6 commercial acres sold inthe third quarter of 2009. Residential land sales volume also increased in 2010at the Summerlin and Bridgeland communities, largely offset by lowerresidential land sales volume at The Woodlands.

 

For all of our master plannedcommunities, we sold a total of 47.5 residential acres for the three monthsended September 30, 2010 compared to a total of 51.5 acres for the threemonths ended September 30, 2009, and a total of 11.3 acres of commerciallots for the three months ended September 30, 2010 compared to 0.6 acresfor the three months ended September 30, 2009.

 

**Strategic Development Segment**

 
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** ** | **$ Increase** | ** ** | **% Increase** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In thousands)**                            | ** ** | **2010**                                                 | ** ** | **2009**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| **Property  revenues:**                            |       |                                                     |       |                |       |                |       |   |   |
| Minimum rents                                      |       | $                                                        | 17,694     |                | $          | 18,784              |       | $ | (1,090 | ) | (5.8 | )% |
| Tenant recoveries                                  |       | 4,637                                                    |       | 5,045               |       | (408                | )          | (8.1 | ) |
| Overage rents                                      |       | 826                                                      |       | 615                 |       | 211                 |       | 34.3 |   |
| Other                                              |       | 7,658                                                    |       | 7,823               |       | (165                | )          | (2.1 | ) |
| Total property revenues                            |       | 30,815                                                   |       | 32,267              |       | (1,452              | )          | (4.5 | ) |
| **Property  operating expenses:**                  |       |                                                     |       |                |       |                |       |   |   |
| Real estate taxes                                  |       | 4,395                                                    |       | 4,023               |       | 372                 |       | 9.3 |   |
| Property maintenance costs                         |       | 1,722                                                    |       | 1,763               |       | (41                 | )          | (2.3 | ) |
| Marketing                                          |       | 248                                                      |       | 278                 |       | (30                 | )          | (10.8 | ) |
| Other property operating  costs                    |       | 16,241                                                   |       | 17,638              |       | (1,397              | )          | (7.9 | ) |
| Provision for doubtful  accounts                   |       | 744                                                      |       | —              |       | 744                 |       | — |   |
| Property management and  other costs               |       | 3,467                                                    |       | 4,561               |       | (1,094              | )          | (24.0 | ) |
| Total property operating  expenses                 |       | 26,817                                                   |       | 28,263              |       | (1,446              | )          | (5.1 | ) |
| **Strategic  Development Segment Adjusted EBITDA** |       | $                                                        | 3,998      |                | $          | 4,004               |       | $ | (6 | ) | (0.2 | )% |

 

Minimumrents decreased for the three months ended September 30, 2010 primarilydue to a decline in revenue for the Woodlands Resort.  Lower tenant recoveries for Landmark Mall andSouth Street Seaport comprised the majority of the third quarter decrease of$0.4 million compared with the same period in 2009.

 

Otherproperty operating costs were $1.4 million less for the quarter ended September 30,2010 compared with the quarter ended September 30, 2009, largely due to areduction in the insurance reserve balance.

 

A$0.7 million increase in the provision for doubtful accounts for the quarterended September 30, 2010 compared with the same period last year wasprimarily due to increases in specific bad debt reserves.

 

Propertymanagement and other costs decreased in the three months ended September 30,2010 primarily due to lower corporate overhead expenses attributable to areduction in force earlier in the year.

 

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**Certain Significant Combined Revenues and Expenses**

 
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** ** | **$ Increase ** | ** ** | **% Increase**  | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------|------------|----------------------|------------|
| **(In thousands)**                            | ** ** | **2010**                                                 | ** ** | **2009**                  | ** ** | ** (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Tenant rents                                       |       | $                                                        | 21,812     |                      | $          | 21,533               |       | $ | 279 |   | 1.3 | % |
| Land sales                                         |       | 10,034                                                   |       | 7,409                     |       | 2,625                |       | 35.4 |   |
| Property operating expense                         |       | 15,353                                                   |       | 14,720                    |       | 633                  |       | 4.3 |   |
| Land sales operations                              |       | 10,057                                                   |       | 8,124                     |       | 1,933                |       | 23.8 |   |
| Property management and  other costs               |       | 3,467                                                    |       | 4,561                     |       | (1,094               | )          | (24.0 | ) |
| Strategic initiatives                              |       | —                                                   |       | 266                       |       | (266                 | )          | (100.0 | ) |
| Provisions for impairment                          |       | 92                                                       |       | 40,582                    |       | (40,490              | )          | (99.8 | ) |
| Depreciation and  amortization                     |       | 4,109                                                    |       | 4,434                     |       | (325                 | )          | (7.3 | ) |
| Interest expense                                   |       | 681                                                      |       | 186                       |       | 495                  |       | 266.1 |   |
| Provision for (benefit from)  income taxes         |       | (350                                                     | )          | (21,897                   | )          | 21,547               |       | 98.4 |   |
| Equity in income (loss) of  Real Estate Affiliates |       | 1,222                                                    |       | (2,004                    | )          | 3,226                |       | 161.0 |   |
| Reorganization items                               |       | (16,515                                                  | )          | (1,814                    | )          | (14,701              | )          | 810.4 |   |
|                                                    |            |                                                          |            |                           |            |                      |            |  |  |  |  |  |

