DALLAS, Nov. 4, 2019 /PRNewswire/ -- The Howard Hughes Corporation® (NYSE: HHC) (the "Company," "HHC" or "we") announced today operating results for the third quarter ended September 30, 2019. The financial statements, exhibits and reconciliations of non-GAAP measures in the attached Appendix and the Supplemental Information, as available through the Investors section of our website, provide further details of these results.
On October 21, 2019, Management announced the conclusion of its previously announced review of strategic alternatives. The process culminated in a transformation plan led by new executive leadership and comprised of three pillars: (1) a $45 - $50 million per annum reduction in overhead expenses, (2) the sale of approximately $2 billion of non-core assets and (3) accelerated growth in our core master planned communities ("MPC") assets.
Strategic Transformation Plan Highlights
- Paul Layne named Chief Executive Officer to lead execution of the transformation plan to create a lean, focused, decentralized organization built around the Company's core MPCs.
- Executed on $86 million in non-core asset sales by completing the sale of Cottonwood Mall, a non-core asset in Salt Lake City, Utah, for $46 million and the sale of approximately 650 acres of land in the West Windsor Township near Princeton, NJ for $40 million.
- Accelerated growth in our core MPC business by commencing construction of Creekside Park Apartments Phase II, a 360-unit multi-family development in The Woodlands, TX. The project is anticipated to contribute approximately $4.7 million of stabilized net operating income ("NOI").
- Board of Directors has authorized a new stock repurchase program, under which the Company may repurchase up to $100 million of its outstanding common stock.
Third Quarter 2019 Highlights
- Net income attributable to common stockholders increased to $29.8 million, or $0.69 per diluted share, for the three months ended September 30, 2019, compared to $23.4 million, or $0.54 per diluted share, for the three months ended September 30, 2018.
- Total NOI from the Operating Assets segment, including our share of NOI from equity investments, grew strongly by 33% to $56.3 million for the three months ended September 30, 2019, compared to $42.2 million for the prior year period.
- MPC segment earnings before tax ("EBT") decreased by $28.3 million to $60.6 million for the three months ended September 30, 2019. Despite the overall decrease in MPC EBT, our Houston MPCs showed continued strength led by Bridgeland with a 62.4% increase in underlying home sales as well as an 8.7% increase in price per acre.
- Broke ground on Ko'ula, our newest condominium tower that began public sales in January 2019, which is approximately 70.3% pre-sold as of the third quarter of 2019.
- Increased Seaport District segment revenues by $8.5 million to $23.1 million for the three months ended September 30, 2019 compared to the prior year period partially driven by the openings of Bar Wayo, Malibu Farm and The Lookout on Pier 17.
Highlights of our results for the nine and three months ended September 30, 2019 are summarized below. We are primarily focused on creating shareholder value by increasing our per share net asset value. Often, the nature of our business results in short term volatility in our Net income due to the timing of MPC land sales, recognition of condominium revenue and operating business pre-opening expenses, and, as such, we believe the following metrics are most useful in tracking our progress towards net asset value creation.
"Our third quarter results illustrate the strong fundamentals of our business across our core markets, highlighted by the 33% quarter-over-quarter growth we experienced in recurring Operating Assets NOI," said Paul H. Layne, Chief Executive Officer. "With the NOI growth in our Operating Assets segment, we have an annual run rate of $231 million with a stabilized NOI target of $323 million, a 2.4% increase over 2018. At Summerlin, we celebrated the Las Vegas Ballpark and Las Vegas Aviators being named ballpark and team of the year by Ballpark Digest. These recognitions speak to the catalytic impact baseball has had on Summerlin, in particular on Downtown Summerlin, and the importance of masterful design in creating vibrant destinations in the hearts of our planned cities. Additionally, home sales, a leading indicator of future land purchases by home builders, are up 22.6% across all our MPCs.
"At Ward Village, we also celebrated the ground breaking of Ko'ula, which began public sales in January 2019, marking our latest milestone as we continue to execute on our vision for the community with the development of each building and one-of-a-kind public spaces as well as the ongoing curation of unique offerings. Demand to live in our community remains high as evidenced by sales at Ko'ula, which is already 70% pre-sold.
