Howard Hughes Holdings Inc. (HHH) Earnings Call Transcript & Summary

Hello, and welcome, everyone. This is a NAREIT World's Conference Presentation on Howard Hughes Corporation. I'm glad you could join us today to learn a little bit more about Howard Hughes. My name is David O'Reilly. And I am the interim CEO, President and CFO at Howard Hughes. With all these titles, you can pretty much rest assured if you call the company, I will be the one that answers. But I figured I would start and take a step back and talk for a few minutes on just what the Howard Hughes Corporation is, how our business model works, because we are very unique among public real estate companies. We have unique sustainable competitive advantages and operational and financial synergies that I think are unmatched in the public real estate space, turn a little bit and talk about our recent successes and challenges and what we've seen during this unique period of economic slowing that has happened as a result of the pandemic and COVID-19, wrap up with a couple of key takeaways and then turn it over to Q&A. So by all means, please feel free to put your Q&A into the -- in queue now, and we'll make sure we leave time to get to it. So first, a little bit about Howard Hughes and our business plan. And we are, as I said, very unique because we have a combination of irreplaceable assets and a unique business model that create those sustainable competitive advantages and unique synergies. The first is an operational synergy. We control small cities like Summerlin in -- outside of Las Vegas, The Woodlands outside of Houston, where we sell land to homebuilders. Those homebuilders build homes. Homeowners move into the homes and demand commercial amenities, office buildings to work, hotels for their friends to stay at, retail to shop at, multifamily for their kids to get apartments, et cetera. We build those amenities in those communities at outsized risk-adjusted returns, which, in turn, makes the communities more valuable, makes the homes more valuable and the land more valuable that we then turn -- sell to new homebuilders. They build homes, residents move in, and that cycle goes on and on and on. The second is the financial synergies. As I said, we're developing those commercial amenities, and we're spending, in typical year, about $1 billion in new development, building that office, that retail, that multifamily, those great amenities in these communities, and we're doing it entirely self-funded on a leverage-neutral basis. We're using the free cash flow from the land we sell to homebuilders, the recurring NOI from our assets that we've built that are the amenities in these communities and the profits from our condo sale in Ward Village in Hawaii. And those 3 are the equity that we use to build our developments. And as I said earlier, we built them in outsized risk-adjusted returns. Over the 10 years that we've been public, we delivered what I think are incredible returns, with a 9.4% return on cost in those developments that have generated over 20% ROE. Putting a little meat on the bones and to talk about that synergy come to life, the top of this chart here shows how our operating NOI has grown over the past several years. And over the past 10 years that Howard Hughes has been public, it's grown from $40 million to $230 million last year, which is that increase of the amenity base. Simultaneous with that, if you look at the bottom right-hand side of the slide, you can see over that period where NOI has gone from $40 million to $230 million. The implied value per acre of our land, the actual value of acre per land, that we've sold to homebuilders has increased dramatically to over $1 million in The Woodlands, close to $800,000 an acre in Summerlin, $400,000 in Bridgeland, meaningful increases over the past 10 years. That is synergy coming to life and what we're seeing -- what we're experiencing in real time. About a year ago, we had a management change and we announced the transformation plan, and I think it's worth highlighting some of those changes that we're executing on right now. The first was a streamlined organizational structure and realizing G&A savings between $45 million and $50 million, with $40 million to $45 million in corporate G&A. We are 95% of the way there over -- using our last quarter annualized results in terms of those cost savings. We've moved aggressively, and we've realized those very quickly. And over the next couple of quarters, as the rest of the transition cost of moving from Dallas to The Woodlands and some of the separation cost of departing employees are fully flushed through the system, that run rate NOI will absolutely achieve our goals. We targeted $2 billion of noncore asset sales, generating $600 million of net proceeds. And this -- while we've gotten about 25% of the way there, the remaining 75% is absolutely going to be a challenge as a result of this pandemic. Some of those assets that we were selling were hotels, non-core retail centers whose values have been impacted. As a result of our incredible liquidity, which I'll touch on a little bit later, we have the legacy and the benefit of patience here, so that we can sell those when we've achieved a full maximum value and we're not forced to sell them in this distressed environment. And we also talked about accelerating growth in our MPC, which we've absolutely been committed to do, and I'm going to talk in a couple of minutes about some of our recent developments and how they've exceeded our expectations in terms of lease-up and rental rate. But a little bit about our assets. In Houston, we have some of the top-selling MPCs in the country in Bridgeland and Woodlands. And they