Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) to “Seaport Entertainment Group,”, “SEG”, the “Company,” “we,” “us,” or “our” shall mean the assets, liabilities, and operating activities related to the Seaport Entertainment division of Howard Hughes Holdings Inc. (“HHH”) that was transferred to Seaport Entertainment Group Inc. on July 31, 2024 in connection with SEG’s separation from HHH (the “Separation”), as well as the assets, liabilities, and operating activities of Seaport Entertainment Group Inc. The following discussion should be read as a supplement to and should be read in conjunction with our Unaudited Condensed Combined Financial Statements for the three months ended June 30, 2024, and June 30, 2023, and six months ended June 30, 2024, and June 30, 2023 (“Unaudited Condensed Combined Financial Statements”) and the related notes which are included elsewhere in this quarterly report on Form 10-Q (“Quarterly Report”). This discussion contains forward-looking statements that involve risks, uncertainties, assumptions, and other factors, including those described in the section entitled “Risk Factors” and elsewhere in this Quarterly Report. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of these factors. You are cautioned not to place undue reliance on this information which speaks only as of the date of this Quarterly Report. We are not obligated to update this information, whether as a result of new information, future events or otherwise, except as may be required by law.
All references to numbered Notes are specific to Notes to our Unaudited Condensed Combined Financial Statements included in this Quarterly Report. Capitalized terms used, but not defined, in this MD&A have the same meanings as in such Notes.
Changes for monetary amounts between periods presented are calculated based on the amounts in thousands of dollars stated in our combined financial statements, and then rounded to the nearest million. Therefore, certain changes may not recalculate based on the amounts rounded to the nearest million.
Overview
General Overview
The Company was formed to own, operate, and develop a unique collection of assets positioned at the intersection of entertainment and real estate. Our existing portfolio encompasses a wide range of leisure and recreational activities, including live concerts, fine dining, professional sports, and high-end and experiential retail. We primarily analyze our portfolio of assets through the lens of our three operating segments: (1) Landlord Operations, (2) Hospitality, and (3) Sponsorships, Events, and Entertainment, and are focused on realizing value for shareholders primarily through dedicated management of existing assets, expansion of partnerships, strategic acquisitions, and completion of development and redevelopment projects.
Landlord Operations . Landlord Operations represents our ownership interests in and operation of physical real estate assets located in the Seaport, a historic neighborhood in Lower Manhattan on the banks of the East River and within walking distance of the Brooklyn Bridge. Landlord Operations assets include:
·
Pier 17, a mixed-use building containing restaurants, entertainment, office space, and the Rooftop at Pier 17, an outdoor concert venue;
·
the Tin Building, a mixed-use building containing a culinary destination featuring a variety of experiences including restaurants, bars, grocery markets, retail, and private dining;
·
the Fulton Market Building, a mixed-use building containing office and retail spaces, including a movie theater and an experiential retail concept focused on “classic lawn games” and cocktails;
·
the Historic District retail and other locations which include the Museum Block, Schermerhorn Row, and more;
27
Table of Contents
·
250 Water Street, a full block development site approved for zoning of affordable and market-rate housing, office, retail, and community-oriented gathering space; and
·
85 South Street, an eight-story residential building.
Our assets included in the Landlord Operations segment primarily sit under a long-term ground lease from the City of New York with an amendment that was executed giving the Company extension options for an additional 48 years from its current expiration in 2072 until 2120. We are focused on continuing to fill vacancies in our Landlord Operations portfolio and believe this to be an opportunity to drive incremental segment growth.
Hospitality. Hospitality represents our ownership interests in various food and beverage operating businesses. We own, either wholly or through partnerships with third parties, and operate, including license and management agreements, six fine dining and casual dining restaurants, cocktail bars and entertainment venues (The Fulton, Mister Dips, Carne Mare, Malibu Farm, Pearl Alley, and The Lawn Club), as well as our unconsolidated venture, the Tin Building by Jean-Georges, which offers over 20 culinary experiences, including restaurants, bars, grocery markets, retail, and private dining. These businesses are all our tenants and pay rent to our Landlord Operations. We also have a 25% interest in Jean-Georges Restaurants. Creative Culinary Management Company (“CCMC”), a wholly owned subsidiary of Jean-Georges Restaurants and a related party of the Company, provides management services for certain retail and food and beverage businesses in the Seaport. We aim to capitalize on opportunities in the food and beverage space to leverage growing consumer appetite for unique restaurant experiences as a catalyst to further expand the Company’s culinary footprint.
Sponsorships, Events, and Entertainment. Sponsorships, Events, and Entertainment includes the Las Vegas Aviators Triple-A Minor League Baseball team (the “Aviators”) and the Las Vegas Ballpark, our interest in and to the Fashion Show Mall Air Rights, events at the Rooftop at Pier 17, and all of our sponsorship agreements across both the Las Vegas Ballpark and the Seaport. The Aviators are a Triple-A affiliate of the Oakland Athletics and play at the Las Vegas Ballpark, a 10,000-person capacity ballpark located in Downtown Summerlin. The Rooftop at Pier 17, as mentioned in Landlord Operations above, is a premier outdoor concert venue that hosts a popular Summer Concert Series featuring emerging and established musicians alike. We see the Rooftop at Pier 17 as an opportunity to continue to drive events and entertainment growth as the demand for live music is strong and accelerating.
Separation from HHH
On July 31, 2024, HHH completed its spin-off of SEG through the pro rata distribution of all the outstanding shares of common stock of SEG to HHH’s stockholders as of the close of business on the record date of July 29, 2024 (the “Separation”).
In connection with the Separation, on July 31, 2024, the Company entered into a separation and distribution agreement and various other agreements with HHH, including a transition services agreement, an employee matters agreement, a tax matters agreement, and a revolving credit agreement. Additionally, HHH contributed capital of $23.4 million to the Company prior to the Separation to support the operating, investing, and financing activities of the Company. For additional discussion of the Separation, see Note 1 – Significant Accounting Policies in the Notes to Unaudited Condensed Combined Financial Statements included in this Quarterly Report.
Basis of Presentation
We historically operated as part of HHH and not as a standalone company. The accompanying Unaudited Condensed Combined Financial Statements have been prepared on a standalone basis derived from the consolidated financial statements and accounting records of HHH. These statements reflect the combined historical results of operations, financial position, and cash flows of Seaport Entertainment Group in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These statements may not include all expenses that would have been incurred had the Company existed as a separate, stand-alone entity during the periods presented.