"In New York, the Seaport District had a strong finish for the summer with the openings of Bar Wayo, the latest offering from the renowned Momofuku restaurant group; Malibu Farm, a California-inspired farm-to-table eatery; and The Lookout, a seasonal bar pop-up. Overall, the Seaport District's revenue is again up for the third quarter, and with many additional key offerings coming online in the next 18 months to complete the district, we are continuing to make substantial progress in accomplishing our vision.
"Finally, we recently announced a transformation plan for the Company following the conclusion of our strategic review process. The transformation plan has three main elements: a streamlined organizational structure with reduced overhead expenses, the sale of non-core assets and accelerated growth in our core MPC business, where we have unique and sustainable competitive advantages. We are confident that focusing on this path will provide the best long-term outcome for our shareholders, our customers and our employees," said Mr. Layne.
Net income attributable to common stockholders increased to $75.1 million, or $1.73 per diluted share, and $29.8 million, or $0.69 per diluted share, for the nine and three months ended September 30, 2019, respectively, compared to $19.8 million, or $0.46 per diluted share, and $23.4 million, or $0.54 per diluted share, for the nine and three months ended September 30, 2018, respectively. The increase for the nine months ended September 30, 2019 is primarily due to higher Condominium rights and unit sales, net of costs, driven by closings at Ae'o. In addition, the increases in both the nine and three months ended September 30, 2019 are attributable to a gain recognized on the sale of Cottonwood Mall and selling profit recognized as a result of a build-to-suit lease that commenced at our 100 Fellowship Drive property which for accounting purposes is recognized as a sales-type lease. The increases in both periods were partially offset by lower MPC superpad sales at Summerlin and higher operating expenses at the Seaport District. The higher operating expenses at the Seaport District are due to start-up costs associated with opening new businesses.
Key factors impacting our Funds from operations ("FFO"), Core funds from operations ("Core FFO") and Adjusted FFO ("AFFO") are discussed below.
FFO increased $53.8 million, or $1.23 per diluted share, for the nine months ended September 30, 2019 and decreased $13.6 million, or $0.33 per diluted share, for the three months ended September 30, 2019, compared to the same periods in 2018. As noted above, the increase for the nine months ended September 30, 2019 was primarily attributable to the increase in Condominium rights and unit sales, net of costs, due to Ae'o closings, partially offset by higher operating losses at the Seaport District. The decrease for the three months ended September 30, 2019 is attributable to a decrease in Master Planned Communities land sales due to fewer superpad sales at Summerlin and a slower pace of land development and custom lot sales at The Summit as well as an increase in interest expense due to placing assets into service. The decrease was partially offset by an increase in Other rental and property revenues in the Operating Assets and Seaport District segments.
Core FFO, our FFO adjusted to exclude the impact of certain non-cash and/or nonrecurring income and expense items, increased $62.5 million, or $1.43 per diluted share, for the nine months ended September 30, 2019 and decreased $12.0 million, or $0.28 per diluted share, for the three months ended September 30, 2019, compared to the same periods in 2018 primarily due to the factors discussed in the FFO section above, as well as a higher Deferred income tax expense, partially offset by lower Other non-recurring expenses.
AFFO, our Core FFO adjusted to exclude recurring capital improvements and leasing commissions, increased $68.2 million, or $1.57 per diluted share, for the nine months ended September 30, 2019 and decreased $12.2 million, or $0.30 per diluted share, for the three months ended September 30, 2019 compared to the same periods in 2018 primarily due to the items mentioned in the FFO and Core FFO discussions above. The increase in the nine month period was also impacted by lower tenant and capital improvements. Please reference FFO, Core FFO and AFFO as defined and reconciled to the closest GAAP measure in the Appendix to this release and the reasons why we believe these non-GAAP measures are meaningful to investors and a better indication of our overall performance.
