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

Good morning, and welcome to the Howard Hughes investor conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Saxon, Investor Relations Associate. Please go ahead and begin.

Good morning, and welcome to the Howard Hughes Corporation's investor call. With me today are David O'Reilly, Chief Executive Officer; Jay Cross, President; Correne Loeffler, Chief Financial Officer; and Peter Riley, General Counsel. Before we begin, I would like to direct you to our website, www.howardhughes.com, where you can download both this morning's press release announcement and investor presentation that will be referenced during this call. Certain statements made today that are not in the present tense or that discuss the company's expectations are forward-looking statements within the meaning of the federal securities law. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. We are not under any duty to update forward-looking statements unless required by law. I will now turn the call over to our CEO, David O'Reilly.

Thank you, John, and good morning, everyone. Thank you all for joining us on what is an incredibly exciting day for the Howard Hughes Corporation. Earlier this morning, we announced the acquisition of Douglas Ranch, HHC's largest MPC yet, spanning 37,000 acres in Phoenix West Valley. We could not be more thrilled to put our capital to work on the $600 million all-cash transaction, which further solidifies our position as the nation's leading developer of large-scale master plan communities. We acquired this MPC from a claim sports executive, Jerry Colangelo and his team at JDM Partners along with Eldorado Holdings. JDM and Eldorado will both remain as our 50-50 joint venture partners for the launch of Trillium, the first 3,000-acre village of Douglas Ranch. Acquiring an MPC of this magnitude is a rare opportunity and the actions that we've taken to strengthen our balance sheet and build our quality executive team have positioned us to take Douglas Ranch and mold it into one of the leading MPCs in the country. This MPC has the potential to scale to 100,000 homes, 300,000 residents and 55 million square feet of commercial development, representing a 50-plus year development pipeline. With a sharp focus on sustainability and innovative technology, we see limitless potential to encourage growth and opportunity as we bring Douglas Ranch into the ranks of our other high-quality communities across the country. This acquisition is a great strategic fit for Howard Hughes with characteristics that are vastly similar to our other master-planned communities. Douglas Ranch is perfectly positioned outside the nation's fastest-growing city. The Phoenix market is experiencing rapid expansion, which offers superior demographics due to a robust job market and business environment while remaining one of the most affordable areas of the country. From a capital perspective, we were able to quickly capitalize on this opportunity, given our well-positioned balance sheet, which speaks to our disciplined spending and vigilant sale process of noncore dispositions. We've now effectively recycled the capital generated from noncore sales and deployed those funds into a new core MPC that is massively accretive to HHC, with over $850 million of pro forma liquidity following this transaction, we remain in an excellent position to continue accelerating development throughout the portfolio. As far as timing, we could not be in a better position with Douglas Ranch. While most new MPCs take years of effort in planning before they can realize any revenue, we will be able to see inflows from land sales as early as the first half of next year. This will generate proceeds that will immediately impact our views, proceeds that can be used to fund additional opportunities across the company. Speaking of opportunities. We have a significant runway of future development potential at Douglas Ranch, with in-place entitlements that will unlock generational wealth for the next several decades. The Phoenix region is a dynamic market with resilient activity in the industrial in single-family for rent sectors. Both asset classes would be new to Howard Hughes and would enhance the diversification of our existing recurring income stream. Jay will touch more on this in a moment. Finally, we see limitless opportunities to innovate across this blank slate of 37,000 acres. We have the chance to develop this MPC from the ground up with the vision of distinguishing Douglas Ranch as a best-in-class community focused on sustainability and technology to build the city for the future and a place residents and tenants can live, work, play and discover. When it comes to Howard Hughes' investment criteria, we have a rigorous review process, and Douglas Ranch has the key requirements that we were looking for, starting with its prime location. If you look at our existing MPCs, you'll notice they all reside in your large metro areas concentrated in the Sunbelt region, such as Houston with the Woodlands and Bridgeland, Las Vegas and Summerlin, and the Baltimore DC quarter with Downtown Columbia. Douglas Ranch is directly adjacent to Phoenix. In addition to a prime location, we were also looking for a community in its beginning stages, where we could leverage the expertise and best practices from our other MPCs to incorporate thoughtful design and create a sustainable environment and Douglas Ranch is essentially that, a blank canvas on which to create a premier master planned community. When you put together the qualities of this transaction, what we have is a shovel-ready MPC with the entitlements and planning already in place. Its location is ideal and the pro-business low-tax structure of Arizona will continue to be an attractive drop for future residents and tenants, which will translate into significant opportunities for years to come. I'd now like to hand the call over to our President, Jay Cross, who will discuss the growth taking place in Phoenix market and highlight the opportunities that lie ahead. Jay, over to you.