These Unaudited Condensed Combined Financial Statements are presented as if the Company had been carved out of HHH and had been combined for all periods presented. The Unaudited Condensed Combined Financial Statements include
28
Table of Contents
the attribution of certain assets and liabilities that have been held at HHH but which are specifically identifiable or attributable to the business that was transferred to the Company in connection with the Separation.
For an additional discussion on the basis of presentation of these statements, see Note 1 – Significant Accounting Policies in the Notes to Unaudited Condensed Combined Financial Statements included in this Quarterly Report.
Key Factors Affecting Our Business
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this Quarterly Report titled “Risk Factors.”
Management Strategies and Operational Changes
As mentioned elsewhere in this Quarterly Report, we historically operated as part of HHH and not as a standalone company. Therefore, our historical results are reflective of the management strategies and operations of the Company based on the direction and strategies of HHH. Additionally, our historical results reflect the allocation of expenses from HHH associated with certain services, including (1) certain support functions that are provided on a centralized basis within HHH, including, but not limited to executive oversight, treasury, accounting, finance, internal audit, legal, information technology, human resources, communications, and risk management; and (2) employee benefits and compensation, including stock-based compensation. As a separate public company, our ongoing costs related to such support functions may differ from, and will potentially exceed, the amounts that have been allocated to us in these financial statements. Following the Separation, HHH will continue to provide some of these services on a transitional basis in exchange for agreed-upon fees. In addition to one-time costs to design and establish our corporate functions, we will also incur incremental costs associated with being a stand-alone public company, including additional labor costs, such as salaries, benefits, and potential bonuses and/or stock based compensation awards for staff additions to establish certain corporate functions historically supported by HHH and not covered by the transition services agreement, and corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees. Following the Separation, our future results and cost structure may differ based on new strategies and operational changes implemented by our management team, which may include changes to our chosen organizational structure, whether functions are outsourced or performed by the Company employees, and strategic decisions made in areas such as executive leadership, corporate infrastructure, and information technology.
Tin Building and our investment in the Tin Building by Jean-Georges
The Company owns 100% of the Tin Building which was completed and placed in service in our Landlord Operations segment during the third quarter of 2022. The Company leases 100% of the rentable space in the Tin Building to the Tin Building by Jean-Georges joint venture, a Hospitality segment business in which the Company has an equity ownership interest and reports its ownership interest in accordance with the equity method. Based on capital contribution and distribution provisions for the Tin Building by Jean-Georges joint venture, the Company currently recognizes all of the economic interest in the venture. The Company recognizes lease payments from the Tin Building by Jean-Georges in Rental revenue within the Landlord Operations segment and recognizes its share of the income or losses from the joint venture in Equity in losses from unconsolidated ventures in the Hospitality segment. As the Company currently recognizes 100% of operating income or losses from the Tin Building by Jean-Georges, the Tin Building lease has no net impact to the total Company net loss. However, Landlord Operations Adjusted EBITDA and NOI, as defined below, includes only rental revenue related to the Tin Building lease payments, and does not include the rent expense in Equity in losses from unconsolidated ventures.
The Tin Building by Jean-Georges is managed by CCMC, a related party that is owned by Jean-Georges Restaurants. The Tin Building by Jean-Georges had a soft opening in August 2022 and a grand opening celebration in late September 2022, with an expanded focus on experiences including in-person dining, retail shopping and delivery. Operating hours were initially constrained due to labor shortages and the venture incurred elevated operating losses during the early months of operations; however, during the fourth quarter of 2022, despite continued labor shortages, operating hours were extended to seven days a week. In 2023, the Tin Building by Jean-Georges was open seven days per week, with strong
29
Table of Contents
foot traffic and sales. However, operating losses at the Tin Building by Jean-Georges joint venture remained elevated, as the venture continues to refine its operating model, and the Seaport experienced poor weather conditions throughout 2023 and into the first quarter of 2024. Performance at the Tin Building improved in the second quarter of 2024, primarily due to reductions in operating and labor costs. As the Company currently funds any operating shortfall and recognizes all of the economic interest in the venture, the future success of the Tin Building by Jean-George may have a significant impact on our results of operations.
Seasonality
Our operations are highly seasonal and are significantly impacted by weather conditions. Concerts at our outdoor venue and Aviator’s baseball games primarily occur from May through October, and we typically see increased customer traffic at our restaurants during the summer months when the weather is generally warmer and more favorable, which contributes to higher revenue during these periods. However, weather-related disruptions, such as floods and heavy rains, can negatively impact our summer operations. For instance, outdoor concerts may have to be cancelled or rescheduled due to inclement weather, which can result in lost revenue. Similarly, floods can lead to temporary closures of our restaurants and can disrupt our supply chain, leading to potential revenue losses and increased costs.
During the fall and winter months, our operations tend to slow down due to the colder weather which results in fewer outdoor events, less foot traffic at our restaurants, and the end of the Aviator’s baseball season. This seasonality pattern results in lower revenues during these periods. Moreover, severe winter weather conditions, such as snowstorms and freezing temperatures, can further deter customers from visiting our restaurants, further impacting our revenues and cash flow. Our seasonality also results in fluctuations in cash and cash equivalents, accounts receivable, deferred expenses, and accounts payable and other liabilities at different times during the year.
Lease Renewals and Occupancy
As of June 30, 2024, and December 31, 2023, the weighted average remaining term of our retail, office, and other properties leases where we are the lessor was approximately seven years, excluding renewal options. The stability of the rental revenue generated by our properties depends principally on our tenants’ ability to pay rent and our ability to collect rents, renew expiring leases, re-lease space upon the expiration or other termination of leases, lease currently vacant properties, and maintain or increase rental rates at our leased properties. To the extent our properties become vacant, we would forego rental income while remaining responsible for the payment of property taxes and maintaining the property until it is re-leased, which could negatively impact our operating results. As of June 30, 2024, our real estate assets at the Seaport were 67% leased. This includes one lease at Pier 17 that is set to expire in December 2025 and represents 12% of our total 2023 rental revenues. We continue to monitor our lease renewals and occupancy rates.