are over 40,000 acres of land with over 100,000 residents, and 60,000 people commute into The Woodlands every day. Our median household income is 81% higher than the greater Houston average. It really talks about how the quality of our master planned communities and how they stand out within their overall city. Summerlin in Las Vegas is no different. Our household income there is 56% higher than the overall Las Vegas median. And we have 22,500 acres there with a population over 100,000. In Maryland -- Columbia, Maryland, which is halfway between DC and Baltimore, again, very similar statistics, great amenities, walkable trails, outdoor areas, it really speaks to the communities that people are seeking today as they've been migrating from higher tax areas into our master planned communities, our low tax states with incredible walkable amenities. In Ward Village in Hawaii, we have 60 acres on the Ward Village Beach Park, which is 100-acre beach park. It's right on Ala Moana Marina, and it's an incredible property where we have built 4 towers to date, 2 more under construction and a seventh tower in presales. And of those towers, we're 91% sold today, with average price of $1 million. We've talked about the assets that we've built in these communities and created amenities, and this is a sampling of those assets here on this slide. We've built across product types. And while we are diverse by product type, we are concentrated within these unique master planned communities that we have control in very limited competition. And our portfolio today is mixed between 34 Class A office buildings, 14 multifamily assets, high-quality retail, largely grocery neighborhood service-anchored and 3 hotels that are all based in The Woodlands. And through the development of those assets, we've increased our recurring NOI from, like I said, 10 years ago, the low $40s million to $230 million last year, and a stabilized number of over $360 million. And that stabilized number is based on just the construction that we have underway today with a project that we've already started that are well pre-leased and leasing every day moving forward towards that targeted old line. And the portfolio is a diverse mix between office, retail, multifamily, hospitality and some other, which is ground leases, baseball stadiums and a few self-storage facilities. So turning now to talk about some of our recent changes and some of our recent successes that we've experienced. I want to talk first about some of our new multifamily developments, and we started 4 projects that commenced between the third quarter of '19, 1 a quarter until the second quarter of 2020. And even those assets that have very recently opened, like Two Lakes Edge completing in the second quarter of 2020, we're already 29% leased. We're way ahead of our projections. We're doing it at rates that are above our projections, and we're really executing well. And it talks to the quality of our communities, the net migration that we're seeing into The Woodlands, into Columbia, into Summerlin, into Bridgeland, where these properties are located. They're still incredibly desirable. They are still low-tax states that have great, well-educated, low-cost workforce, incredible amenities, walking trails, great schools, and then they are in the path of growth. And we're seeing that translate in the lease-up of our new multifamily properties. Our collections have been strong and improving. And in office and multifamily, we've seen very high 90s percentage, both 2Q and 3Q. Our retail was obviously very challenged in the second quarter. We only collected 50%. We saw a meaningful increase from 2Q to 3Q. And candidly, that number would have been a bit higher in 3Q, but 1 million of our 2.5 million square feet of retail is located in Hawaii, which went through a second round of stay-at-home orders that just came off on October 15. Now that those restrictions have eased in Hawaii and assuming that the restrictions do not get too much more difficult in all of our other locations, we very much expect those collections will continue to improve in the fourth quarter. We talked about the desirability of our communities and how it translated into the lease-up and rates of our new multifamily. It's also translated into the desirability for new homeowners to buy homes in our communities, which, therefore, drives land values. And we've seen strong increases in land values across all of our communities from Woodlands to Summerlin to Bridgeland and Woodland Hills. The compound annual growth rate's ranging between 6% and 14%. And it really shows the power of the platform that as we amenitize these communities, the homes and land become more valuable, and that translates into incremental free cash flow for the Howard Hughes Corporation year after year. Now turning to the underlying home sales. And home sales for us, while we're not a direct beneficiary, they are a leading indicator. And strong home sales generally translate into very strong land sales in the subsequent quarters. And I think this is important. These are 2 largest MPCs where we're selling residential in Bridgeland and Summerlin, have shown incredible resiliency and strength during the pandemic. And in Bridgeland, we set record-high home sales in May, June, July and August. And this demand for homes, I believe, is attributed to those that are seeking great open spaces away from densely-populated cities and into urban forest where we have great walking amenities, incredible schools and infrastructure that homebuyers are seeking. Summerlin is very similar in that we saw a slowdown in Q2 when the pandemic took hold and an immediate bounce back in Q3 up to levels that we did not