Thanks, David. As already mentioned, Douglas Ranch is located in Phoenix's West Valley, but more specifically, it's situated in the city of Buckeye, a location which is poised for outstanding growth in a start for new product and more space as migration to the area continues to rapidly flow west. This demand, which will be dominated by Douglas Ranch for decades to come. If you look at the images on the current slide, you will see a red dotted line bisecting Douglas Ranch, which is the expected path of the future I-11 interstate. Upon completion, the interstate would further enhance transportation access further adding to its list of unique qualities. We want to ensure the development of I-11 is successful and would welcome the chance to donate land to support the collation of this project. If you look at the image on the right, you can see the location of Trillium, which is the site where we will begin residential land sales in 2022. The Sun Valley Parkway runs right along the outer rim of the community, which allows for easy commuting in and out of the NBC for future residents. If we zoom out a bit further, we can see its proximity to other regional hubs, including Las Vegas, the Port of Los Angeles, the Port of San Diego and Mexico. Douglas Ranch has direct access to I-10 and to the future home of I-11, allowing for convenient travel petites around in metro communities. We consider its location situated in the path of such high-growth cities as a strong catalyst for residential and commercial opportunities. On the residential side, the close proximity to surrounding large cities will allow for the continued influx of residents from the West Coast and further afield. From a commercial lens, we see this as an opportunity to develop new asset types such as industrial space as this NBC is ideally situated to become a transportation hub for several industries. Now let's look a bit deeper into the Phoenix market. What made this deal with Douglas Ranch so attractive is the sheer growth that is occurring in Phoenix. Not only is it the fastest-growing city in the country, but it ranks among the top cities and several other categories as well. Home prices have appreciated over 12% for the last decade. Its unemployment rate is lower than the national average, and the Phoenix airport is rated #1 in the nation. From a residential standpoint, there are a lot of positive drivers as the net migration of residents coming into Phoenix is the highest in the U.S. In addition, there's a lack of housing supply in the region, which creates significant opportunity as we began selling residential land to homebuilders. This lack of housing supply in the market also presents meaningful opportunity from a commercial side, there is an established market for single-family build-to-rent communities in Phoenix, and we believe we can deliver additional versions of this product in the West Valley to meet surging demand introducing new product types, such as build-to-rent communities will not only diversify our recurring income stream, it will also further accelerate our development pipeline. Briefly touched on the factors that could transform Douglas Ranch into a transportation hub and what that could mean for Howard Hughes. Phoenix has gained significant traction in the industrial market and currently has over 24 million square feet of industrial space under construction, the most of any other city in the country. Over the last decade, rents have risen significantly while vacancy has consistently declined, which points to strong underlying demand in this sector. Given these strong fundamentals, this will be an asset type that we would hope to develop further in the future as yet another product in our portfolio. With all of the positive momentum in is experiencing, it still remains the most affordable city in America despite the accelerating growth of home prices. This is because the growth in medium income has kept up with the pace of appreciating homes. When you combine the strength of a robust job market, resilient housing market and a thriving local economy, it's easy to see why Phoenix is experiencing such rapid growth. Although the housing market across the country experienced accelerated growth last year, the strength of the Phoenix market is showing continued progression and the outlook from homebuilders shows Phoenix to have one of the strongest housing markets in the country. A lot of this is tied to the economic activity of the city with outsized job growth and population broke, pushing home prices even higher as demand persists. So while the housing market over the last year saw a fast acceleration, there really is no sign suggesting this will abate anytime soon, especially given the fact that demand in Phoenix is so much greater than supply. If we look at this demand more closely, we can see that within Phoenix, the majority of the market is migrating West directly in the path of Douglas Ranch. Just looking at housing permits, we can see that the West Valley has become almost dominant. In 2010, this region had less than 40% market share. Fast forward to 2020, and the data shows that West Valley has taken over 50% of the market for single-family home permits. The demographics of those migrating to the West Valley are largely made up of young families and professionals. And this is only projected to grow faster over the next several years. We are confident that the introduction of new homes at Douglas Ranch will be well received and will attract residents with superior demographics as this data suggests. If you look at the resident makeup of our Summerlin and Woodlands Master Plan Communities, the demographic profiles far exceed their nearby markets in Las Vegas and Houston. And we look forward to replicating that at Douglas Ranch. Overall, we are really in an exceptional position to capture the growth happening in the Phoenix market. Now for some background on Douglas Ranch, JDM originally acquired this land back in 2002 and brought on Eldorado as a partner in 2005. It's important to highlight the groundwork administered by these prior owners over the last 2 decades. JDM and Eldorado were able to establish a master plan of the city, obtain the necessary entitlements and assemble the land, which is now entering to its first contracts with homebuilders. In addition to being highly reputable developers, both JDM and Eldorado were some of the largest landowners in the Phoenix area and their dedication to this NBC is a testament to their confidence in Douglas Ranch and the entire Phoenix market. All the initial planning and work that JDM and El Dorado have done over the last 20 years has set up Douglas Ranch to be shovel ready with land sales expected in early 2022. So let's focus specifically on Trillium for a moment. Trillium, which is the first village of Douglas Ranch is direct access to the Sun Valley Parkway, a 4-lane thoroughfare that gives the community direct access to I-10 and a 303 Loop, which is already yielding growth to the north and the south on property. We are excited for what 2022 has to offer with the delivery of lots to homebuilders in Trillium. These initial sales are expected to contract around $300,000 to $315,000 per acre which is a significant increase from our basis at Trillium at $39,000 per acre. The fact that we can close in this deal and then months later sell land at 8x our land cost truly represents the value of this acquisition and it's just the tip of the iceberg. Just before in this, I would now like to hand the call back over to David.