Inflationary Pressures
Financial results across all our segments may be impacted by inflation. In Landlord Operations, certain of our leases contain rent escalators that increase rent at a fixed amount and may not be sufficient during periods of high inflation. For properties leased to third-party tenants, the impact of inflation on our property and operating expenses is limited as substantially all our leases are net leases, and property-level expenses are generally reimbursed by our tenants. Inflation and increased costs may also have an adverse impact on our tenants and their creditworthiness if the increase in property-level expenses is greater than their increase in revenues. For unleased properties and properties occupied by our restaurants, we are more exposed to inflationary pressures on property and operating expenses. For our Hospitality and Sponsorships, Events, and Entertainment segments, inflationary pressure has a direct impact on our profitability due to increases in our costs, as well as potential reductions in customers that could negatively impact revenue.
Significant Items Impacting Comparability
Separation Costs. The Company incurred pre-tax charges related to the planned separation from HHH, primarily related to legal and consulting costs, of $7.9 million and $17.1 million for the three months and six months ended June 30, 2024, respectively. No costs related to the planned separation were incurred or recorded in the Unaudited Condensed Combined Statement of Operations for the three months and six months ended June 30, 2023.
30
Table of Contents
Shared Service Costs. HHH provided the Company certain services, including (1) certain support functions that are provided on a centralized basis within HHH, including, but not limited to executive oversight, treasury, accounting, finance, internal audit, legal, information technology, human resources, communications, and risk management; and (2) employee benefits and compensation, including stock-based compensation. The Company’s Unaudited Condensed Combined Financial Statements reflect an allocation of these costs. When specific identification or a direct attribution of costs based on time incurred for the Company’s benefit is not practicable, a proportional cost method is used, primarily based on revenue, headcount, payroll costs or other applicable measures. The Company recorded expenses associated with shared services that are not directly attributable to the Company of $3.9 million and $3.8 million for the three months ended June 30, 2024, and 2023, respectively, $7.5 million and $6.7 million for the six months ended June 30, 2024, and 2023, respectively.
Non-GAAP Measure
Landlord Operations Net Operating Income
In addition to the required presentations using GAAP, we use certain non-GAAP performance measures, as we believe these measures improve the understanding of our operational results and make comparisons of operating results among peer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change.
Landlord Operations Net Operating Income (“Landlord Operations NOI”) is a non-GAAP supplemental measure that we believe is useful in measuring the period-over-period performance of our Landlord Operations segment. As Landlord Operations NOI reflects the revenues and expenses directly associated with owning and operating real estate properties, variances between years in Landlord Operations NOI typically result from changes in rental rates, occupancy, tenant mix, and operating expenses. We define Landlord Operations 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). Landlord Operations NOI excludes straight-line rents and amortization of tenant incentives, net; interest expense, net; ground rent amortization; other income (loss); expenses for concepts that did not proceed to completion; depreciation and amortization; development-related marketing costs; gain on sale or disposal of real estate and other assets, net; provision for impairment and equity in earnings (losses) from unconsolidated ventures.
Although we believe that Landlord Operations NOI provides useful information to investors about the performance of our Landlord Operations segment, due to the exclusions noted above, Landlord Operations NOI should only be used as an additional measure of the financial performance of such assets and not as an alternative to GAAP net income.
31
Table of Contents
Results of Operations
Comparison of the Three Months Ended June 30, 2024, and 2023
The following table sets forth our operating results:
Three Months Ended June 30,
Change
in thousands except percentages
2024
2023
$
%
REVENUES
Sponsorships, events, and entertainment revenue
$
18,651
$
22,080
(3,429)
(16)
%
Hospitality revenue
8,914
9,734
(820)
(8)
%
Rental revenue
6,317
5,727
590
10
%
Other revenue
59
—
59
NM 1
Total revenue
33,941
37,541
(3,600)
(10)
%
EXPENSES
Sponsorships, events, and entertainment costs
12,544
14,834
(2,290)
(15)
%
Hospitality costs
8,367
8,607
(240)
(3)
%
Operating costs
12,921
10,874
2,047
19
%
Provision for doubtful accounts
1,307
6
1,301
NM 1
General and administrative
18,613
7,037
11,576
165
%
Depreciation and amortization
5,333
13,170
(7,837)
(60)
%
Other
—
(382)
382
(100)
%
Total expenses
59,085
54,146
4,939
9
%
OTHER
Other income, net
(91)
(18)
(73)
406
%
Total other
(91)
(18)
(73)
406
%
Operating loss
(25,235)
(16,623)
(8,612)
52
%
Interest expense, net
(3,210)
(627)
(2,583)
412
%
Equity in losses from unconsolidated ventures
(6,552)
(10,896)
4,344
(40)
%
Loss before income taxes
(34,997)
(28,146)
(6,851)
24
%
Income tax (benefit) expense
—
—
—
—
Net loss
$
(34,997)
$
(28,146)
(6,851)
24
%
1
Not Meaningful
Net loss increased $6.9 million, or 24%, to $35.0 million for the three months ended June 30, 2024, compared to $28.1 million in the prior-year period, primarily due to an $11.6 million increase in general and administrative costs and a $3.6 million decrease in total revenue, partially offset by a $7.8 million decrease in depreciation and amortization.
Items Included in Segment Adjusted EBITDA
See Segment Operating Results for discussion of significant variances for revenues and expenses included in Adjusted EBITDA.
Items Excluded from Segment Adjusted EBITDA
The following includes information on the significant variances in expenses and other items not directly related to segment activities.
General and Administrative . General and administrative costs increased $11.6 million, or 165%, to $18.6 million for the three months ended June 30, 2024, compared to $7.0 million in the prior-year period. This change was primarily due to a $7.9 million increase in separation costs and a $5.4 million increase in personnel and overhead expenses, partially offset by a $1.6 million decrease in expenses related to the development of the Company’s e-commerce platform in the prior-year period that did not occur in the current period and a $0.1 million decrease in shared service costs allocated from HHH based on various allocation methodologies.
32
Table of Contents
Depreciation and Amortization Expense. Depreciation and amortization expense decreased $7.8 million, or 60%, to $5.3 million for the three months ended June 30, 2024, compared to $13.2 million in the prior-year period. This change was primarily due to a decrease in depreciation expense following the impairment recognized on the Company’s buildings and equipment in the third quarter of 2023.
Interest Expense, Net . Interest expense, net increased $2.6 million, or 412%, to $3.2 million for the three months ended June 30, 2024, compared to $0.6 million in the prior-year period. This change is primarily due to a $2.2 million decrease in amounts capitalized to development assets and a $0.5 million increase in interest expense on secured mortgages payable, partially offset by a $0.2 million increase in interest income.