Business Segment Operating Results
In our Operating Assets segment, we increased NOI, including our share of NOI from equity investees and excluding properties sold or in redevelopment, by $33.0 million, or 24.5%, to $168.2 million in the nine months ended September 30, 2019 and by $14.1 million, or 33.4%, to $56.3 million in the three months ended September 30, 2019 compared to the same periods in 2018. The increase in NOI for the nine and three months ended September 30, 2019 is primarily driven by increases of $11.9 million and $2.5 million in our other properties category; $12.9 million and $7.1 million in our office properties; and $3.0 million and $2.3 million in our hospitality properties. The increase in our other category for the nine and three months ended September 30, 2019 is a result of placing the Las Vegas Ballpark, the home of our Triple-A baseball team The Las Vegas Aviators, into service in March 2019. The increases in our office and hospitality properties are mainly the result of continued stabilization of existing assets within these categories, increased occupancy, as well as NOI generated from assets placed into service subsequent to the third quarter of 2018.
As previously mentioned, in September 2019, the Las Vegas Ballpark and its professional Triple-A baseball team, the Las Vegas Aviators, were named ballpark and team of the year, respectively, by Ballpark Digest. This is the first time Ballpark Digest has awarded both a stadium and its affiliated team with top honors during the same year.
Master Planned Communities
Our MPC revenues fluctuate each quarter given the nature of development and sale of land in these large scale, long-term communities. As a result of this fluctuation, we believe full year results are a better measurement of performance than quarterly results. We also use residential home sales as a leading indicator of continued demand from homebuilders in our communities. As we continue to see strong demand for our land from homebuilders, continued demand in our MPCs for new homes and interest rate stabilization, we do not expect a material slowdown in the pace of residential land sales for the remainder of 2019.
During the nine and three months ended September 30, 2019, our MPC segment EBT decreased $26.9 million to $145.5 million and $28.3 million to $60.6 million, respectively, mainly as a result of fewer superpad sales at Summerlin and lower Equity in earnings from real estate and other affiliates. Land sales revenues at Summerlin were also negatively impacted by lower recognition of revenue deferred from previous sales and fewer SID bond assumptions and reimbursements. As noted above, the decrease in Equity in earnings from real estate and other affiliates is primarily attributable to a slower pace of land development and fewer custom lot sales at The Summit, which offers a mix of custom lots, detached homes sold by the joint venture and multi-family homes sold by the joint venture. This decrease in Equity in earnings from The Summit is in line with our expectations as a higher percentage of sales are being generated from the sale of homes built by the joint venture, which has a lower margin than the sale of custom lots. Our estimate of overall gross margin generated by the project remains unchanged. Despite the decline in year-to-date land sales in Summerlin, we remain optimistic that we will achieve total land sales for the year consistent with our results over the past two years.
For the nine month period, the decreases noted above are partially offset by increased land sales revenues at Bridgeland, The Woodlands and The Woodlands Hills. At Bridgeland, land sales revenues increased $15.3 million, or 50.4%, due to robust sales of single-family lots, resulting in 197 more lot sales in the nine months ended September 30, 2019 compared to the prior year period. Land sales revenues at The Woodlands increased $7.7 million due to a 48.3% increase in superpad and single-family sales for the nine months ended September 30, 2019 compared to the prior period. For the nine months ended September 30, 2019, land sales revenues at The Woodlands Hills increased 25.7% primarily due to the mix and number of lots sold. Despite fewer lots sales, Summerlin's price per acre increased to $685,000 for the nine months ended September 30, 2019 from $589,000 in the prior period primarily due to the mix of lots sold. For the three months ended September 30, 2019, the decreases in overall MPC revenue are partially offset by increased land sales revenues at The Woodlands Hills and The Woodlands, which increased 77.0% and 62.7%, respectively, primarily due to the mix and number of lots sold. The Woodlands also achieved a $737,000 price per acre for the three month period, an increase of $195,000, primarily due to the mix of lots sold. Land sales revenue at Bridgeland also increased for the three months ended September 30, 2019 primarily due to an 8.7% higher price per acre. Similarly, while Summerlin had fewer lots sales, price per acre increased 17.8% for the superpad and custom lot products for the three months ended September 30, 2019.