Thank you, Jay. On the topic of land sales, we see significant room for growth as we always make it a priority in our markets to be a price maker, not a price taker. While we expect to achieve a premium price for our land with these initial sales that Jay just alluded to, we don't expect it to stop there. Looking at the price appreciation of our other MPCs outside of Las Vegas and Houston, we have been able to achieve consistent pricing growth between 5% and 10%, and we would expect similar results at Douglas Ranch over the long term. Finding an MPC like Douglas Ranch that is both shovel-ready and fully entitled was another critical selling point for HHC to move forward with this acquisition. While a typical developer will spend years to curing entitlements and planning on top of spending millions of dollars, we were able to bypass that process with Douglas Ranch, which is now entering the land sales phase and will become immediately accretive to Howard Hughes. As these land sales accelerate over time, we will be able to generate meaningful cash flow that can then be used as the equity capital for future commercial developments in this MPC, thereby growing our stream of recurring income and enhancing the value of the remaining residential land. As we look forward to our near-term goals, we will be focused on delivering lots to homebuilders at Trillium. We feel confident we can deliver over 1,000 lots next year, largely because the builders will be offering housing options across a wide array of price points. This will ensure we were able to keep a robust sales pace, which will bring more residents into the community. Another aspect that makes this MPC unique are the near-term commercial opportunities. Typically, we needed influx of residents in the community to drive demand for commercial amenities. Douglas Ranch, however, is uniquely positioned to capitalize on the demand already present in Phoenix, particularly within the industrial and single-family rent asset classes, as Jay highlighted earlier. In the near term, Douglas Ranch will be cash flow neutral as the proceeds from land sales will fund horizontal development, which will further be supplemented by a modest line of credit and reimbursable development costs, similar to the structure at our Houston and Summerlin MPCs. Over the long term, Douglas Ranch has the potential to not only become the top-selling MPC in the country, but to also become a leading community focused on sustainability and technology. We see this community becoming a meaningful contributor to HHC's overall free cash flow generation as we monetize its vast land bank and introduce commercial amenities to meet the demands of future residents. I'll pause there and hand the call over to our CFO, Correne Loeffler, who will touch on the specifics of this deal in more detail.

Thank you, David, and good morning, everyone. As we have highlighted, Howard Hughes acquired Douglas Ranch for $600 million from JDM and El Dorado, companies which will remain our partners for the launch of Trillium. At the same time, JDM escrowed $34 million as a nonrefundable deposit. Over the next 6 months, JDM has the option to reacquire a 50% stake in Douglas Ranch for $271 million, inclusive of their original escrow deposit. If JDM does not reacquire their 50% stake in Douglas Ranch, they will forfeit their deposits, resulting in Howard Hughes owning the entire 34,000 acres outright. In either scenario, regardless of whether JDM reacquires its 50% stake in Douglas Ranch or not, Howard Hughes has a favorable ownership structure that will generate meaningful value for our shareholders. Even with the $600 million purchase price, Howard Hughes is well equipped with significant excess liquidity given our fortress-like balance sheet, which is a testament to our disciplined capital approach. Following the Douglas Ranch acquisition, we will maintain over $865 million of excess liquidity, which is more than enough to fund our current development pipeline, which includes activity in every region within our portfolio and leaves us plenty of runway to seek out additional opportunities. Said differently, we are in a position to deploy capital into Douglas Ranch without detracting from new development activity within our existing MPC. In addition, we are continuing to market selected noncore assets within the portfolio. The proceeds from these eventual noncore asset sales will further enhance our liquidity position. Overall, Howard Hughes' liquidity position remains robust and leaves us in an excellent position to continue unlocking value in deploying capital at outsized risk-adjusted returns. The ultimate goal here is to monetize the residential and commercial land to unlock the inherent value. During our Investor Day in April, we laid out our approach to value Howard Hughes based on an illustrative sum of the parts analysis. At that time, we showed that we had just over 10,000 acres of remaining residential and commercial land throughout our MPCs, which represented a value of approximately $4.6 billion. This is in comparison to Douglas Ranch that is approximately 37,000 acres, which is over 3x the size of our existing land bank. Just the addition of this raw acreage alone represents substantial value to Howard Hughes' total NAV. We look forward to adding more details on this MPC in upcoming quarters, so investors can really break down the value proposition this brings to Howard Hughes. With that, I'd like to hand the call back over to David.