Equity in Losses from Unconsolidated Ventures. Equity losses from unconsolidated ventures decreased $4.3 million, or 40%, to $6.6 million for the three months ended June 30, 2024, compared to $10.9 million in the prior-year period. This change was primarily due to a $3.6 million decrease in losses for the Tin Building by Jean Georges, and a $0.5 million increase in earnings related to the Lawn Club, which opened in the fourth quarter of 2023.
Comparison of the Six Months Ended June 30, 2024 and 2023
The following table sets forth our operating results:
Six Months Ended June 30,
Change
in thousands except percentages
2024
2023
$
%
REVENUES
Sponsorships, events, and entertainment revenue
$
22,831
$
26,161
(3,330)
(13)
%
Hospitality revenue
12,918
14,956
(2,038)
(14)
%
Rental revenue
12,764
11,169
1,595
14
%
Other revenue
82
3
79
NM 1
Total revenue
48,595
52,289
(3,694)
(7)
%
EXPENSES
Sponsorships, events, and entertainment costs
17,405
20,822
(3,417)
(16)
%
Hospitality costs
13,935
15,488
(1,553)
(10)
%
Operating costs
22,825
20,011
2,814
14
%
Provision for (recovery of) doubtful accounts
2,260
(13)
2,273
NM 1
General and administrative
35,167
12,493
22,674
181
%
Depreciation and amortization
13,407
26,400
(12,993)
(49)
%
Other
—
21
(21)
(100)
%
Total expenses
104,999
95,222
9,777
10
%
OTHER
Other income, net
(83)
3
(86)
NM 1
Total other
(83)
3
(86)
NM 1
Operating loss
(56,487)
(42,930)
(13,557)
32
%
Interest expense, net
(5,756)
(1,257)
(4,499)
358
%
Equity in losses from unconsolidated ventures
(16,832)
(21,716)
4,884
(22)
%
Loss before income taxes
(79,075)
(65,903)
(13,172)
20
%
Income tax (benefit) expense
—
—
—
—
Net loss
(79,075)
(65,903)
(13,172)
20
%
1 Not Meaningful
Net loss increased $13.2 million, or 20%, to $79.1 million for the six months ended June 30, 2024, compared to $65.9 million in the prior-year period, primarily due to a $22.7 million increase in general and administrative costs and a $3.7 million decrease in total revenue, partially offset by a $13.0 million decrease in depreciation and amortization.
33
Table of Contents
Items Included in Segment Adjusted EBITDA
See Segment Operating Results for discussion of significant variances for revenues and expenses included in Adjusted EBITDA.
Items Excluded from Segment Adjusted EBITDA
The following includes information on the significant variances in expenses and other items not directly related to segment activities.
General and Administrative . General and administrative costs increased $22.7 million, or 181%, to $35.2 million for the six months ended June 30, 2024, compared to $12.5 million in the prior-year period. This change was primarily due to a $17.1 million increase in separation costs, a $6.6 million increase in personnel and overhead expenses, a $0.5 million increase in shared service costs allocated from HHH based on various allocation methodologies, and a $0.1 million increase in rent expense related to the corporate office. These increases were partially offset by a $1.6 million decrease in expenses related to the development of the Company’s e-commerce platform in the prior-year period that did not occur in the current period.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased $13.0 million, or 49%, to $13.4 million for the six months ended June 30, 2024, compared to $26.4 million in the prior-year period. This change was primarily due to a decrease in depreciation expense following the impairment recognized on the Company’s buildings and equipment in the third quarter of 2023.
Interest Expense, Net . Interest expense, net increased $4.5 million, or 358%, to $5.8 million for the six months ended June 30, 2024, compared to $1.3 million in the prior-year period. This change is primarily due to a $3.5 million decrease in amounts capitalized to development assets and a $1.1 million increase in interest expense on secured mortgages payable, partially offset by a $0.4 million increase in interest income.
Equity in Losses from Unconsolidated Ventures. Equity losses from unconsolidated ventures decreased $4.9 million, or 22%, to $16.8 million for the six months ended June 30, 2024, compared to $21.7 million in the prior-year period. This change was primarily due to a $4.1 million decrease in losses for the Tin Building by Jean Georges, and a $0.5 million decrease in losses for Ssäm Bar, which closed in the third quarter of 2023.
Segment Operating Results
Landlord Operations
Segment Adjusted EBITDA
The following table presents segment Adjusted EBITDA for Landlord Operations:
Three Months Ended
Six Months Ended
Landlord Operations Adjusted EBITDA
June 30,
Change
June 30,
Change
in thousands except percentages
2024
2023
$
%
2024
2023
$
%
Rental revenue
$
6,317
$
5,727
$
590
10
%
$
12,764
$
11,169
$
1,595
14
%
Other revenue
59
—
59
NM 1
82
3
79
NM 1
Total revenues
6,376
5,727
649
11
%
12,846
11,172
1,674
15
%
Operating costs
(9,847)
(8,166)
(1,681)
(21)
%
(18,115)
(15,598)
(2,517)
(16)
%
Provision for doubtful accounts
(320)
(6)
(314)
NM 1
(518)
(51)
(467)
NM 1
Total operating expenses
(10,167)
(8,172)
(1,995)
(24)
%
(18,633)
(15,649)
(2,984)
(19)
%
Other income, net
—
1
(1)
(100)
%
5
9
(4)
(50)
%
Total expenses
(10,167)
(8,171)
(1,996)
(24)
%
(18,628)
(15,640)
(2,988)
(19)
%
Adjusted EBITDA
$
(3,791)
$
(2,444)
$
(1,347)
(55)
%
$
(5,782)
$
(4,468)
$
(1,314)
(29)
%
34
Table of Contents
For the three months ended June 30, 2024
Landlord Operations Adjusted EBITDA loss increased $1.3 million compared to the prior-year period primarily due to the following:
Rental Revenue . Rental revenue increased $0.6 million, or 10%, to $6.3 million for the three months ended June 30, 2024, compared to $5.7 million in the prior-year period. This change was primarily driven by a $1.3 million increase in rental revenue at the Fulton Market Building due to the commencement of the Alexander Wang lease at the end of 2023. This increase was partially offset by a $0.3 million decrease at Schermerhorn Row, a $0.3 million decrease at the Tin Building, and a $0.1 million decrease at Pier 17.