see in '19 and '18, which were both tremendous years for home sales. And I think this uptick in home sales has largely been driven by out-of-state migration predominantly from California that has continued to drive demand in Summerlin. Turning to Ward Village, and just to highlight a little bit of what we've done there. We've had more from an in-person sales effort to an entirely virtual, entirely digital sales effort, and it has not slowed our sales. They've continued to progress forward. All of our towers, as we highlighted, 91% sold. And Victoria Place, which isn't in the chart, because we haven't started construction yet, is already 71% pre-sold. It's been our fastest-selling tower to date in Ward Village, and we still have just under 6 million square feet of remaining development to execute on as we continue to build out Ward Village. From a visual perspective, when we first started, Ward Village was really a light industrial retail area. It was almost no residential whatsoever, and it was an area desperately in need redevelopment. And what we've done to date, highlighted on this chart here, you can see the blue and the orange boxes, which show what's completed, and the white box is which are to be completed, we've made tremendous progress in transforming this area really from a light industrial retail area to a livable, walkable luxurious master planned community that's just vertical instead of horizontal, and we're thrilled with the progress we've made. And we think as a result of this progress and the result of further amenitizing this community, that is what has driven the incredible success we've seen in condo sales and success throughout the pandemic shifting to an entirely virtual or digital sales platform has continued to drive results. A couple of minutes on the Seaport, and then we'll wrap up. Seaport, as most of you know, going -- starting from the top left working down, is comprised of Pier 17 building, which is 6 individual restaurants; 2 floors of office, which is filled with ESPN, their broadcast studio for a number of their shows, as well as a Nike Design Studio; and the rooftop, which has been historically used for summer concerts, but we pivoted this summer and reacted appropriately to the pandemic and created a great use for that roof despite the fact we could not host concerts. Just below that is a Tin Building, which completed exterior construction. And that's a food hall curated by Jean-Georges. The [ remaining ] buildings are what we call the Historic District, which are unique retailers that are harder to find, not on every corner in New York, and we think will continue to be the type of retail that New Yorkers will seek. And at the very bottom of the page, 250 Water Street, which we recently announced our filing to move to air rights and redevelop that parking lot into 2 towers, including some low-income housing that has not been available in this district for a very long time and we think will be a great benefit to the city of New York. So quickly, the greens is our transition and how we improvised, adapt and overcame on the rooftop. And we lost the summer concert series, and as a result, we're in risk of losing our great sponsorship business, sponsorship with folks like Chase, Lincoln cars, [ PepsiCo. ], Grey Goose, go down the list, Heineken. And instead of kind of giving up on that business, we decided to shift, and we created these great socially distant green areas that folks could rent out on the Seaport. And it actually delivered over 42,000 guests, with a 20,000-person daily wait list. It increased our social and media presence in ways that we never expected. And just to give everyone an appreciation for what we have, just a quick clip here to see exactly what The Greens is. [Presentation]

So now for the winter, we've transitioned from the summer greens to the winter greens, where now instead of renting an outdoor lawn, you can rent an indoor, what I -- I guess we could call it an igloo, where you have incredible views of the Brooklyn Bridge, The Statue of Liberty, food catered by Jean-Georges and cocktails by Dante, which has been named the second best cocktail bar in the world. And it's just a great opportunity for folks to be activated for us to generate great experiences for our sponsors and maintain that sponsorship income while keeping the peer relevant during a pandemic. We've also, in a couple of other ways, try to make lemonade out of lemons as it comes to the Seaport by installing -- we're having ESPN install this studio on the roof deck, where they've been broadcasting their Sunday football countdown as well as Monday night football. And we've taken the opportunity, why we've enclosed, to install glass doors throughout the lower level of the Seaport so that we can have a climatized dining experience for all of our restaurant towards year-round and really activate that taste in a way that will be critical, especially coming out of this pandemic. Restaurants will be opening. And in fact, most of the restaurants are opening now, including The Fulton, Malibu Farm and Cobble, Andrew Carmellini's 2 concepts will open in the spring as well as Andrew (sic) [ David ] Chang's Ssam Bar, which is relocated from the East Village. We took advantage of the construction halt in New York, which delayed our construction of the Tin Building for 3 to 4 months and really focused on what we needed to do to make sure that Tin Building was most successful. Again, this is a 53,000-square foot food hall by Jean-Georges. And we have completed the exterior and have refocused the interior modestly to make sure that we can accommodate the growing demand for e-commerce. We made some key hires that are experts in