Thanks, Correne. I think what's important to highlight here is the vast size of HHC's total portfolio with the recent addition of Douglas Ranch. Our portfolio is now comprised of over 100,000 acres situated across 6 states. I can't think of another developer that has an MPC portfolio of this size, whereas the reach matched with the capabilities of Howard Hughes. What's even more incredible is the opportunity that has yet to come. Once all of our communities are fully sold out, over 700,000 residents will call one of our Howard Hughes communities homes. This means immense expansion of commercial development lies ahead as more residents indicate more demand for amenities, translating to tens of millions of square feet of diversified real estate. Developing these one-of-a-kind destinations really sets us apart and presents a unique chance to create generational wealth over a span of several decades. What's also interesting is the range of the current maturity phases each of our communities is in. We now have the community in virtually every stage of the life cycle, and we're able to leverage this as the cash flow generated by our communities is completely diversified. Our newer communities provide more land sales tied to residential activity, while our more mature communities produced cash flow from the NOI generated by their properties, which is tied to tenant activity. This also means there's really no end in sight in terms of projects. We will always have something in the pipeline, spanning several products across several regions. With an MPC like Douglas Ranch, encompassing thousands of acres of raw land, we want to ensure we create a community that is built to last. If we take a thoughtful long-term approach and implement the core principles from the founders of our other master plan communities, we can establish a solid foundation for Douglas Ranch and transform this blank canvas into a thriving one-of-a-kind destination. Starting with our namesake Howard Hughes, who is known for innovative thinking and relentless pursuit of excellence, we will be sharply focused on incorporating innovative solutions throughout Douglas Ranch in the form of cutting-edge technology. In the 1970s, founder of The Woodlands, George Mitchell had a vision to create a community where people and nature could coexist and we see several avenues to incorporate Mitchell's approach to the environment throughout Douglas Ranch. One of our major focus will be around water conservation, given the desert-like environment in Phoenix. Our team in Summerlin has already implemented several water conservation measures given their similar climate in the Las Vegas Valley. And we will be able to replicate their best practices at Douglas Ranch to ensure we are being thoughtful about our water usage. Developing these 37,000 acres will take decades to complete. And over that period of time, we want to make sure we are being inclusive of everyone who comes to Douglas Ranch, which is one of the core principles of Jim Rouse, the founder of Columbia. Lastly, we must be able to create an environment that brings everyone together. Victoria Award was the founder of Ward Village on the island of and she envisioned her state as a gathering place to celebrate culture and community. All of these principles are already embedded within our existing regions. And if we apply those same principles to Douglas Ranch, we'll establish a community that hundreds of thousands of people will want to call home. These are the principles that set Howard use a part, and these are the same principles that will be instilled throughout Douglas Ranch. Like we do with every community in our portfolio, we are taking a long-term cohesive view at every element that goes into making this MPC an outstanding and sought after community. Before we open the call up for Q&A, I just want to hone in on the position. Howard Hughes is in to unlock meaningful value for years to come. Our MPCs are situated in markets that produce outsized returns due to their size and locations outside of large cities. This creates high barriers to entry and very little competition, meaning HHC is a beneficiary of all the increased demand that's generated by the residents that live there. Speaking of demand, we are seeing strong signs of heightened demand across all of our regions, which is one of the key drivers we need to develop additional commercial assets. The other key driver that will allow us to accelerate development is capital. And as we have shown, we have the excess liquidity needed to fund our existing pipeline and more than enough capacity to execute on additional projects. Our executive team, who you heard speak today is in place. And as you can see from this acquisition is fully ready to put capital to work for the benefit of our shareholders. And I would be remiss if I did not mention the incredible support that we've had from our Board of Directors, whose talent and industry expertise is unmatched in the industry. Finally, we have the land, entitlements, capital and expertise to execute quickly on our decades-long development pipeline. The addition of Douglas Ranch only adds to our depth of opportunities. And I could not be more excited to see what the future holds for Howard Hughes. With that, we can open it up for Q&A. Operator, could you please open the line?