Operating Costs . Operating costs increased $1.7 million, or 21%, to $9.8 million for the three months ended June 30, 2024, compared to $8.2 million in the prior year period. This change was primarily due to a $1.2 million increase in labor costs, a $0.9 million increase in professional services fees, and $0.4 million increase in marketing and advertising expenses, partially offset by a $0.3 million decrease in state business tax and a $0.2 million decrease in insurance expense.
Provision for Doubtful Accounts . Provision for doubtful accounts increased to $0.3 million for the three months ended June 30, 2024, compared to an immaterial amount in the prior-year period, primarily due to a tenant reserve established during the three months ended June 30, 2024.
For the six months ended June 30, 2024
Landlord Operations Adjusted EBITDA loss increased $1.3 million compared to the prior-year period primarily due to the following:
Rental Revenue . Rental revenue increased $1.6 million, or 14%, to $12.8 million for the six months ended June 30, 2024, compared to $11.2 million in the prior-year period. This change was primarily driven by a $2.5 million increase in rental revenue at the Fulton Market Building due to the commencement of the Alexander Wang lease at the end of 2023. This increase was partially offset by a $0.3 million decrease at Schermerhorn Row, a $0.3 million decrease at Pier 17, and a $0.2 million decrease at the Tin Building.
Operating Costs . Operating costs increased $2.5 million, or 16%, to $18.1 million for the six months ended June 30, 2024, compared to $15.6 million in the prior year period. This change was primarily due to a $1.3 million increase in labor costs and a $1.2 million increase in professional services fees.
Provision for Doubtful Accounts . Provision for doubtful accounts increased to $0.5 million for the six months ended June 30, 2024, compared to an immaterial amount in the prior-year period, primarily due to a tenant reserve established during the six months ended June 30, 2024.
Non-GAAP Measure
Landlord Operations Net Operating Income
Refer to the Non-GAAP Measure discussion above for additional information and disclosure on the usefulness, relevance, limitations, and calculation of Landlord Operations Net Operating Income. A reconciliation of Landlord Operations Adjusted EBITDA to Landlord Operations NOI is presented in the table below.
35
Table of Contents
Reconciliation of Landlord Operations Adjusted EBITDA to Landlord Operations NOI:
Three Months Ended
Six Months Ended
Landlord Operations NOI
June 30,
Change
June 30,
Change
in thousands except percentages
2024
2023
$
%
2024
2023
$
%
Landlord Operations Adjusted EBITDA
$
(3,791)
$
(2,444)
$
(1,347)
(55)
%
$
(5,782)
$
(4,468)
$
(1,314)
(29)
%
Adjustments:
Impact of straight-line rent
777
677
100
15
%
1,223
1,394
(171)
(12)
%
Other
4
(1)
5
(500)
%
(4)
(10)
6
(60)
%
Landlord Operations NOI
$
(3,010)
$
(1,768)
$
(1,242)
(70)
%
$
(4,563)
$
(3,084)
$
(1,479)
(48)
%
For the three months ended June 30, 2024
Landlord Operations NOI losses increased $1.2 million compared to the prior-year period, primarily due to increased operating costs and provision for doubtful accounts, partially offset by the increase in rental revenue as mentioned above.
For the six months ended June 30, 2024
Landlord Operations NOI losses increased $1.5 million compared to the prior-year period, primarily due to increased operating costs and provision for doubtful accounts, partially offset by the increase in rental revenue as mentioned above.
Hospitality
Segment Adjusted EBITDA
The following table presents segment Adjusted EBITDA for Hospitality:
Three Months Ended
Six Months Ended
Hospitality Adjusted EBITDA
June 30,
Change
June 30,
Change
in thousands except percentages
2024
2023
$
%
2024
2023
$
%
Hospitality revenue
$
8,914
$
9,734
$
(820)
(8)
%
$
12,918
$
14,956
$
(2,038)
(14)
%
Total revenues
8,914
9,734
(820)
(8)
%
12,918
14,956
(2,038)
(14)
%
Hospitality costs
(8,367)
(8,607)
240
3
%
(13,935)
(15,488)
1,553
10
%
Operating costs
(1,236)
(1,059)
(177)
(17)
%
(1,789)
(1,762)
(27)
(1)
%
Provision for doubtful accounts
—
—
—
NM 1
(101)
(2)
(99)
NM 1
Total operating expenses
(9,603)
(9,666)
63
1
%
(15,825)
(17,252)
1,427
8
%
Other income, net
3
2
1
50
%
5
9
(4)
(44)
%
Total expenses
(9,600)
(9,664)
64
1
%
(15,820)
(17,243)
1,423
8
%
Adjusted EBITDA
$
(686)
$
70
$
(756)
NM 1
$
(2,902)
$
(2,287)
$
(615)
(27)
%
1 Not Meaningful
For the three months ended June 30, 2024
Hospitality Adjusted EBITDA loss increased $0.8 million compared to the prior-year period primarily due to the following:
Hospitality Revenue . Hospitality revenue decreased $0.8 million, or 8%, to $8.9 million for the three months ended June 30, 2024, compared to $9.7 million in the prior-year period. This change was primarily due to a $0.5 million decrease related to small popups and short-term activations in the Cobble & Co and Garden Bar spaces in the second quarter of 2023, with no similar activity in the second quarter of 2024, and a $0.3 million decrease related to reduced restaurant performance, primarily at The Fulton and Carne Mare.
36
Table of Contents
Hospitality Costs . Hospitality costs decreased $0.2 million, or 3%, to $8.4 million for the three months ended June 30, 2024, compared to $8.6 million in the prior-year period, primarily due to decreases in variable costs such as food and beverage costs and labor costs, which are generally in line with the decrease in Hospitality revenue.
For the six months ended June 30, 2024
Hospitality Adjusted EBITDA loss increased $0.6 million compared to the prior-year period primarily due to the following:
Hospitality Revenue . Hospitality revenue decreased $2.0 million, or 14%, to $12.9 million for the six months ended June 30, 2024, compared to $15.0 million in the prior-year period. This change was primarily due to a $1.3 million decrease related to reduced restaurant performance, primarily at The Fulton, Carne Mare, and Malibu Farms, and a $0.7 million decrease related to small popups and short-term activations in the Cobble & Co and Garden Bar spaces in the first half of 2023, with no similar activity in the first half of 2024. The reduced restaurant performance was primarily related to poor weather conditions in the first quarter of 2024.
Hospitality Costs . Hospitality costs decreased $1.6 million, or 10%, to $13.9 million for the six months ended June 30, 2024, compared to $15.5 million in the prior-year period, primarily due to decreases in variable costs such as food and beverage costs and labor costs, which are generally in line with the decrease in Hospitality revenue.
