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

Hello, and welcome to NAREIT 2021. I'm Alexander Goldfarb, Senior REIT analyst at Piper Sandler. Today, we're very pleased to have with us David O'Reilly, CEO of Howard Hughes, which is the leading master plan community developer in the country. So I will turn it over to David.

I appreciate, Alex, and thank you for joining with me today, and I'm thrilled to be here at NAREIT again. I figured I would start off with just a couple of minutes on our business, how we go about making money and creating value for our shareholders, talk a little bit about how that strategy has translated into some great results coming out of the pandemic. And then leave plenty of time for both Alex, your questions as well as the questions that come in from the audience through the chat feature that's available to everyone joining us today. So first, a little overview on Howard Hughes. At the end of the day, we essentially own large communities or master planned communities. We're the dominant landowner of residential and commercial land. Those communities are the Woodlands, Bridgeland and Woodland Hills in Houston; Summerlin in Las Vegas; Columbia, Maryland; Ward Village in Honolulu; and the Seaport in New York City. In these MPCs, we basically play SimCity. We decide where the roads go, the hospitals, the office buildings, retail, homes, et cetera. And by having control and by being the decurrent or the controlling entity of the Master Planned Communities, we create both an operational and financial synergy that are sustainable and drive value creation for our shareholders for the past several decades and for decades to come. The first is an operational synergy. It's our virtuous cycle of value creation. We sell land to homebuilders, who build homes and bring in residents to our communities. Those residents demand commercial amenities. We build those commercial amenities such as retail shopping centers, office buildings, restaurants, et cetera, at outsized risk-adjusted return. By amenitizing our communities, we make the communities more desirable, more people want to live there. Homes are worth more, and our remaining land is worth more, and that goes on and on. The second synergy is the financial synergy, really driven by our structure as a C-corp, where we're able to use the proceeds from selling our residential land, the net operating income from our operating assets and the profitability from our condo sales in Hawaii to entirely self-fund our commercial development pipeline, which has, on average, been over $1 billion a year in new development and value creation. Today, we have nearly 7,000 acres of remaining residential land and 3,100 acres of commercial land for development, basically, decades worth of development opportunities, where we're going to essentially turn vacant land into income-producing assets in these markets where we have unique controls and very little competition. As I said, we've historically invested about $1 billion annually, where we've earned an unlevered 9.6% return on cost and approximately 24% return on equity. At Ward Village in Honolulu, we've sold approximately $3.6 billion of condominiums, with an average margin of 30% since 2014. Shifting now to our most recent results coming out of the pandemic. We've shown incredible resiliency across our portfolio. Over the past several quarters, despite what's happened with COVID 19. It's really a reflection of the exceptional quality of our communities, which are consistently ranked among the best places to live in the nation. We're in excellent locations in low-cost states, and we provide the safety, security and sought-after amenities like walkability and wide open spaces that are so important today. In our MPC segment throughout Houston and Las Vegas, we saw robust demand. The flight to quality continued to come in with increasing demand from high-cost states like California and other states in the Northeast. Further driven by the acceptability of work from home, we signed 35% increase in new home sales across all of our MVCs in 1Q 2021 versus the first quarter of 2020. This drove an increase in our earnings before taxes in our MPC segment of 44% year-over-year. It gave us the confidence to increase our guidance, $30 million to a range of $210 million to $230 million for the year. In our strategic development segment, we sold 46 condos in Hawaii in the first quarter, a 64% sequential increase. Our current buildings are under construction are already 91% sold with 20% hard deposits from our buyers. We'll close out Honolulu at the end of this year, 2021 and finish Koula, our next tower at the end of 2022. While we also started construction earlier this year on our seventh tower, Victoria Place, which is already 85% presold. In our operating asset segment, we saw the continued rapid lease-up of our latest new developments. Our collections and occupancy within our retail and hotel assets continue to show signs of improvement. And the Las Vegas ballpark is now opened and going to complete -- almost a complete season now at full capacity. Our NOI of $52 million in the first quarter increased 10% sequentially, and this was really driven by a 20% sequential growth in our retail portfolio, primarily driven by Downtown Summerlin and Ward Village. At the Seaport District in Manhattan, we saw continued success at The Greens with over $5 million in revenue generated since launching, a little bit less than a year ago. We received the approval from the Landmarks Preservation Commission on our proposed design at 250 Water Street, which is a major hurdle and cleared the way for us to pursue the ULURP process, which we hope to complete by the end of this year. The Tin Building construction is progressing just as we anticipated, with the completion expected at the end of this year and the grand opening in early '22. And the new concepts that are opening at Pier 17, such as Carne Mare, Mister Dips and David Chang Sambar are all opening up already or in the next coming weeks. So in summary, I would say that we have seen resilient performance despite the pandemic. We have the communities that people want to live in, they want to work in and they want to play in. And this positive momentum in home sales should continue to fuel strong land sales across our MPCs, and that will combine with our improving NOI and sustained strength in the condo market in Hawaii. All of this should lead to great positive cash flow that will self-fund the 2 million square feet of new developments we've recently announced and are underway. Those new developments with our seasoned team and 50 million square feet of entitlements in place, combined with our strong balance sheet with over $1 billion of liquidity, gives us the opportunity to drive meaningful net asset value accretion for our shareholders over the coming quarters, years and decades. So I'll pause there and wrap up my prepared remarks and give Alex a chance to fire away.