Although they do not directly impact our results of operations, we believe ongoing strong underlying home sales will continue to drive demand for land in our MPCs. The rate of home sales at The Woodlands Hills, which commenced sales in the second quarter of 2018, increased 154.5% and 18.2% for the nine and three months ended September 30, 2019, respectively, over the prior year periods. Bridgeland's home sales increased 42.7% and 62.4% for the nine and three months ended September 30, 2019, respectively, over the prior year periods. We believe that the acceleration at both The Woodlands Hills and Bridgeland speak to their respective maturation as master planned communities as well as their thoughtful approach to conservation, recreation and transportation. In addition, they have excellent access, schools and amenities. During the current quarter, we celebrated the opening of one such amenity, Dragonfly Park, a 25-acre park and 25-acre lake, located in Bridgeland's Parkland Village. Touted as a destination, the grand opening drew more than 1,500 residents to the park, which offers an abundance of outdoor activities, including a resort-style pool, lazy river, basketball and tennis courts, dragonfly play structure and event space. While home sales decreased 5.4% and 3.8% in Summerlin and The Woodlands, respectively, for the nine months ended September 30, 2019 compared to the previous year, home sales at Summerlin and The Woodlands have increased 6.6% and 27.0%, respectively, for the three months ended September 30, 2019 compared to the prior year period, evidencing continued strength. The following summarizes home sales in our MPCs during the nine and three months ended September 30, 2019.
The Seaport District
In the Seaport District, we celebrated the openings of Bar Wayo, the latest offering from the renowned Momofuku restaurant group; Malibu Farm, a California-inspired farm-to-table eatery; and The Lookout, a seasonal pop-up bar at Pier 17. We also sold out 30 concerts and have sold 96% of all available tickets for the Summer Concert Series.
Seaport District segment revenues increased by $20.4 million to $43.1 million and $8.5 million to $23.1 million for the nine and three months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases are due to both our existing businesses as well as new business openings and were driven by the summer concert series, Cobble & Co, The Fulton, Garden Bar and 10 Corso Como Retail and Café.
In the Seaport District segment, NOI, including our share of NOI from equity investees, decreased by $7.6 million to a net operating loss of $10.2 million and increased by $0.4 million to a net operating loss of $3.0 million for the nine and three months ended September 30, 2019, respectively, compared to the same periods in 2018. The decrease in NOI in the nine month period was driven by continued investment in the development of the Seaport District, particularly as it relates to funding start-up costs related to the retail, food and beverage and other operating businesses. Decreases of $3.9 million, $2.4 million and $1.4 million, in managed businesses, landlord operations and events and sponsorships, respectively, compared to the prior year period were primary contributors to the decrease in NOI for the nine months ended September 30, 2019. The increase for the three month period compared to the prior year period was primarily attributable to an increase of $1.2 million in our events and sponsorships, partially offset by a decrease of $0.7 million in landlord operations for the three months ended September 30, 2019. Our landlord operations business represents physical real estate developed, owned and leased to third parties by HHC. We expect to continue to incur operating expenses in excess of rental revenues while the remaining available space is in lease-up. Our managed businesses include retail and food and beverage entities that we operate and own, either directly, through license agreements or in joint ventures. Our event and sponsorship businesses include our concert series; Winterland skating and bar; event catering; private events; and sponsorships from approximately 11 partners. We expect to incur operating losses for our event and sponsorship, landlord operations and managed business entities until the Seaport District reaches its critical mass of offerings.