Sponsorships, Events, and Entertainment
Segment Adjusted EBITDA
The following table presents segment Adjusted EBITDA for Sponsorships, Events, and Entertainment:
Sponsorships, Events, and Entertainment Adjusted EBITDA
Three Months Ended June 30,
Change
Six Months Ended June 30,
Change
in thousands except percentages
2024
2023
$
%
2024
2023
$
%
Sponsorships, events, and entertainment revenue
$
18,651
$
22,080
$
(3,429)
(16)
%
$
22,831
$
26,161
$
(3,330)
(13)
%
Total revenues
18,651
22,080
(3,429)
(16)
%
22,831
26,161
(3,330)
(13)
%
Sponsorships, events, and entertainment costs
(12,544)
(14,834)
2,290
15
%
(17,405)
(20,822)
3,417
16
%
Operating costs
(1,838)
(1,649)
(189)
(11)
%
(2,922)
(2,650)
(272)
(10)
%
Provision for doubtful accounts
(987)
—
(987)
NM 1
(1,641)
65
(1,706)
NM 1
Total operating expenses
(15,369)
(16,483)
1,114
7
%
(21,968)
(23,407)
1,439
6
%
Other income, net
(94)
(21)
(73)
348
%
(92)
(15)
(77)
513
%
Total expenses
(15,463)
(16,504)
1,041
6
%
(22,060)
(23,422)
1,362
6
%
Adjusted EBITDA
$
3,188
$
5,576
$
(2,388)
43
%
$
771
$
2,739
$
(1,968)
72
%
1 Not Meaningful
For the three months ended June 30, 2024
Sponsorships, Events, and Entertainment Adjusted EBITDA decreased $2.4 million compared to the prior-year period primarily due to the following:
Sponsorships, Events, and Entertainment Revenue . Sponsorships, events, and entertainment revenue decreased $3.4 million, or 16%, to $18.7 million for the three months ended June 30, 2024, compared to $22.1 million in the prior-year
37
Table of Contents
period. This change was primarily due to a $2.7 million decrease in concert series revenue at the Seaport, primarily related to the timing of concerts with 11 shows held during the second quarter of 2024, compared to 19 shows held during the second quarter of 2023. Additionally, there was a $1.2 million decrease in concession sales at the Las Vegas Ballpark and a $0.4 million decrease in Aviators ticket revenue, primarily related to lower attendance in the current quarter. These decreases were partially offset by a $0.6 million increase in sponsorship revenue at the Seaport due to the execution of four new sponsorship agreements in the current quarter and a $0.4 million increase in special event revenue at the Las Vegas Ballpark, primarily due to additional events held in the current quarter.
Sponsorships, Events, and Entertainment Costs . Sponsorships, events, and entertainment costs decreased $2.3 million, or 15%, to $12.5 million for the three months ended June 30, 2024, compared to $14.8 million in the prior-year period. This change was primarily due to a $1.4 million decrease in costs associated with the concert series at the Seaport, primarily due to the timing of concerts with fewer concerts held during the current period, and a $0.8 million decrease in costs at the Las Vegas Ballpark, primarily due to lower cost of sales and labor costs as expected with lower attendance and lower concessions revenue.
Provision for Doubtful Accounts . Provision for doubtful accounts increased to $1.0 million for the three months ended June 30, 2024, compared to no activity in the prior-year period, primarily due to a $0.5 million reserve associated with the Winterland Skating concept at the Seaport and a $0.4 million reserve associated with events at the Las Vegas Ballpark, both established during the three months ended June 30, 2024.
For the six months ended June 30, 2024
Sponsorships, Events, and Entertainment Adjusted EBITDA decreased $2.0 million compared to the prior-year period primarily due to the following:
Sponsorships, Events, and Entertainment Revenue . Sponsorships, events, and entertainment revenue decreased $3.3 million, or 13%, to $22.8 million for the six months ended June 30, 2024, compared to $26.2 million in the prior-year period. This change was primarily due to a $2.7 million decrease in concert series revenue at the Seaport, primarily related to the timing of concerts with 11 shows held during the first half of 2024, compared to 19 shows held during the first half of 2023. Additionally, there was a $1.3 million decrease in concession sales at the Las Vegas Ballpark and a $0.4 million decrease in Aviators ticket revenue, primarily related to lower attendance in the current period. These decreases were partially offset by a $0.7 million increase in special event revenue at the Las Vegas Ballpark, a $0.4 million increase in sponsorship revenue at the Seaport due to the execution of four new sponsorship agreements in the first half of 2024, and a $0.4 million increase in private event revenue at the Seaport.
Sponsorships, Events, and Entertainment Costs . Sponsorships, events, and entertainment costs decreased $3.4 million, or 16%, to $17.4 million for the six months ended June 30, 2024, compared to $20.8 million in the prior-year period. This change was primarily due to a $1.7 million decrease in costs associated with the Las Vegas Ballpark, primarily due to lower cost of sales and labor costs as expected with lower attendance and lower concessions revenue, a $1.4 million decrease in costs associated with the concert series at the Seaport, primarily due to the timing of concerts with fewer concerts held during the current period, and a $0.3 million decrease in breakdown and removal costs associated with the seasonal Winterland Skating concept at the Seaport.
Provision for Doubtful Accounts . Provision for doubtful accounts increased to $1.6 million for the six months ended June 30, 2024, compared to immaterial amounts in the prior-year period, primarily due to a $1.0 million reserve associated with the Winterland Skating concept at the Seaport and a $0.5 million reserve associated with events at the Las Vegas Ballpark, both established during the six months ended June 30, 2024.
Liquidity and Capital Resources
We historically operated as a division within HHH’s consolidated structure, which uses a centralized approach to cash management and financing of our operations. This arrangement is not reflective of the manner in which we would have financed our operations had we been an independent, publicly traded company during the periods presented. The cash and cash equivalents held by HHH at the corporate level are not specifically identifiable to us and, therefore, have not been reflected in our Unaudited Condensed Combined Financial Statements. As of June 30, 2024, and December 31, 2023, our
38
Table of Contents
cash and cash equivalents were $3.3 million and $1.8 million, respectively. As of June 30, 2024, and December 31, 2023, our restricted cash was $42.2 million and $42.0 million, respectively. Restricted cash is segregated in escrow accounts related to development activity at 250 Water Street and other amounts related to payment of principal and interest on the Company’s outstanding mortgages payable. In August 2024, following the final resolution of the 250 Water Street litigation, the escrow amount of $40 million related to 250 Water Street was released to the City of New York. See Note 7 – Commitments and Contingencies in the Notes to Unaudited Condensed Combined Financial Statements, included in this Quarterly Report for additional information on the 250 Water Street litigation.