Sure. Well, thank you, David. Maybe for the first question. You've been at the company now going on 5, 6 years. You've been intimately involved in a lot of the decision-making, the strategic overhaul of a number of years ago, but you are now officially the CEO. And as is often the case, when new CEO comes in, he or she may make their imprint, maybe change a few things, tweak, sometimes wholesale, sometimes just little things here and there. What would you say has changed? Or what have you brought now that you are CEO versus before you were CFO?

Well, look, I think that there was not a wholesale strategic shift or a meaningful change in what we do every day at Howard Hughes as a result of my appointment from CFO to President and then to CEO. It was a gradual evolution of our strategy that we highlighted about 1.5 years ago when we announced the transformation plan. We are sticking with our strategic announcement at that point. I would say that if I were going to put my fingerprint on anything, it would be on the pace under which that we will endeavor to monetize our commercial land. The rate under which we see we can monetize that land and drive value creation, increases in NAV per share at a faster pace than we historically have. I think we can do this by not just doing what we've historically done year in and year out, which is deliver great office, multifamily and retail developments across our communities. But by expanding our strike zone in terms of the type of amenities that we can build and create for our residents and introducing more medical office, introducing single-family for rent, thinking about senior housing and condo opportunities away from Hawaii within our core MPCs as a way to diversify our product offering and execute on that acceleration.

Perfect. And then when we -- you mentioned the Aviators, your AAA [ form ] team in Las Vegas, which I have to point out, as you guys have pointed out, as better attendance than the softball team in Miami, the Miami Marlins, I believe it is. So that's kudos to you. But can you just talk a little bit about what is lingering from COVID? So how much of Howard Hughes is still lagging because of the lockdowns and the concerns that shoppers or travelers may have had over COVID versus the other side of your business, the housing market, the MPCs, which can imagine they could get any hotter. So maybe you could just provide a little sense for how the operations are running, what you need to still have recover and what a timeline is on that recovery? And then what is the stuff that's certainly in the red zone.