[Operator Instructions] And the first question will be from Alexander Goldfarb with Piper Sandler.

So a few questions, David. The first is, there's the old adage that it's not the first or second owner that makes money on a project. It's the third owner. And especially when you think about the time line that it's taken for Woodland, for The Woodlands to gain its notoriety for Summerlin. It takes a long, long time. You guys right now are starting out early in the process. So as far as the way investors should think about this, is it fair to say that this is something that from a realistic standpoint, probably maybe the next decade is going to be sort of neutral. There's going to be a lot of cost, a lot of upfront, but then sometimes past 5 years from now, we'll start to see stuff come to fruition? Or is your view that this could really be accelerated and that, that traditional sort of lag late economic mantra may be different this time?

Alex, it's a great question. And it's something that before we pursued this acquisition we thought long and hard about. And I think some of the characteristics that we talked about in our prepared remarks really set Douglas Ranch apart and actually put it closer to an area where we're monetizing sooner rather than later. As we talked about, Alex, we think the first 5 years of this project, now that we're already 20 years into this project, the JDM partners, Jerry Colangelo and El Dorado have been working on this for 20 years securing entitlements, getting a master plan. And we're in a spot where we believe we're going to sell over 1,000 lots early next year to homebuilders. That's a position that even Bridgeland, that's after over 11 years old today hasn't gotten to a spot where it sold 1,000 lots a year, and we think we can do that in the first year at Douglas Ranch. We also think there are much more near-term opportunities for commercial development at Douglas Ranch, both in terms of industrial and single-family for rent, that will make this project more cash flow neutral to positive, much more near term than I think the previous perception of a large-scale master plan community. I think we're excited. We don't look at this as a 10-year project before we see cash flow. We look at this as something that's going to generate cash flow near term and absolutely not limit the opportunities across the rest of the portfolio.

Okay. So in thinking about that, and if I understand the way you're presenting it is Howard Hughes is not really taking on the cost of all the infrastructure, meaning roads, plumbing, sewerage and all that fun stuff. What you're doing is selling the lots to the homebuilders, commercial pad, commercial sites to commercial people, and they will then take on that those infrastructure costs? Is that correct?

No. I said differently, Alex, we'll be using the proceeds from homebuilders that will be acquiring lots and taking a portion of those proceeds and putting it back into the infrastructure and the land. We can also use some of those proceeds from selling the lots to work on the commercial development when those opportunities arise. And Arizona, similar to what we have in Nevada and Texas has the ability to use municipal financing to help fund a meaningful component of that water sewer curves, lighting, et cetera, that will be reimbursed through what are called CFDs in Phoenix, but known as muds and CID in Houston and Summerlin, respectively.

Okay. Okay. We like mud instead. Okay. The second question is, can you just walk again through the economics? I guess the $600 million in total but there's a component. It sounds like either way, Trillium remains a 50% venture regardless of whether your partners cash in their deposit or not, but I was a little confused because you have Trillium, you have Douglas Ranch, there's your partners who have a deposit, they may not make it or if they don't make it. But in the slides, it looks like Trillium remains at 50% either way. So if you could -- sorry, if you could just go back through the economics on these.

Absolutely, Alex. And you're 100% correct. The Trillium is a 50-50 joint venture between Howard Hughes and the other 50% is JDM and El Dorado. That is certain. The Douglas Ranch side, we have acquired 100% of, but the JDM team has put down a $34 million hard non-refundable deposit with the option to come back in and own 50% of Douglas Ranch. This structure was part of what we needed to do to get the deal done, and we feel strongly that JDM will raise that money and come back into the deal. But either way, we feel like we're winning. We're getting Douglas Ranch at $16,000 an acre if they come back in and $15,000 if they don't. So it's a great opportunity for us either way. We'd love to have JDM as a partner because they have great local expertise and Jerry Colangelo and his partners have done an incredible job getting the entitlements in place here. And also helped advance I-11, which Jay talked about earlier, which is that transportation node, which eventually will get built between Canada and Mexico and immediately buy sec the Douglas Ranch property. So we think we feel strongly they are going to come back in. But either way, we feel like we're in a great position.

Okay. And then the $600 million that you guys cite, that's really just a rounded number from that $566 million, correct?

That is the $566 million with the deposit. So it is exactly $600 million.