HHH’s third-party long-term debt and the related interest expense have not been allocated to us for any of the periods presented as we are not the legal obligor nor are we a guarantor of such debt. As of June 30, 2024, and December 31, 2023, we have third-party mortgages payable of $155.1 million and $155.6 million, respectively, related to our 250 Water Street development and the Las Vegas Ballpark. As of June 30, 2024, and December 31, 2023, the Company’s secured mortgage loans did not have any undrawn lender commitment available to be drawn for property development. In connection with the separation, on July 31, 2024, the variable rate mortgage related to 250 Water Street was refinanced, with HHH paying down $53.7 million of the outstanding principal balance and SEG refinancing the remaining $61.3 million at an interest rate of SOFR plus a margin of 4.5% and scheduled maturity date of July 1, 2029.
Following the Separation, our capital structure and sources of liquidity have changed from our historical capital structure because HHH is no longer financing our operations, investments in joint ventures, and development and redevelopment projects. Our development and redevelopment opportunities are capital intensive and will require significant additional funding, if and when pursued. Our ability to fund our operating needs and development and redevelopment projects will depend on our future ability to continue to manage cash flow from operating activities, and on our ability to obtain debt or equity financing on acceptable terms. In addition, we typically must provide completion guarantees to lenders in connection with their financing for our development and redevelopment projects. Additionally, on July 31, 2024, a subsidiary of HHH that became our subsidiary in connection with the separation, issued 10,000 shares of 14.000% Series A preferred stock, par value $0.01 per share, with an aggregate liquidation preference of $10.0 million. Management believes that our existing cash balances, restricted cash balances, funds provided by HHH prior to the Separation, along with expected borrowing capacity and access to capital markets, and the proceeds of our rights offering and the related backstop commitment as described under “—Expected Financings” below, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, including our third-party mortgages payable, and (ii) adequate liquidity to fund capital expenditures and development and redevelopment projects. However, our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including (1) our credit ratings, including the lowering of any of our credit ratings, or absence of a credit rating, (2) the liquidity of the overall capital markets, and (3) the current state of the economy and, accordingly, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future, or at all, which could have a negative impact on our liquidity and capital resources. The cash flows presented in our Unaudited Condensed Combined Statement of Cash Flows may not be indicative of the cash flows we would have recognized had we operated as a standalone publicly traded company for the periods presented.
Prior to the distribution, HHH contributed additional cash to the Company in order to fund its operations until a permanent capital structure is finalized. However, we do not expect HHH to have an ongoing long-term relationship with the Company and HHH will not have any ongoing financial commitments to the Company.
Expected Financings
The Company expects to conduct a $175 million Rights Offering following the distribution in the third quarter of 2024. In connection with the Rights Offering, the Company has entered into a backstop agreement with Pershing Square, which through investment funds advised by it, is our largest stockholder. Pursuant to that agreement Pershing Square has agreed to (i) exercise its pro rata subscription right with respect to the Rights Offering at a price of $25 per share of the Company’s common stock and (ii) purchase any shares not purchased upon the expiration of the Rights Offering at the Rights Offering price, up to $175 million in the aggregate. The backstop agreement could result in Pershing Square’s affiliated funds owning as much as approximately 72.3% of the Company’s common stock if no other stockholders participate in the Rights Offering. Any capital raised through the Rights Offering would further strengthen the Company’s balance sheet. With over $203.4 million of liquidity, primarily consisting of (i) $23.4 million of cash contributed by HHH pursuant to the separation and distribution agreement, (ii) expected gross proceeds from the Rights Offering and (iii)
39
Table of Contents
amounts available under the Revolving Credit Agreement, we believe we will have ample capital to support the existing business and facilitate the Company’s business plan.
Cash Flows
Six Months Ended June 30, 2024 and 2023
The following table sets forth a summary of our cash flows:
Six Months Ended June 30,
in thousands
2024
2023
Cash used in operating activities
$
(39,149)
$
(7,911)
Cash used in investing activities
(33,027)
(55,395)
Cash provided by financing activities
$
73,907
$
48,582
Operating Activities
Cash used in operating activities increased $31.2 million to $39.1 million in the six months ended June 30, 2024, compared to $7.9 million in the prior-year period. The increase in cash used in operating activities was primarily due to increased costs incurred in the six months ended June 30, 2024, related to the Separation from HHH, with no similar activity in the prior-year period, and an increase in cash used in operating activities at our segments. Sponsorships, Events, and Entertainment Adjusted EBITDA decreased $2.0 million primarily due to decreased ticket revenue, event revenue, and concessions sales; Landlord Operations Adjusted EBITDA decreased $1.3 million primarily due to increased operating expenses, partially offset by increased rental revenue; and Hospitality Adjusted EBITDA decreased $0.6 million primarily due to reduced restaurant performance.
While we have historically used cash in operating activities, we expect that the additional liquidity provided by our expected financings will provide sufficient capital to fund operations until such time that we may generate cash from operating activities. Refer to “Expected Financings” above for additional explanation.
Investing Activities
Cash used in investing activities decreased $22.4 million to $33.0 million in the six months ended June 30, 2024, compared to $55.4 million in the prior-year period. The decrease in cash used in investing activities was primarily related to lower property development costs for 250 Water Street, and lower funding of operating costs related to the Tin Building by Jean-Georges joint venture and the Lawn Club joint venture in the six months ended June 30, 2024.
Financing Activities
Cash provided by financing activities increased $25.3 million to $73.9 million in the six months ended June 30, 2024, compared to $48.6 million in the prior-year period, primarily due to an increase in the net transfers provided by Parent to fund the operating and investing activities explained above.
Contractual Obligations
We have material contractual obligations that arise in the normal course of business. These contractual obligations may not be representative of our future contractual obligations profile as an independent, publicly traded company. Our contractual obligations do not reflect changes that we expect to experience in the future as a result of the Separation, such as contractual arrangements that we may enter into in the future that were historically entered into by the HHH for shared services.