 

Landsales and associated sales operations increased during the three months endedSeptember 30, 2010 compared to the prior year period due to higher residentialsales volume at the Summerlin and Bridgeland communities as discussed above inour MPC segment basis results.

 

Strategic initiatives for the threemonths ended September 30, 2009is primarily due to property-specific professional fees for restructuring andstrategic initiatives that were incurred prior to filing for Chapter 11.  Similar costs incurred after filing forChapter 11 are recorded as reorganization items.

 

Based on the results of ourevaluations for impairment (Note 1), we recognized impairment charges of $0.1million for the three months ended September 30, 2010 related to the write down of various pre-development coststhat were determined to be non-recoverable due to the termination of associatedprojects and $40.6 million for the three months ended September 30,2009 related to the Kendall mixed-use development property ($35.1 million) andthe Village at Redlands redevelopment property ($5.5 million). Although all of the properties in our Master PlannedCommunities segment and two of our operating properties in our StrategicDevelopment segment had impairment indicators and carrying values in excess ofestimated fair value at September 30, 2010, aggregate undiscounted cash flowsfor such master planned communities properties and the two strategicdevelopment properties exceeded their respective aggregate book values by over200% and over 32%, respectively.

 

The significant assumptionsin our Master Planned Communities segment relate to future sales prices of landand future development costs needed to prepare land for sale, over the plannedlife of the project, which are based, in part, on assumptions regarding salespace, timing of related development costs, and the impact of inflation andother market factors. A decrease in aggregate sales prices of 10% would reducethe excess of cash flows over book values by approximately 47%. An increase inthe aggregate development costs of 10% would reduce the excess of cash flowsover book values by approximately 16%.

 

The significant assumptionfor one of the two strategic development properties is our future revenueassumption and the significant assumption for the second strategic developmentproperty is net operating income. The combined book value of the two propertiesis approximately $32.8 million. A 10% reduction in the revenues of the firstproperty and NOI of the second property would reduce the 32% excess of cashflows over book value to approximately 19%.

 

Interest expense increased duringthe three months ended September 30, 2010 primarily due to a $0.5 millionincrease in the amortization of debt issuance costs.

 

The decrease in the benefit fromincome taxes for the three months ended September 30, 2010 was primarilyattributable to a decrease in the taxable loss in the current year period and atax benefit related to provisions for impairment in the third quarter of 2009.

 

Reorganizationitems under the bankruptcy filings are expense or income items that wereincurred or realized by the Debtors as a result of the Chapter 11 Cases.These items include professional fees and similar types of expenses incurreddirectly related to the bankruptcy filings, loss accruals or gains or lossesresulting from activities of the reorganization process and interest earned oncash accumulated by the Debtors.  See Note 1 — Reorganization items foradditional detail.

 

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**Nine months ended September 30, 2010 and 2009**

 

**Master Planned Communities Segment**

 
| ** **                                              | ** ** | **Nine Months Ended September 30,** | ** ** | **$ Increase** | ** ** | **% Increase** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                                | ** ** | **2009**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| Land sales                                              |       | $                                                       | 58,937     |                | $          | 65,163              |       | $ | (6,226 | ) | (9.6 | )% |
| Land sales operations                                   |       | (57,475                                                 | )          | (63,707             | )          | (6,232              | )          | (9.8 | ) |
| **Master  Planned Communities Segment Adjusted EBITDA** |       | $                                                       | 1,462      |                | $          | 1,456               |       | $ | 6 |   | 0.4  | % |

 

Adjusted EBITDA was essentially flatfor the nine months ended September 30, 2010 compared to the prior yearperiod.  Although there was increasedresidential and commercial sales activity at the Woodlands community in HoustonTexas, these increases were largely offset by the bulk sale of remaining singlefamily lots at the Fairwood community in Maryland in 2009. There were no landsales for the nine months ended September 30, 2010 in our Fairwood communitiesin Maryland and in our Summerlin community in Las Vegas, Nevada.  There were minimal land sales in our Columbiacommunity in Maryland and our Bridgeland Community in Houston, Texas.