Okay, cool. And then I appreciate it. And then just final. A number of -- I remember years ago, like Westcore Matrix, when they owned land in Phoenix. There was a lot of talk about government ownership that would then transfer or maybe there was like extended ground leases or whatever. The Douglas Ranch and Trillium, that is all land that is outright owned by you guys it's fee simple. There's no government restrictions or any other hindrances on that land? Do you own 100% fee simple of both land parcels?

That's correct, Alex. We're 100% fee simple owners.

And the next question will be from John Petersen with Jefferies.

Great. So I guess, looking at this price per acre here, it's obviously that what you're paying is a decent amount less than, I guess, what you're selling residential plots of land for right now in your other MPCs. I guess I'm just curious because we run this math on our sum of the parts analysis straight line out future land sales, put growth rates on it, put discount rates on it, try to get to a fair value. You guys have just gone through this exercise to buy this. So maybe you could talk us through some underwriting assumptions that got you the $600 million purchase price. Specifically, like how are you expecting this price per acre to appreciate over time? And then how do you think about discounting it back?

Sure. It's a great question, John, and it's something that obviously was paramount in our underwriting. Look, in terms of how we've underwritten this deal, I think we've tried to take a very conservative approach and really looked at conservative growth rates. Our experience has been substantially greater. And in Summerlin, over the past 10 years, we've seen 10% compounded annual growth rates in the Woodland Hills 9% in Bridgeland, 5%. I would say that those growth rates with our initial underwriting are definitely outsized to what we're thinking. But we also know that we have meaningful places that we can allocate capital across the portfolio and other development projects. And obviously, if we're going to invest this much money here at Douglas Ranch, we're going to need to achieve returns that we think are at least that, if not higher, relative to the risk of starting a new community. So from a discount rate perspective, I think really instead of applying a discount rate, we really solve for the internal rate of return that justify this investment. And I would tell you that we feel strongly that it's going to generate outsized returns and meaningful value creation in terms of growing our NAV for decades to come.

Okay. And then I guess if we think about -- I guess, some of the immediate upside in this portfolio, your price per acre on Trillium is $39,000, the rest is $15,000 I mean is the difference between those 2 prices, the fact that Trillium is ready to be sold, it's like room ready to be sold land and the other stuff isn't. I'm just trying to think about like, are you guys creating more than double the value by getting entitled and ready to sell to homebuilders?

You've hit exactly the point, John, which is Trillium will be selling starting early next year, whereas the Douglas Ranch piece, we really won't be selling lots there for several years until the 3,000 acres of Trillium are largely developed. And as a result of that time between getting from here to selling lots in Douglas Ranch, at a lower price per acre was applied to account for that discounted time whereas Trillium is much more near term.

Got it. And then I guess I did as much research as I could while listening to your call and poke around the Internet. But the I-11 thing. I mean, -- it seems like that's a proposed thing but not finalized and funded. I guess, how critical is that to the long-term success? And I guess where do you handicap the likelihood that actually goes on the path that you think it will?

I don't think it's critical at all. Our access to the Sun Valley Parkway and I-10 is fantastic. And if I-11 comes to fruition, which we hope and believe it will, we would love to contribute land through Douglas Ranch to see it come to fruition. It's obviously uncertain. And as a result, we wouldn't count on it today. We feel good that it could happen. And if it does, it would be a great accelerator. Similar to the acceleration that we saw in Bridgeland when the Grand Parkway was completed or when the freeway was built through Summerlin. All of those are great catalysts for growth. Again, as you pointed out, I-11 is uncertain. It's proposed, but we feel strongly it could get done. And when it does, I think it could be a catalytic change that would just drive further upside to the valuation that we paid for today. It was not contingent our belief that it was certain to get to the point of this. It's really just upside.

Got it. Okay. And then I guess my last question, I think in response to Alex, you guys mentioned that you might be doing industrial in addition to single-family for rent. You don't have a lot of industrial in your portfolio and your other MPCs. West Phoenix is a -- can be a big industrial market. So maybe talk about the breakdown about how much you would want this to be kind of an industrial area versus kind of preserving that land, so it's more residential and commercial?

John, it's tough to say that there's an exact mix or a certain percentage of the pie chart that should be industrial. From our perspective, it's always about building to meet the deepest pockets of demand. And across 36,000, 37,000 acres, we have the opportunity to do both thoughtful industrial and residential without impacting the valuation of the other side of the coin, so to speak. Look -- and Phoenix, as you highlighted, has been a rapid growth market for industrial. It's within the OSHA drive time from the Port of Los Angeles so that the drivers can make a round trip in a day, which is critical and it has burned that growth in industrial there. We're going to look to see how much demand we see. And as soon as we find it, we will build to meet it. The access to the Sun Valley Parkway and the I-10, I think, put us in a great position in the West Valley to be a leader of industrial, and we're going to look to execute on that.