The Seaport District is part non-stabilized operating asset, part development project and part operating business. As such, the Seaport District has a greater range of possible outcomes than our other projects. The greater uncertainty is largely the result of (i) business operating risks, (ii) seasonality, (iii) potential sponsorship revenue and (iv) event revenue. We operate and own, either directly, through license agreements or in joint ventures, many of the tenants in the Seaport District, including retail stores such as 10 Corso Como and SJP by Sarah Jessica Parker and restaurants such as The Fulton by Jean-Georges, Bar Wayo, Malibu Farm, two concepts by Andrew Carmellini, R17 and the Jean-Georges food hall. As a result, the revenues and expenses of these businesses, as well as the underlying market conditions affecting these types of businesses, will directly impact the NOI of the Seaport District. This is in contrast to our other retail properties where we primarily receive lease payments and are not as directly impacted by the operating performance of the underlying businesses. This causes the quarterly results and eventual stabilized yield of the Seaport District to be less predictable than our other operating real estate assets with traditional lease structures. Further, as we open new operating businesses, either owned entirely or in joint venture, we expect to incur pre-opening expenses and operating losses until those businesses stabilize, which likely will not happen until the Seaport District reaches its critical mass of offerings. We expect the time to stabilize the Seaport District will be primarily driven by the construction, interior finish work and stabilization to occur at the Jean-Georges food hall in the Tin Building. Construction is expected to be substantially complete in early 2021 with an expected opening by summer 2021, assuming that we receive the necessary approvals timely. We expect stabilization to occur approximately 12 to 18 months after opening. Given the factors and uncertainties listed above combined with our operating experience during this past summer as we opened multiple new venues, we will no longer provide guidance on our expected NOI yield and stabilization date for the Seaport District for the next several quarters. We will continue all other aspects of our disclosure for the Seaport District segment including revenues, expenses, NOI and EBITDA. As we move closer to opening a critical mass of offerings at the Seaport District and after a more thorough internal review by our new leadership, we will re-establish goals for yield on costs and stabilization dates when the uncertainties and range of possible outcomes are more clear.
Strategic Developments segment EBT increased $98.4 million and $25.9 million for the nine and three months ended September 30, 2019, respectively, compared to the same periods in the prior year. The increase for the nine months ended September 30, 2019 compared to the prior year period is primarily due to an increase in Condominium rights and unit sales, net of costs, due to closings at Ae'o. As a result of the adoption of Topic 606 in 2018, condominium revenue is only recognized as unit sales close which occurs after building completion. The year to date period was also positively impacted by the gain recognized for the sale of Cottonwood Mall and the absence of the $13.4 million charge for window repairs at our Waiea condominium tower which was recorded in the second quarter of 2018 but did not recur in 2019. The increase for the three months ended September 30, 2019 compared to the prior year period is primarily due to an increase in the Gain on sale or disposal of real estate driven by the sale of Cottonwood Mall. For the nine and three months ended September 30, 2019, we reported revenues of $443.9 million and $10.0 million, respectively, from Condominium rights and unit sales for homes that actually closed escrow at our four delivered buildings (Waiea, Anaha, Ae'o and Ke Kilohana) in Ward Village compared to $39.8 million and $8.0 million for the prior periods, respectively.
As noted above, the cause of the increase in revenue in the nine month period compared to prior year is increased closings. We closed on 594 condominium units during the nine months ended September 30, 2019 compared to 15 during the prior year period. Condominium revenue is recognized when construction of the condominium tower is complete and unit sales close, leading to greater variability in revenue recognized between periods. Strong sales momentum continued at 'A'ali'i and Ko'ula, which are 83.1% and 70.3% pre-sold, respectively, as of September 30, 2019. Ko'ula, our newest condominium tower that began public sales in January 2019, was 71.9% pre-sold as of October 31, 2019. With approximately 89% of our homes sold across our six towers that are either delivered or under construction, our sales continue to support our ability to maintain a 30% blended profit margin, excluding land, across the community. We feel that the pace of pre-sales of our recent buildings reflects the combination of product and price that we have found to resonate in the market. Further, these sales continue to demonstrate the desirability of our community and the high quality product that we are developing in Honolulu. The current increased pace of pre-sales gives us the opportunity to modestly accelerate the pace under which we launch new towers.
Balance Sheet Third Quarter Activity and Subsequent Events
On October 24, 2019, we modified and extended our $47.9 million loan for Outlet Collection at Riverwalk. The total commitment was reduced to $30.9 million, including the required pay-down of $15.0 million. The loan bears interest at one-month London Interbank Offered Rate ("LIBOR") plus 2.50% and matures October 24, 2021.
On October 17, 2019, our wholly-owned subsidiary purchased the $99.7 million note for 250 Water Street from the previous lender at a discount of approximately $6.5 million. We expect to obtain third-party financing in the fourth quarter of 2019.
On October 17, 2019, we closed on a $250.0 million credit facility secured by land and certain other collateral in The Woodlands and Bridgeland master planned communities. The loan bears interest at LIBOR plus 2.50% with a final maturity of October 17, 2024. The new loan refinanced The Woodlands Master Credit Facility and Bridgeland Credit Facility with a combined principal balance of $215.0 million and a weighted average interest rate of LIBOR plus 2.87%.