that area, redesigned some square footage for the appropriate staging, both cold storage and warm storage, and are ready to make sure that when we open, we're going to be able to handle both the in-person shopping as well as the e-commerce shopping effectively. Turning to the balance sheet before we open up for questions quickly. We're excited, not just for the things that we've talked about today, the strength that we've seen in home sales, the strength that we've seen in the lease-up of our apartments and the resiliency of our portfolio, but also excited that as we are hopefully coming out of this pandemic and as those vaccines are distributed, our balance sheet has never been better. We have over $1 billion of liquidity, very few debt maturities over the next few years and actually, through our bond deal a little over a month ago, increased our unencumbered asset base by over $1 billion on book value of assets, really drove increased financial flexibility so that this company can move with great alacrity as demand returns and we can get back to building, developing great amenities throughout our communities. So I guess, if I were to sum it all up before we move on to questions, I would say we have seen excellent new home sales, which for us is a great leading indicator for land sales. Our operating assets in multifamily and office have been tremendous, and we are seeing real-time improvements in our retail and hospitality portfolio. Ward Village has been incredible, 91% pre-sold despite selling for the last 2 quarters entirely virtually as travel has been completely shut down to Hawaii. We've improvised and adapted at the Seaport to make great adjustments as a result of the pandemic and have generated a huge response that has really demonstrated the viability of the Seaport, not just for folks in the Seaport District, but for all New Yorkers that have lined up 20,000 deep to get on the roof this summer, and we've made incredible progress in the transformation plan and reducing our run rate G&A. So with that, I'll wrap up my prepared remarks and make sure that we've left some time and encourage anybody who has some questions to put them in now.

All right, seeing no questions. I think we'll wrap up. Thank you all so much for the time. I appreciate you joining us to learn a little bit more about Howard Hughes. We are always available to follow-up with any investors that -- before I do, we have a question. So the question comes in and says if the home developers that acquire the residential land with default before delivering the house, do you have any clause to take the land back? So we're selling to local and national homebuilders that are then in turn selling to home buyers and then the homebuilders are building the homes for the buyers. Look, if we -- there have been times where we're selling individual custom lots to homeowners themselves, and in those situations, we have a requirement to develop on those [ lots ]. We prohibit speculation because we require that [indiscernible] and flip it. We disproportion -- a certain period of time, there are fines and fees that we can assess that encourage people to move quickly. We have very rarely had any defaults in that area, but these national and local homebuilders are those that have strong balance sheets. We make sure that they have the financial wherewithal to develop that community that they're taking down before they do, and we've never had a situation where a homebuilder has not had the financial ability to finish that community that they built. We have another question that's come in. Can you share how many years of land inventory you have? We can, and we disclose that every quarter within our supplemental information package, and it's on Page 22. This quarter, we detail all of our land holdings. So from a residential perspective, we have just over 6,000 residential land acres that would sell out between 2031 and 2039. The Woodland Hills in Houston is a 2031, Bridgeland in Houston is 2034, and Summerlin in Las Vegas, we expect to sell out for 2039. So decades of land left to sell. And by the time we run out, we will have grown our recurring NOI to a level that I think will be substantial, such that the loss of revenue from land sales will be a very small impact to the company. Next question. What kind of demand are we seeing from major employers looking to move operations to tax-free states like Texas and Nevada? We have seen some demand, and we just announced a corporate relocation from the West Coast to The Woodlands for a company called SmartDraw, which we are thrilled to welcome to The Woodlands and have plenty of offerings for them. We have not -- there hasn't been a very deep pipeline, as I think a lot of companies right now are assessing their current needs, but we are out front and very aggressive in seeking corporate relocations. We are out talking to companies on the West Coast and the East Coast and the Midwest and hammering home the benefits of why they would want to be located in a great master planned community like The Woodlands, like Summerlin. Low-tax state, well-educated low-cost workforce, business-friendly environments, incredible housing offices in short commutes for both your entry-level employee and your C-suite, incredible schools for the kids of your employees to go to and a lifestyle that is candidly beyond compare with most other communities, given the incredible amenities we have, the outdoor access to great outdoor areas, walking trails, biking trails, nature, et cetera. So we're very excited about that opportunity, and we continue to aggressively pursue corporate relocations. All right. Next question. Most REITs pay a dividend. What is the long-term