Yes, absolutely. So perhaps I'll punt on providing an exact day when we fully recover, Alex. But I think it's a great question. It's something we spend a lot of time talking about. And you probably recall from our Investor Day, which we did a few months ago, where we walked through an illustrative NAV of the company. And one of the things we did after we showed a potential NAV of the company is we showed the impact of a return to pre-COVID NOI levels across the portfolio. And that was a $30 delta. And that delta was largely concentrated in 3 sectors -- segments of our non-operating income within our operating asset segment. The first, clearly, retail. Lots of headwinds in retail during the pandemic, but we saw a very quick recovery and resiliency in Downtown Summerlin and the smaller retail holdings we have in Houston and Colombia. Collections getting up to or beyond 90% and a rapid rebound in the NOI. Where we haven't seen as quick a recovery has been in Hawaii and our Riverwalk asset in New Orleans. And that's largely because those assets are dependent on travel and tours. I mean Hawaii, clearly, travel and tourism is driving the demand on those assets beyond just our local residents in Ward Village. And as we've seen some return of domestic travel in those coming from the mainland U.S., we have not seen the return of the Asian travelers back to Oahu yet. And I think there we'll still seek some continued headwinds there and a slower recovery of that retail. In New Orleans at Riverwalk, that is going to be largely dependent on the return of the cruise ship industry. It's an asset and outlet center that sits right on the cruise port in New Orleans. And as cruise ships get going again, which we hope are very soon, and we hope that they're full very soon, we think that, that asset will snap back pretty quickly. So that's the first leg and the largest leg of the stool in terms of the recovery of the value of the company. The second is our hotels. We have 3 hotels here in the Woodlands and Embassy Suites, The Westin and a resort Conference Center. They continue to do better. And we went from meaningful losses during the depths of the pandemic a year ago right now to break even in the fourth quarter and the first quarter of this year. And we think that we continue to drive positive NOI over the coming quarters as we see the slow but meaningful rebound of leisure travel, of business travel and the early stages of kind of the green shoots coming for convention and conference business. We haven't seen the traffic hit the properties yet, but there are some pre-bookings out there in the back half of this year and in early '22. And we're optimistic that we'll be able to execute on those pre-bookings as people become vaccinated and they feel safer, getting in large groups and gatherings on a more regular basis. And the final piece of the puzzle, as you mentioned, is the aviators. And we went from 2019, where we averaged over 9,500 fans and generating NOI of about $8.5 million. So losing close to $4 million last year. This year, we're going to be about 10 games short of a full season, and our first home stand was a limited capacity. But since then, we've been at full capacity and filling the stadium pretty regularly, which we're very excited about. So we think we have the opportunity to get not all the way back this year to where we were in 2019, but hopefully, most of the way, based on the performance we've seen to date.

Great. And now maybe we can talk a little bit about housing. I don't know that everyone appreciates the housing structure that you -- that Howard Hughes has, the profit participation. And then also the tight range that you have that you keep on the homebuilders that they're only taking down enough land that they can sell. But maybe you can just give a little framework on what's going on with housing today. Is it the superpads, the Discovery, mega and luxury sales that are driving it? Is it the more starter homes? So what is the composition? Where do you see the most demand? And then is the market too hot? Are there concerns that this is not sustainable? Or the view is that because housing was down and out for the past decade, there's a lot of catch-up that needs to be done because we're simply unwinding this sort of over renting that everyone is living in the cities now they're all living in the homes, and so that's all we're shifting -- that's all we're seeing in the shift. So maybe some commentary there.