On September 13, 2019, we closed on a $37.7 million multi-family loan and security agreement for Creekside Park Apartments. The loan bears interest at 3.52% with a maturity of October 1, 2029.
On August 6, 2019, we closed on a $30.7 million construction loan for Millennium Phase III Apartments. The loan bears interest at one-month LIBOR plus 1.75% with an initial maturity date of August 6, 2023 and a one-year extension option.
On August 1, 2019, we modified our $64.6 million construction loan, of which $31.1 million relates to Aristocrat and $33.5 million relates to Two Summerlin. The original loan bears interest at Wall Street Journal Prime plus 0.40% with a maturity of October 19, 2022. As part of the modification, the $33.5 million Two Summerlin note was amended to bear interest at 4.25% with an initial maturity of October 18, 2022 and one, 36-month extension option. We closed on a new $38.3 million note for Aristocrat which bears interest at 3.67% with an initial maturity of September 1, 2029. A portion of the proceeds for the new Aristocrat note were used to extinguish the original Aristocrat note.
As of September 30, 2019, our total consolidated debt equaled approximately 45.6% of our total assets and our leverage ratio (debt to enterprise value, as defined in the Supplemental Information) was 41.2%. We believe our low leverage, with a focus on project-specific financing, reduces our exposure to potential downturns and provides us with the ability to evaluate new opportunities. As of September 30, 2019, we had $638.0 million of cash and cash equivalents.
About The Howard Hughes Corporation®
The Howard Hughes Corporation® owns, manages and develops commercial, residential and mixed-use real estate throughout the U.S. Our properties include master planned communities, operating properties, development opportunities and other unique assets spanning 12 states from New York to Hawai'i. The Howard Hughes Corporation® is traded on the New York Stock Exchange under HHC with major offices in New York, Columbia, MD, Dallas, Houston, Las Vegas and Honolulu. For additional information about HHC, visit www.howardhughes.com or find us on Facebook , Twitter , Instagram and LinkedIn .
Safe Harbor Statement
We may make forward-looking statements in this press release and in other reports and presentations that we file or furnish with the Securities and Exchange Commission. In addition, our management may make forward-looking statements orally to analysts, investors, creditors, the media and others. Forward-looking statements include:
- announcement of certain changes, which we refer to as our "Transformation Plan", including new executive leadership, reduction in our overhead expenses, the proposed sale of our non-core assets and accelerated growth in our core MPC assets;
- expected performance of our stabilized, income-producing properties and the performance and stabilization timing of properties that we have recently placed into service or are under construction;
- capital required for our operations and development opportunities for the properties in our Operating Assets, Seaport District and Strategic Developments segments;
- expected commencement and completion for property developments and timing of sales or rentals of certain properties;
- expected performance of our MPC segment;
- forecasts of our future economic performance; and
- future liquidity, finance opportunities, development opportunities, development spending and management plans.
These statements involve known and unknown risks, uncertainties and other factors that may have a material impact on any future results, performance and achievements expressed or implied by such forward-looking statements. These risk factors are described in our Annual Report on Form 10-K, which has been filed with the Securities and Exchange Commission ("SEC") on February 27, 2019, as amended and supplemented by any risk factors contained in our quarterly reports on Form 10-Q, which have been subsequently filed with the SEC. Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There may be other factors currently unknown to us that we have not described in our Annual Report that could cause results to differ from our expectations. These forward-looking statements present our estimates and assumptions as of the date of this press release. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this release.
Our Financial Presentation
As discussed throughout this release, we use certain non-GAAP performance measures, in addition to the required GAAP presentations, as we believe these measures improve the understanding of our operational results and make comparisons of operating results among peer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations and calculation of the Company's reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change. The non-GAAP financial measures used throughout this release are net operating income, Funds from operations, Core funds from operations, and Adjusted funds from operations. We provide a more detailed discussion about these non-GAAP measures in our reconciliation of non-GAAP measures provided in this earnings release.