The next question will be from Tayo Okusanya with Credit Suisse.

First question is just JDM on El Dorado, could you just talk about, again, the genesis of why you decided this was the right time to do this. I mean they spent a decade kind of getting this together. They've done all the entitlements, there's kind of light at the end of the tunnel in regards to being able to kind of start selling lots. Like why do they decide to kind of do this now when again, for example, you're kind of talking about your base is at kind of $40,000 and yet you'll be able to kind of turn around and kind of sell at 8, 9x that. Like why can't they do that by themselves? Why do they kind of decide this is the best way to do this?

Tayo, it's good to hear from you. It's been a while. I'm glad...

Good to hear you here.

Thank you, sir. But it's a great question. And look, I don't want to put words in the folks at El Dorado or JDM's mouth. But from what they've communicated to us, I think it's clear, given the limited supply in Phoenix, the continued robust housing market, and the dynamics that have put growth right on the doorstep of Trillium and Douglas Ranch now is the time to execute. And whether they did it themselves or brought in an execution partner, look, I'll let them comment on that at some point in time when they feel appropriate. But I think pretty clearly, they were able to see the benefit of bringing in Howard Hughes. We are one of the few companies out there that have developed large-scale 20-plus thousand acre master-planned communities that have developed them in a thoughtful way. And if you look across who the potential partners are out there to do this, there's not a lot of other companies that can say that they have as according to niche #1 community in America and the Woodlands. Top 3 selling MPC 4 years in a row in Summerlin. Money Magazine ranking Columbia, one of the best places to live in the country. I think our unique qualifications, our unique skill set in being able to execute masterpiece of this magnitude made us the ideal partner for them. And I think, clearly, given the transaction and the structure of the transaction, JDM and El Dorado both believe that by including Howard Hughes, we can drive outsized returns to all of our partners.

Got you. That's helpful. And then the second question is, again, you talk about the transaction being kind of cash flow and NOI positive for Howard Hughes. I mean is there -- again, just back to Alex's question, it does take a while for these things to kind of get going. You're kind of a little bit of an accelerated time line. But again, when you kind of talk about that cash flow and NOI accretion, is that something you expect after one year with the initial sale of lots that are happening with Douglas Ranch? Or are we talking about some type of a 5-year or 10-year protection of when you kind of talk about it being cash flow and NOI positive?

Absolutely, Tayo. And I go back to Page 15 where there's some comments as it relates to the near-term 5-year and long-term plan. Our view is that for the first 5 years, this project will be cash flow neutral. And that is away from any meaningful commercial development that could change that pretty quickly. And that's largely because this is business community has been 20 years in the making. And right now, it's on the doorstep of selling lots early next year. And in our past experience, like with the Woodland Hills, that was an acquisition that took 3 years to get to its first lot sale. So to have the opportunity to acquire Douglas Ranch today, with only being several months away from over 1,000 lots being sold, generating a tremendous amount of cash that keeps us on a cash flow neutral basis but an NAV accretive basis very early on. That was a really remarkable opportunity and one that we didn't want to pass up. And I do think if we are able to execute on some of the industrial and single-family for rent opportunities that Jay highlighted in our prepared remarks, we're going to be able to generate meaningful NOI growth out of this property much sooner than almost any other master plan community that we saw in our portfolio.

And the next question is from Vahid Khorsand with BWS.

You have listed as 100,000 homes and 55 million square feet of commercial. I was wondering, is that when you say entitled and blank canvas, is that something where that's just a baseline and you can work up from there? Or is that a hard cap?

As of right now, I think that we are several decades away from getting to that cap, before we think about going back to try to move it higher. For now, I think we're going to have our hands full trying to build out 100,000 residences and 55 million square feet of commercial space. Look, if we're able to use those entitlements and still have when left over, could we go back to the appropriate authorities to increase that, sure. But for now, I think that, that is plenty of a runway for decades to come for us at Douglas Ranch.

And for the moment, have you any idea on -- of that 100,000 homes, what percentage of that would be multifamily that would be HHC owned rather than single-family lot sales.

Right now, the near term is single-family lot sales. And I think that over time, as the community continues to develop, like we've seen in our other communities, adding a component of single-family for rent or multifamily for rent becomes an important driver of growth, and it allows us to meet that demand for those that want to be in those markets, access to schools, access the amenities, but can't afford homeownership. For me to say today, over the next 20, 30, 40 years at Douglas Ranch, what the perfect mix is, I think, would be disingenuous because our goal is to always meet the deepest pockets of demand. And as we see demand for multifamily build to meet it. And as we see demand for single-family, deliver those lots to homebuilders. I don't know that there's an ideal mix. I think it's community by community driven and demand driven. And we're going to continue to adapt to make sure we're hitting that deep pocket of demand.