Yes. And maybe I'll start there, Alex. We saw almost a decade's worth of what we had largely anticipated was a generation of delayed home buying and those that were slower to get into homeownership and wanted to rent for longer. And I think this pandemic really accelerated the unwind of that trend and the long overdue increase in millennial home buyers, which we are absolutely seeing in great numbers across our communities. I very much view this as sustainable. I do not see this similar to what we saw in the last cycle, where we had homebuilding on fire, but it was people building homes or building homes, that were mortgaging homes, that were financing homes. There weren't jobs or people behind those homes. They were lots of flips and lots of people owning 2 or 3 homes at a time. These are primary residents. These are people that are living in these homes. There's people that are bringing their jobs to our communities, that are leaving some of those areas in a flight to safety and a flight to quality of life and a flight to communities with great outdoor amenities and walkable infrastructure that we have in our Master Planned Communities. And I absolutely believe that's sustainable. I think that, that's a trend that's been going on for a long time and one that truly accelerated during the pandemic but our home buying has been across all areas. We have seen an incredible increase in the Woodland Hills, just north of the Woodlands here, which are typically a starter homes, and we have homes there in the mid-200s and up. And that has been saw a massive increase in home sales year-over-year. But we've also seen that same increase in the multimillion-dollar lot purchase price in our exclusive community of the Summit, and it's really everywhere in between. And we're seeing that flight to quality, not just of residents in Houston coming to the Woodlands or Las Vegas going to Summerlin, but that out-of-state migratory patterns that have accelerated of those coming out of the West Coast, specific Northwest and Northeast, seeking those amenities and quality of life that I highlighted earlier that has become more and more important to these younger families and these more diverse families are coming to our communities every day. You also asked at the very beginning, Alex, about the structure under which how we sell. And yes, there are different structures, and they're all running largely the same way. We're selling individual lots in Houston and superpads in Summerlin, but we're only selling land to homebuilders, as you mentioned, to keep up with underlying home sales. So that we're not overselling our land and providing too much supply into the market at any point in time. And we're always selling our lots with not just a price per acre and a takedown schedule. But as you've mentioned, a residual participation. And that participation is typically between 17% and 20%, where if the home is sold at a price above where we indicate at the bid, we get to share in our 17% to 20% of the upside above that. So if the market is on fire like it is today, and home prices are rapidly appreciating, we're getting our fair share of it despite the fact that we may have sold that dirt 6 or 12 months earlier.

And that translates to real dollars. I think that you've said it's been maybe $20 million, $40 million or something in that magnitude annually, which is really impressive.

Well, it's hopefully nonrecurring because I would love for it to be 0 because it means we priced our land to perfection. But in a market like today, where things are moving faster than we can keep up with pricing and homes are selling 6 months after we're selling the dirt and the price is moving, it has become a very meaningful portion of our P&L. I will highlight it as a one-way option. So that if there is an unforeseen downturn in the housing market, we are not writing checks on make wholes. It is just a one-way to us on the upside.

So let's go to a place that's not known for low cost, Hawaii. Certainly, unless you're up and want to be Ironman and row your boat there, you have to hop on a plane. It's about -- even from the West Coast, there's about a 3- or 4-hour fight, very expensive. And yet you -- well, Howard Hughes has seen tremendous demand. First, from Hawaiians looking for affordable housing closer in to avoid the commute to Honolulu. And now from people from the mainland from the West Coast, looking for either to play the sort of chaos of what's been going on or a second home. But it's easy for investors to understand the allure of Summerlin or Houston, given the low-cost and the pro-growth attitude of those markets. Hawaii is sort of high cost, not exactly pro-growth, and yet it has the same attraction to the buyers and I don't think you guys can build condos quick enough to satisfy the inbound demand for buyers. So maybe a little bit more color on Hawaii. And as you roll out, I think you announced that your intention is to roll out another 1 or 2 towers in the next 6 to 12 months. Your thoughts on the positioning of what those towers could be?