Appendix – Reconciliations of Non-GAAP Measures
As of and for the Nine and Three Months Ended September 30, 2019
We use certain non-GAAP performance measures, in addition to the required GAAP presentations, as we believe these measures improve the understanding of our operational results and make comparisons of operating results among peer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations, and calculation of the Company's reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change. The non-GAAP financial measures used herein are Net operating income ("NOI"), Funds from operations ("FFO"), Core funds from operations ("Core FFO") and Adjusted funds from operations ("AFFO").
As a result of our four segments, Operating Assets, Master Planned Communities ("MPC"), Seaport District and Strategic Developments, being managed separately, we use different operating measures to assess operating results and allocate resources among these four segments. The one common operating measure used to assess operating results for our business segments is earnings before tax ("EBT"). EBT, as it relates to each business segment, represents the revenues less expenses of each segment, including interest income, interest expense and Equity in earnings of real estate and other affiliates. EBT excludes corporate expenses and other items that are not allocable to the segments. We present EBT because we use this measure, among others, internally to assess the core operating performance of our assets. However, EBT should not be considered as an alternative to GAAP net income.
Effective January 1, 2019, the Company moved the Seaport District out of the Operating Assets and Strategic Development segments and into a stand-alone segment for disclosure purposes. As applicable, we have adjusted our performance measures in all periods reported to reflect this change.
We believe that NOI is a useful supplemental measure of the performance of our Operating Assets and Seaport District portfolio because it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in rental and occupancy rates and operating costs. We define NOI as operating revenues (rental income, tenant recoveries and other revenue) less operating expenses (real estate taxes, repairs and maintenance, marketing and other property expenses, including our share of NOI from equity investees). NOI excludes straight-line rents and amortization of tenant incentives, net interest expense, ground rent amortization, demolition costs, other (loss) income, amortization, depreciation and development-related marketing. All management fees have been eliminated for all internally-managed properties. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that property-specific factors such as lease structure, lease rates and tenant base have on our operating results, gross margins and investment returns. Variances between years in NOI typically result from changes in rental rates, occupancy, tenant mix and operating expenses. Although we believe that NOI provides useful information to investors about the performance of our Operating Assets and Seaport District assets, due to the exclusions noted above, NOI should only be used as an additional measure of the financial performance of the assets of this segment of our business and not as an alternative to GAAP Net income (loss). For reference, and as an aid in understanding our computation of NOI, a reconciliation of EBT to NOI for Operating Assets and Seaport District has been presented in the tables below.
FFO, Core FFO and AFFO
FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as net income calculated in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges (which we believe are not indicative of the performance of our operating portfolio). We calculate FFO in accordance with NAREIT's definition. Since FFO excludes depreciation and amortization, gains and losses from depreciable property dispositions and impairments, it can provide a performance measure that, when compared year over year, reflects the impact on operations from trends in land sales prices, occupancy rates, rental rates, operating costs, acquisition and development activities, and financing costs. This provides a perspective of our financial performance not immediately apparent from net income determined in accordance with GAAP. Core FFO is calculated by adjusting FFO to exclude the impact of certain non-cash and/or nonrecurring income and expense items, as set forth in the calculation below. These items can vary greatly from period to period, depending upon the volume of our acquisition activity and debt retirements, among other factors. We believe that by excluding these items, Core FFO serves as a useful, supplementary measure of the ongoing operating performance of our core operations, and we believe it is used by investors in a similar manner. Finally, AFFO adjusts our Core FFO operating measure to deduct cash spent on recurring tenant improvements and capital expenditures of a routine nature as well as leasing commissions to present an adjusted measure of Core FFO. Core FFO and AFFO are non-GAAP and non-standardized measures and may be calculated differently by other peer companies.
While FFO, Core FFO, AFFO and NOI are relevant and widely used measures of operating performance of real estate companies, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance. FFO, Core FFO, AFFO and NOI do not purport to be indicative of cash available to fund our future cash requirements. Further, our computations of FFO, Core FFO, AFFO and NOI may not be comparable to those reported by other real estate companies. We have included a reconciliation of FFO, Core FFO and AFFO to GAAP net income below. Non-GAAP financial measures should not be considered independently, or as a substitute, for financial information presented in accordance with GAAP.
David R. O'Reilly
Chief Financial Officer
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