 

For the nine months ended September30, 2010, we sold 186.4 residential acres compared to 355.2 acres for the ninemonths ended September 30, 2009.  We sold36.0 acres of commercial lots for the nine months ended September 30, 2010compared to 35.1 acres for the nine months ended September 30, 2009.

 

**Strategic Development Segment**

 
| ** **                                         | ** ** | **Nine Months Ended September 30,** | ** ** | **$ Increase** | ** ** | **% Increase** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In thousands)**                            | ** ** | **2010**                                                | ** ** | **2009**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| **Property  revenues:**                            |       |                                                    |       |                |       |                |       |   |   |
| Minimum rents                                      |       | $                                                       | 54,078     |                | $          | 59,255              |       | $ | (5,177 | ) | (8.7 | )% |
| Tenant recoveries                                  |       | 13,891                                                  |       | 14,827              |       | (936                | )          | (6.3 | ) |
| Overage rents                                      |       | 1,738                                                   |       | 1,465               |       | 273                 |       | 18.7 |   |
| Other                                              |       | 26,650                                                  |       | 25,213              |       | 1,437               |       | 5.7 |   |
| Total property revenues                            |       | 96,357                                                  |       | 100,760             |       | (4,403              | )          | (4.4 | ) |
| **Property  operating expenses:**                  |       |                                                    |       |                |       |                |       |   |   |
| Real estate taxes                                  |       | 11,942                                                  |       | 10,681              |       | 1,261               |       | 11.8 |   |
| Property maintenance costs                         |       | 5,250                                                   |       | 4,632               |       | 618                 |       | 13.4 |   |
| Marketing                                          |       | 755                                                     |       | 738                 |       | 17                  |       | 2.3 |   |
| Other property operating  costs                    |       | 48,923                                                  |       | 54,055              |       | (5,132              | )          | (9.5 | ) |
| Provision for doubtful  accounts                   |       | 1,101                                                   |       | 1,212               |       | (111                | )          | (9.2 | ) |
| Property management and  other costs               |       | 12,463                                                  |       | 12,992              |       | (529                | )          | (4.1 | ) |
| Total property operating  expenses                 |       | 80,434                                                  |       | 84,310              |       | (3,876              | )          | (4.6 | ) |
| **Strategic  Development Segment Adjusted EBITDA** |       | $                                                       | 15,923     |                | $          | 16,450              |       | $ | (527 | ) | (3.2 | )% |

 

Minimumrents decreased $5.2 million for the nine months ended September 30, 2010primarily due to a decrease of approximately $5.1 million in minimum rentsrevenue from The Woodlands, one of our Real Estate Affiliates.

 

Tenantrecoveries of $13.9 million during the first nine months of 2010 were $0.9million less than the first nine months of 2009 mostly as a result of lowertenant recoveries for South Street Seaport and Village at Redlands.

 

Otherproperty revenues primarily include vending, parking, marketing and promotion,and gains and losses on certain property disposition transactions.  The $1.4 million increase in other propertyrevenue in the nine months ended September 30, 2010 results primarily from netlosses on certain property transactions in the nine months ended September 30,2009 of approximately $3.4 million compared with no gains or losses in thecomparable period of 2010.  Decreases inThe Woodlands revenues during the nine month period ended September 30, 2010,compared to the prior year period provided a partial offset.

 

Realestate taxes of $0.7 million associated with the Kendall property were largelyresponsible for the $1.3 million increase for the nine months ended September30, 2010.  There was no real estate taxexpense for this

 

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propertyin the same period during 2009, as all real estate taxes were capitalized whileongoing development of this property was still in progress.

 

Propertymaintenance costs increased $0.6 million in the nine months ended September 30,2010 primarily due to increased seasonal maintenance costs, miscellaneousbuilding repairs and higher contract service costs across the segment in 2010.