We have outstanding mortgages payable related to the 250 Water Street development and Las Vegas Ballpark, which are collateralized by certain of the Company’s real estate assets. A summary of our mortgages payable as of June 30, 2024, and December 31, 2023 can be found in Note 5 – Mortgages Payable, Net in the Notes to Unaudited Condensed Combined Financial Statements, included in this Quarterly Report.
40
Table of Contents
We lease land or buildings at certain properties from third parties. Rental payments are expensed as incurred and have been, to the extent applicable, straight-lined over the term of the lease. Contractual rental expense was $1.6 million for the three months ended June 30, 2024 and 2023, and $3.7 million for the six months ended June 30, 2024, and 2023. The amortization of straight-line rents included in the contractual rent amount was $0.6 million for the three months ended June 30, 2024, and 2023, and $1.2 million for the six months ended June 30, 2024, and 2023. A summary of our lease obligations as of June 30, 2024, and December 31, 2023, can be found in Note 10 – Leases in the Notes to Unaudited Condensed Combined Financial Statements included in this Quarterly Report.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make informed judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates.
We believe that of our significant accounting policies, which are described in Note 1 – Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Combined Financial Statements included in this Quarterly Report, the accounting policies below involves a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to understand and evaluate fully our financial condition and results of operations.
Impairments
Methodology
We review our long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Although the carrying amount may exceed the estimated fair value of certain properties, a real estate asset is only considered to be impaired when its carrying amount is not expected to be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations and the carrying amount of the asset is reduced. The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset.
Judgments and Uncertainties
An impairment loss is recognized if the carrying amount of an asset is not recoverable and exceeds its fair value. The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy, pricing, development costs, sales pace and capitalization rates, selling costs, and estimated holding periods for the applicable assets. As such, the evaluation of anticipated cash flows is highly subjective and is based in part on assumptions that could differ materially from actual results in future periods. Unfavorable changes in any of the primary assumptions could result in a reduction of anticipated future cash flows and could indicate property impairment. Uncertainties related to the primary assumptions could affect the timing of an impairment. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.
Variable Interest Entities
Methodology
Our Unaudited Condensed Combined Financial Statements include all of our accounts, including our majority owned and controlled subsidiaries and VIEs for which we are the primary beneficiary. The Company was not the primary beneficiary of any VIE’s during the six months ended June 30, 2024, and December 31, 2023, and, therefore, the Company does not consolidate any VIE’s in which it holds a variable interest.
41
Table of Contents
Judgments and Uncertainties
The Company determines whether it is the primary beneficiary of a VIE upon initial involvement with a VIE and reassesses whether it is the primary beneficiary of a VIE on an ongoing basis. The determination of whether an entity is a VIE and whether the Company is the primary beneficiary of a VIE is based upon facts and circumstances for the VIE and requires significant judgments such as whether the entity is a VIE, whether the Company’s interest in a VIE is a variable interest, the determination of the activities that most significantly impact the economic performance of the entity, whether the Company controls those activities, and whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
As of June 30, 2024, the Company had a variable interest in Tin Building by Jean-Georges and as of December 31, 2023, the Company had a variable interest in Tin Building by Jean-Georges and Ssäm Bar. The Ssäm Bar restaurant closed during the third quarter of 2023, and the venture was liquidated in May 2024. The Company determined that it is not the primary beneficiary of the VIE’s as of June 30, 2024, and December 31, 2023, as the Company does not have the power to direct the activities of the VIE’s that most significantly impact the VIE’s economic performance. Therefore, the Company accounts for its investment in the VIE’s in accordance with the equity method.
Investments in Unconsolidated Ventures
Methodology
The Company’s investments in unconsolidated ventures are accounted for under the equity method to the extent that, based on contractual rights associated with the investments, the Company can exert significant influence over a venture’s operations. Under the equity method, the Company’s investment in the venture is recorded at cost and is subsequently adjusted to recognize the Company’s allocable share of the earnings or losses of the venture. Dividends and distributions received by the business are recognized as a reduction in the carrying amount of the investment.
The Company evaluates its equity method investments for significance in accordance with Regulation S-X, Rule 3-09 and Regulation S-X, Rule 4-08(g) and presents separate annual financial statements or summarized financial information, respectively, as required by those rules.
For investments in ventures where the Company has virtually no influence over operations and the investments do not have a readily determinable fair value, the business has elected the measurement alternative to carry the securities at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the issuer.
Judgments and Uncertainties
Generally, joint venture operating agreements provide that assets, liabilities, funding obligations, profits and losses, and cash flows are shared in accordance with ownership percentages. For certain equity method investments, various provisions in the joint venture operating agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and preferred returns may result in the Company’s economic interest differing from its stated ownership or if applicable, the Company’s final profit-sharing interest after receipt of any preferred returns based on the venture’s distribution priorities. For these investments, the Company recognizes income or loss based on the joint venture’s distribution priorities, which could fluctuate over time and may be different from its stated ownership or final profit-sharing percentage.
Capitalization of Development Costs
Methodology
Development costs, which primarily include direct costs related to placing the asset in service associated with specific development properties, are capitalized as part of the property being developed. Construction and improvement costs incurred in connection with the development of new properties, or the redevelopment of existing properties are capitalized before they are placed into service. Costs include planning, engineering, design, direct material, labor and subcontract
42
Table of Contents
costs. Real estate taxes, utilities, direct legal and professional fees related to the sale of a specific unit, interest, insurance costs and certain employee costs incurred during construction periods are also capitalized. Capitalization commences when the development activities begin and cease when a project is completed, put on hold or at the date that the Company decides not to move forward with a project. Capitalized costs related to a project where the Company has determined not to move forward are expensed if they are not deemed recoverable. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period. Demolition costs associated with redevelopments are expensed as incurred unless the demolition was included in the Company’s development plans and imminent as of the acquisition date of an asset. Once the assets are placed into service, they are depreciated in accordance with the Company’s policy. In the event that management no longer has the ability or intent to complete a development, the costs previously capitalized are evaluated for impairment.
Judgments and Uncertainties
The capitalization of development costs requires judgment, and can directly and materially impact our results of operations because, for example, (i) if we don't capitalize costs that should be capitalized, then our operating expenses would be overstated during the development period, and the subsequent depreciation of the developed real estate would be understated, or (ii) if we capitalize costs that should not be capitalized, then our operating expenses would be understated during the development period, and the subsequent depreciation of the real estate would be overstated. For the six months ended June 30, 2024 and 2023, we capitalized development costs of $3.9 million and $20.2 million, respectively.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.