dividend you expect to see? Well, we're not structured as a REIT, and we still have net operating losses that were generated from the spin-out of GGP over 10 years ago that should last us through at least the end of 2021. And as a result, we are not in REIT so we're not required to pay dividend. For us, the highest and best use of our capital allocation has been to reinvest in our communities where we have these unique control provisions, this unique opportunity to accelerate that virtuous cycle of value creation we talked about earlier. Secondarily, we have also allocated some of our capital towards share repurchases when we've seen risk-adjusted returns at an outside level by buying our own shares. I think that it's unlikely today that we would pay a dividend because we have just better uses of that capital in terms of investing in our own portfolio or buying back our shares, and that -- the capital that we would potentially dividend out. I don't want to have to go back out and raise it and dilute our shareholders. I want to make sure that we're self-funding ourselves using our free cash flow to execute on our development. The next question is can you discuss the balance sheet and under what circumstances you would issue additional equity? I had hoped when I joined the company 4 years ago as CFO, that we would never be in a position to have to issue equity, and then our self-funding mechanism would sustain us to a point that we would never have to dilute our shareholders. As a shareholder myself, it's something that is a very difficult decision and one that is very hard to make. I think the pandemic was very unique as it had the impact -- the potential to impact our business in ways that we had never seen in another down cycle. The potential of losing condo sales in a recession was real. Would people continue to buy homes in the midst of a pandemic, which is absolutely uncertain? And I never expected to be here 6 months later showing record home sales. And we absolutely anticipated the impact it could have on our retail collections, our office and multifamily. And as a result, we wanted to make sure that we had the liquidity, not just to withstand this darker storm, but to make sure that we were prepared for the worst and hope for the best. We're grateful that we got something closer to the best and far from the worst. And as a result, we have this incredible liquidity, but I don't see any future requirement or need to issue equity. And the business plan is predicated on self-funding using our free cash flow rather than issuing equity to execute on our growth plans. Next question is, is there any interest in The Woodlands by Tesla employees? Look, I think that we have interest in The Woodlands from all sorts of employees, and those that work or have jobs in and around the Houston area often seek out the great schools, amenities, infrastructure of The Woodlands because it does offer something that most other places in Houston cannot. Next question is who are your top tenants and what is your larger exposure to a single tenant? Quite clearly, our largest exposure based on our acquisition at the end of 2019 is Occidental Petroleum. It is a credit that has, as a result of the pandemic, been impacted in a negative way. And we watch it very, very closely. But we feel very good about where we are as a landlord in their capital structure and have some very smart folks subordinate to us, whether it's Warren Buffett or Carl Icahn, in their capital structure and feel good that, that is a company that has a long-term sustainable business plan, especially as we hopefully emerge from this pandemic over the next 6 to 9 months. The next question asks, do you have a consistent formula for the amenities that you offer in each community or is it subject to regional needs? It's both. And we -- there are some that are very consistent from community to community. Great schools, we need to make sure that we help invest in school systems, both public, private and charter. It's great walking trails and amenities. And some of those do differ. In Las Vegas, we have access to hundreds of acres of natural conservation lane in Red Rock National Park which is an incredible amenity. They just obviously can't be recreated in The Woodlands. But in The Woodlands, there is the Lake Woodlands, which has great boating, kayaking, canoeing, et cetera. And it's slightly different, but I think the formula is consistent in that we want great schools, great outdoor amenities, a rich, walkable amenity-rich urban environment for office workers, multifamily tenants and retailers to thrive. Running short on time, so last question. Can you talk about the potential to REIT and stabilized NOI? So we have the opportunity -- we could execute a REIT conversion, but it would also impact one of our greatest benefits of our business plan, which is our self-funding business model. And then if I were to convert to a REIT and be forced to dividend out our free cash flow, I'd now need to raise equity on a consistent basis to execute on our business plan. And today, with NOLs in front of us, a low corporate tax rate and the negative impact to our self-funding nature, we're not pursuing any of a reconversion in the near term. So I think with that, having hit the 30-minute mark here at our time, I'll wrap up. I'll thank everyone again for joining us. If there are other questions in the future, we are always available. Please feel free to shoot us an e-mail through our website on the Investor Relations tab, and we will absolutely set up a time to talk and get back to you. Thank you again, and we really appreciate your interest in Howard Hughes and look forward to connecting in the future.