 

Otherproperty operating costs decreased $5.1 million in the nine months endedSeptember 30, 2010 primarily as the result of lower costs at The Woodlands anda third quarter 2010 reduction in the insurance reserve balance.

 

**Certain Significant Combined Revenues and Expenses**

 
| ** **                                  | ** ** | **Nine Months Ended September 30,** | ** ** | **$ Increase** | ** ** | **% Increase** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In thousands)**                     | ** ** | **2010**                                                | ** ** | **2009**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| Tenant rents                                |       | $                                                       | 65,978     |                | $          | 65,682              |       | $ | 296 |   | 0.5 | % |
| Land sales                                  |       | 22,141                                                  |       | 38,843              |       | (16,702             | )          | (43.0 | ) |
| Property operating expense                  |       | 44,223                                                  |       | 40,922              |       | 3,301               |       | 8.1 |   |
| Land sales operations                       |       | 30,654                                                  |       | 40,578              |       | (9,924              | )          | (24.5 | ) |
| Property management and  other costs        |       | 12,463                                                  |       | 12,992              |       | (529                | )          | (4.1 | ) |
| Strategic initiatives                       |       | —                                                  |       | 5,380               |       | (5,380              | )          | (100.0 | ) |
| Provisions for impairment                   |       | 578                                                     |       | 180,762             |       | (180,184            | )          | (99.7 | ) |
| Depreciation and  amortization              |       | 12,535                                                  |       | 15,221              |       | (2,686              | )          | (17.6 | ) |
| Interest expense                            |       | 1,888                                                   |       | 768                 |       | 1,120               |       | 145.8 |   |
| Provision for (benefit  from) income taxes  |       | 17,603                                                  |       | (24,810             | )          | 42,413              |       | 171.0 |   |
| Equity in income of Real  Estate Affiliates |       | 6,394                                                   |       | 2,117               |       | 4,277               |       | 202.0 |   |
| Reorganization items                        |       | (43,129                                                 | )          | (3,831              | )          | (39,298             | )          | 1,025.8 |   |
|                                             |            |                                                         |            |                     |            |                     |            |  |  |  |  |  |

 

 Land sales and associated sales operationsdecreased during the nine months ended September 30, 2010 compared to the prioryear due to lower residential sales volume at theFairwood community in Maryland as discussed above in our MPC segment basisresults.

 

Strategic initiatives for the nine monthsended September 30, 2009 consistof professional fees for restructuring that were incurred prior to the filingfor protection under the Bankruptcy Code of certain of the HHC Debtors.  Similar costs incurred after filing for protectionunder the Bankruptcy Code are recorded as reorganization items.

 

Based on the results of ourevaluations for impairment (Note 1), we recognized impairment charges of $0.6million (related to the write down of various pre-development costs that weredetermined to be non-recoverable due to the termination of associated projects)for the nine months ended September 30, 2010 and $180.8 million for the ninemonths ended September 30, 2009.  Theimpairment charges recognized in 2009 were as follows:

 

2009

·                  $55.9million related to our Nouvelle at Natick project located in Boston,Massachusetts

·                  $52.8million to our Fairwood Master Planned Community in Columbia, Maryland

·                  $35.1million to the Kendall development in Miami, Florida

·                  $24.2million to the Allen development in Allen, Texas

·                  $6.7million to the Redlands Promenade development in Redlands, California

·                  $5.5million to the Village at Redlands in Redlands, California

·                  $0.6million related to the write down of various pre-development costs that weredetermined to be non-recoverable due to the termination of associated projects

 

The decrease in depreciation andamortization for the nine months ended September 30, 2010 primarily resultedfrom the decrease in buildings and equipment due to the impairment chargesrecorded in fiscal year 2009.

 

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Interest expense increased duringthe nine months ended September 30, 2010 primarily due to a $1.4 millionincrease in the amortization of debt market rate adjustments partially offsetby a $0.3 million decrease in the amortization of deferred finance costs.

 

The increase in the provision forincome taxes for the nine months ended September 30, 2010 was primarilyattributable to an increase in taxable income related to our taxable entitiesfor the nine months ended September 30, 2010 and a tax benefit related toprovisions for impairments at our master planned communities in 2009, partiallyoffset by a significant decrease in valuation allowances compared to the ninemonths ended September 30, 2009.