Absolutely. Well, it's a great point, Alex. And while it may not have some of the affordability traits that we see in our other communities, it does have so many of the other traits that make a great Master Planned Community. It has great access to infrastructure. It has an incredible amenity base as a level of safety and security that is unmatched in the surrounding area. And I think that's what's driven some of the premium and continued absorption at Ward Village to those same traits. But there has been a shift in buyer, and you alluded to a little bit in your question, pre-pandemic, we saw about 50% of our buyers local from Oahu, about 30% from Asia, primarily from Tokyo. 10% from mainland in U.S. and another 10% could be scattered depending on the tower. During the pandemic, we saw a modest decline in the local buyer from 50% to, call it, 35% or 40%, and an increase in the U.S. buyer from 10% to approximately 25%, predominantly coming from the West Coast. And again, in a world of work from home, at least part-time or having more flexibility in the workspace, to have an incredible opportunity to live in a condominium on the Ala Moana Beach Park, a 100-acre Beach Park immediately on the South Shore of Oahu, one of the best surf breaks in the South Shore in my most opinion, I think, is a great opportunity that folks jumped at. And I think we're offering a compelling opportunity in these towers to have world-class living, world-class amenities with an incredible landscape of what is beyond of Oahu and Hawaii. So we're blessed that we have that opportunity and we've been working quickly to execute on. Victoria place, which was our seventh tower, it's our fastest selling tower ever. And we're 85% pre-sold now, and we just broke ground earlier this year. So we're trying to capitalize on that momentum. And as you mentioned, we are in the process of finalizing our approvals, which we just received for the next 2 towers, one of which will be a market rate tower, another which will be a reserved housing tower. That reserved housing tower will fulfill all of our reserve housing requirements on the island. And for those of you who are less familiar, we have 9.2 million square feet of entitlement, 1 million square feet are for commercial and retail on the ground floor. And the remainder is for residential for sale that we're building, 20% of the units that we build have to meet the workforce housing criteria. So you can't make more than so much beyond the median income of the island, and it's typically the local buyer and reserve for those that are part of the workforce on Hawaii. And it's also part of our commitment in all of our communities to make sure that we're delivering an affordable product in all -- every community in which we operate.

Okay. Let me see if there are any questions from the audience, I believe there is a chat feature in the Zoom that the audience is watching. So let me give it a minute or so and see if anyone wants to pop anything into the chat, so we'll wait right there. And maybe while we're waiting for those people to put in their questions, we'll ask about the Seaport. You mentioned in your opening remarks that you've got the initial approval, obviously in New York, ain't for the faint of heart. Development is an active skill and sort of a bit like ice hockey. But maybe you can talk a little bit about the tower and then the peer reopening, you have some leasing yet to do. You have the Tin Building, and you've had a lot of stuff going on. At the same time. I think as you have pointed out in your earnings calls, during the height of COVID, your roof deck was sold out in the summer, in the winter, your warming huts or ice huts, were also sold out huge weight list. So it was sort of a juxtaposition of closed restaurants, active roof vice versa, but maybe you can give us a little bit of the latest and maybe some people in that time will put in some questions they have.

Absolutely. So starting with 250 Water Street, which is the parking lot that you mentioned in the beginning of your question, Alex. We received approval from the Landmarks Preservation Commission, which really allows us to proceed. It was the last major hurdle that allowed us to proceed with the ULURP process. And that's the process that we expect will take the balance of this year to hopefully gain approval of. Obviously, no certainties in New York, but we feel like we've done everything we can to position ourselves well to deliver that building that has incredible community benefits in terms of both affordable housing and an endowment to the Seaport Museum that should ensure its viability on a go-forward basis. As far as the peer goes, yes, we're back, hopefully having concerts in the second half of this summer. The Greens are back open on the rooftop and doing very well. We're excited about the continued success of The Greens, even though social distancing is starting to evaporate slowly. And we're reopening the restaurants on the peer across the board. Malibu Farm remains open. The Fulton by John George remains open. David Chang reopened his -- what was Bar Wayo and to the Ssam Bar, moving that location from the East village to the peer, which we're incredibly excited about. And just recently, this past week, Mister Dips, which is a fast-casual burger and shake opportunity from Chef, Andrew Carmellini opened. And his Italian Chophouse is now doing friends and family will open in 2 weeks. So we're really excited about that. The Street area between the restaurants on the peer, which has now been climatized with the installation of incredibly large glass doors that can open and close, depending on the weather, will be fully opened in July. And we're really excited about the opportunity that, that brings for expanded indoor and outdoor seating for all of our restaurants throughout the year. We have ESPN and Nike on the office floor of the third floor of the pier, and we're in the midst of trying to lease the fourth floor. And we have about 70,000 feet to lease at the Seaport, which we're very much focused on. And just now, we're starting to see that leasing pipeline rebuild itself coming out of the pandemic. So we're cautiously optimistic that we'll be able to continue to execute on the leasing strategy there and get some office tenants in the door. And obviously, getting those office leases signed and getting folks in the building, getting the restaurants stabilized and completing the Tin Building at the end of this year, the 50,000 square foot Food Hall being curated by John George, all unlock tremendous value, especially and coupled with hopefully the approval of the air right transfer to 250 Water Street. All unlocks a tremendous amount of value for our shareholders at the Seaport and helps us execute on the vision that we have laid out for the Seaport, which is to be one of a kind entertainment and dining destination for New York, all New Yorkers, not just lower Manhattan, but all of those in Manhattan that have the opportunity to experience what we've been able to put together with the Seaport.