 

Reorganizationitems under the bankruptcy filings are expense or income items that wereincurred or realized by the Debtors as a result of the Chapter 11 Cases. Theseitems include professional fees and similar types of expenses incurred directlyrelated to the bankruptcy filings, gains or losses resulting from activities ofthe reorganization process, including gains related to recording the mortgagedebt at Fair Value upon emergence from bankruptcy and interest earned on cashaccumulated by the HHC Debtors.  See Note 1 — Reorganization items foradditional detail.

 

**Liquidity and Capital Resources**

Ourprimary sources of cash are expected to include cash flow from land sales inour Master Planned Communities segment, cash generated from our operatingproperties and the net proceeds from the sale to the Plan Sponsors andBlackstone on the Effective Date of $250.0 million of our common stock.  We believe that these sources will providesufficient cash to meet our existing contractual obligations and ouranticipated ordinary course operating expenses for at least the next 12 months.  The negative operating cash flows reflectedin the periods presented in this Quarterly Report were primarily the result ofreorganization items paid of $46.0 million and $4.1 million for the nine monthsended September 30, 2010 and 2009, respectively, as well as costs associatedwith land/residential development and acquisitions expenditures in our MasterPlanned Communities segment of $39.1 million and $33.4 million for the ninemonths ended September 30, 2010 and 2009, respectively.  The funds for these expenditures came fromGGP and are reflected in our combined statement of cash flows in change in GGPinvestment, net.  Going forward, weintend to better time the funding of land development expenses in our MasterPlanned Communities segment with anticipated land sales from our Master PlannedCommunities.

 

Ourprimary uses of cash are expected to include working capital, funding overhead,debt repayment, land development costs in our Master Planned Communitiessegment and, with respect to our Strategic Development segment, we may incuroperating expenses for the Operating Retail Properties.

 

Inorder to pursue development and redevelopment opportunities in our StrategicDevelopment segment, we will require significant additional capital.  We intend to raise this additional capitalwith a mix of construction, bridge and long-term financings, as well as jointventure equity.  We have not yet obtainedany financing or identified any potential lenders or joint venture equitypartners and do not have a revolving line of credit.  We cannot assure you that any financings orjoint venture arrangements will be available on terms acceptable to us or atall.

 

Asof September 30, 2010, our combined debt was $336.8 million and our share ofthe debt of our Real Estate Affiliates was $195.5 million.

 

**Cash Flows from Operating Activities**

Netcash used in operating activities was $60.5 million for the nine months endedSeptember 30, 2010 and $16.9 million for the nine months ended September 30,2009.

 

Cashused for land/residential development and acquisitions expenditures was $39.1million for the nine months ended September 30, 2010, an increase from $33.4million for the nine months ended September 30, 2009.

 

Netcash provided by (used in) certain assets and liabilities, including accountsand notes receivable, prepaid expense and other assets, deferred expenses, andaccounts payable and accrued expenses and deferred taxes totaled $28.6 millionfor the nine months ended September 30, 2010 and $(33.4) million for the ninemonths ended September 30, 2009. Accounts payable and accrued expenses anddeferred taxes increased $16.5 million.

 

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Althoughliabilities not subject to compromise and certain liabilities subject tocompromise have been approved for payment by the Bankruptcy Court, asignificant portion of our liabilities subject to compromise are subject tosettlement under the Plan and have not been paid to date. In addition, accountsand notes receivable decreased $3.3 million from December 31, 2009 to September30, 2010, whereas, such accounts increased $0.8 million from December 31, 2008to September 30, 2009.

 

**Cash Flows from Investing Activities**

Netcash used in investing activities was $71.1 million for the nine months endedSeptember 30, 2010 and $18.4 million for the nine months ended September 30,2009. Cash used for development of real estate and property additions/improvementswas $71.1 million for the nine months ended September 30, 2010, and $23.8million for the nine months ended September 30, 2009.  We expect or are obligated to incur,development and redevelopment expenditures of $64.7 million from 2010 to 2012.

 

**Cash Flows from Financing Activities**

Netcash provided by financing activities was $131.2 million for the nine monthsended September 30, 2010 and $34.0 million for the nine months ended September30, 2009.

 

Principalpayments on mortgages, notes and loan payable were $4.7 million for the ninemonths ended September 30, 2010 and $7.6 million for the nine months endedSeptember 30, 2009. In addition, we received contributions from GGP of $137.4million during the nine months ended September 30, 2010 and $41.7 millionduring the nine months ended September 30, 2009.

 

**Seasonality**

OurMaster Planned Communities segment is not subject to significant seasonalvariations. In addition, revenues from development, redevelopment or sale ofproperty in our Strategic Development segment similarly are not subject toseasonal variations. However, with respect to our Operating Retail Propertieswithin the Strategic Development segment, although we have a year-longtemporary leasing program, occupancies for short-term tenants and, therefore,rental income recognized, including overage rent, are higher during the secondhalf of the year. As a result, rental revenue production in this segment isgenerally highest in the fourth quarter of each year.

 

**Critical Accounting Policies**

Criticalaccounting policies are those that are both significant to the overallpresentation of our financial condition and results of operations and requiremanagement to make difficult, complex or subjective judgments. Our critical accountingpolicies as discussed in our 2009 combined financial statements have notchanged during 2010, and such policies, and the discussion of such policies,are incorporated herein by reference to The Howard Hughes Corporation AmendmentNo. 3 to Form 10 filed November 4, 2010, Commission File No. 001-34856.

 

**REIT Requirements**

In order for Ward to remain qualified as a REIT forfederal income tax purposes, Ward must distribute or pay tax on 100% of itscapital gains and distribute at least 90% of our ordinary taxable income itsstockholders, including us.  See Note 5for more detail on Ward’s ability to remain qualified as a REIT.

 

**Recently Issued AccountingPronouncements**

As described in Note 9, new accountingpronouncements have been issued which impact or could impact the prior,current, or subsequent years.

 

**ITEM 3           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Therehave been no significant changes in the market risks described in The HowardHughes Corporation Amendment No. 3 to Form 10 filed November 4, 2010,Commission File No. 001-34856.

 

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**ITEM 4           CONTROLSAND PROCEDURES**

 

**Disclosure Controls and Procedures**

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer (“CEO”) our InterimChief Financial Officer (“CFO”), of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, asamended, (the “Exchange Act”).  Based onthat evaluation, the CEO and the CFO have concluded that our disclosurecontrols and procedures are effective.

 

**PART II       OTHER INFORMATION**

 

**ITEM 1         LEGAL PROCEEDINGS**

 

Otherthan the Chapter 11 Cases, neither the Company nor any of the Real EstateAffiliates is currently involved in any material pending legal proceedings nor,to our knowledge, is any material legal proceeding currently threatened againstthe Company or any of the Real Estate Affiliates.

 

**ITEM 1A   RISK FACTORS**

 

None

 

**ITEM 2   UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3     DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM 5   OTHER INFORMATION**

 

None

 

**ITEM 6   EXHIBITS**

 

10.1                           Management Services Agreement, datedAugust 6, 2010, between The Howard Hughes Corporation and Brookfield AdvisorsLP (incorporated by reference to Exhibit 10.4 to the Company’s Form 10, filedOctober 7, 2010)

 

31.1                           Certificationof Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2                           Certificationof Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1                           Certificationof Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

32.2                           Certificationof Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

Pursuant to Item 601(b)(4)(v) of Regulation S-K, theregistrant has not filed debt instruments relating to long-term debt that isnot registered and for which the total amount of securities authorizedthereunder does not exceed 10% of total assets of the registrant and itssubsidiaries on a combined basis as of September 30, 2010.  The registrant agrees to furnish a copy ofsuch agreements to the SEC upon request.

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                    |   |   | The Howard Hughes  Corporation  |
|-------------------------|--------|--------|---------------------------------|
|                    |   |   | (Registrant)                    |
|                    |   |   |                            |
|                    |   |   |                            |
| Date: November 23, 2010 |   | by:    | /s/ Rael Diamond                |
|                    |   |   | Rael Diamond                    |
|                    |   |   | Interim Chief Financial Officer |

 

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**EXHIBIT INDEX**

 

10.1                           Management Services Agreement, datedAugust 6, 2010, between The Howard Hughes Corporation and Brookfield AdvisorsLP (incorporated by reference to Exhibit 10.4 to the Company’s Form 10, filed October 7, 2010)

 

31.1                           Certificationof Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2                           Certificationof Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1                           Certificationof Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

32.2                           Certificationof Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

Pursuant to Item601(b)(4)(v) of Regulation S-K, the registrant has not filed debt instrumentsrelating to long-term debt that is not registered and for which the totalamount of securities authorized thereunder does not exceed 10% of total assetsof the registrant and its subsidiaries on a combined basis as of September 30,2010.  The registrant agrees to furnish acopy of such agreements to the SEC upon request.

 

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