No, that's perfect. And then maybe going to Chicago, you're about to open 110 North Wacker, certainly a marquee trophy building. Capital markets are surging back. All we hear from folks is capital, capital, capital, washing capital. No need for a mortgage, will you take my cash? Where do we stand in the marketing process and expectations? I would assume this will go in a pretty penny, tight cap rate, high per-pound valuation. But what can you tell investors?

Look, also I might have you do my marketing for me on the sale of that building because I agree with you. It should trade at a very tight cap rate and a high price per square foot, which is -- which would be a great benefit for our shareholders and highlight the value creation that we executed on the redevelopment of that site. We're in the very early stages of marketing. And while I agree with you that the capital markets are full with capital, processes on building sales have taken longer in a post-COVID world. So we're moving quickly, but thoughtfully, and we're going to wait for the right transaction, not the first transaction. So that process has just started, and we'll keep everyone updated as it progresses.

Okay. And fittingly, we'll close with a question from the audience. So David, you mentioned that Hawaii state laws facilitated your development of housing on the island. How are you tackling this issue in the mainland U.S., more specifically in your luxury prime locations? So if I can embellish, maybe talk a little bit about some of those affordable learnings that you may be bringing to Summerlin, Woodlands, Bridgelands, Woodland Hills, Columbia, Maryland, et cetera.

And even in Colombia, where we have 9 million square foot, 14 million square feet of entitlement, part of those entitlements will be absolutely focused on delivering affordable housing to Columbia, which is much needed. In Summerlin, we are working hard with our homebuilding partners, making sure that we're delivering price points of new construction homes as low as we possibly can to make sure that we are as an inclusive and welcoming community and affordable community as possible. 3 years ago, we were very concerned as Summerlin's starting new home price entry-level for the cheapest new home you could get in Summerlin was $400,000 and up. And unfortunately, that only represented about 30% of the new homebuyers in Las Vegas, not enough. So we worked hard. We created a more dense product with our home building partners. We laid out a design that we thought was both thoughtful and appropriate with the community, and we're able to introduce a housing product over 25%, $100,000 lower, starting in the low $300,000s. As a result, we've been able to access a much larger portion of the home buyers universe and have a much affordable -- much more affordable price point in that community. In addition, we're also building multifamily. And that is a way for those that want to get into a community that may not be able to afford to buy at this point in time to get access to those great schools, those great amenities, that quality of life that we offer in Summerlin, Woodlands, Colombia and Bridgeland. And as I mentioned earlier, we are also starting to look at the single-family for rent, which we think is a great additive product that will help hopefully meet the demands of those that want to rent by choice or perhaps can't afford to buy at this point in time.

Well, that's a perfect way to end it. So thank you, David, for participating. Thank you, everyone, for joining today. Obviously, if you have any questions, you can reach out to me, Alexander Goldfarb at Piper Sandler; David O'Reilly and his team at Howard Hughes or the folks at NAREIT. But again, have a great virtual event, and we look forward to seeing everyone in person in Vegas. So take care.

Thank you, Alex, and everyone. Appreciate it.