Fair enough. And then final question. Looking across the portfolio and the MPCs, where would you put the class of the initial single-family homes that are going to be sold? Are they going to be more in the Bridgeland category? Or are they going to be more in The Woodlands or The Woodlands Hills categories? Like where do you see that initial sale?

I think like most communities when they initially start, our goal is to try to drive demand and maximize the velocity under which we're selling lots. And the way that we've been able to do that in areas like The Woodland Hills and Bridgeland is by having a wider way of price points. There are homes that sell in Bridgeland in the mid-200s, and we've actually had a custom of -- a couple of the higher-end custom homes traded closer to 1 million. And having that widest array of potential price points allows us to access the deepest amount of buyers and drive velocity, which creates value, which creates resonance, which drives demand for commercial. So it's not as if we're only going to hit a pretty narrow band of price points, I envision us working with the builders to make sure that we're accessing a pretty wide band, driving more potential buyers into the community.

[Operator Instructions] The next question is a follow-up from Alexander Goldfarb with Piper Sandler.

Two follow-ups. The first, a number of the other analysts hit on the topic of sort of how much of this will you ultimately own versus sell? It sounds like on the housing side, you're first going to sell lots before you contemplate building your own single-family rental. But as far as future, whether it's office, hotel, retail, industrial, how much of that do you think you would own versus have third parties construct? And I say that from the perspective that I think when you guys -- when Howard Hughes came about as a company, one of the things that you guys commented early on was under prior ownership, whether it's Morgan Stanley or GP or whoever, they had sold portions or assets that you would have otherwise rather kept to sort of generate even more value among the other assets. So as you think about this blank canvas, how do you think about what is critical for you guys to keep to generate and propel future value versus what parts are fine to sell and it doesn't impair your ability to really capitalize on what will ultimately be created.

It's a great question, Alex, and it speaks to the heart of our strategy in terms of how we execute across all of our master plans. And when it comes to office, multifamily, single-family for rent or now even industrial, I think those are absolutely asset classes that we want to own. We like being the dominant landlord. We think we can meet tenant needs better. We think we can drive better results in terms of higher rents and growth markets and more resiliency in challenging markets. And from that perspective, those are assets that we want to build and hold. I think some of the other asset classes that are great amenities for the communities, we're happy to build, but I don't know that we're the best long-term owner. And those clearly are hotels, which we just sold in the Woodlands. I think some of the city center retail, we believe like Downtown Summerlin and Ward Village is critical to maintain the ownership because it helps drive the experience. It helps drive the residential sales. And it's very synergistic to being in the community. But some of the neighborhood grocery-anchored shopping centers that aren't core to the experience are areas that we could build that are great amenities to have in the community, but some things that we don't necessarily need to own for the long term.

Okay. But as far as like industrial, for example, given that there's a lot of demand on the West side of the Valley proximity to L.A., et cetera, would you early on just to generate the proceeds to fund -- to build out everything you would have third parties come in and sell it to them? Or your view is you would do industrial from day one?

We wouldn't do the industrial from day one. That's not to say that we wouldn't contemplate bringing in any partners similar to what we did with, for example, our first multifamily in Summerlin, which we did with a partner. We ended up buying them out and we own 100% of. But as we learn in new asset class as we learn a new asset, having some local expertise on the ground in terms of bringing in someone for a small ownership stake to make sure that we're executing as best we possibly can. It is absolutely on the table, but it's having that ownership, not selling that land early is what drives the outsized results later. And having that long-term view about driving value creation and NAV accretion for this community for the next several decades, I think will drive the best results for our shareholders.

Okay. And then the second question. A number of your communities feature either some sort of sporting venue or sporting team, constant venue or something that creates sort of a hub that then you build off of with retail and housing and office like you did in Summerlin or even at Seaport on the roof deck. Is there anything that you're contemplating for Trillium and Douglas Ranch along those lines?

I think the opportunities that you highlighted are pretty wide. And whether it's a performing art center, while it's hundreds of acres of green space, walking trails, a sports venue a university or educational facility. All of those are on the table, Alex, and it's about trying to curate that best experience across the community. As we're just selling our first lots next year, I think we have a little ways to go before that kind of critical amenity comes at the bar. And at the time that we think it's right, we'll endeavor to build that. And we're excited about our First Town Center, but we're years away from that. For now, it's about building up the residents. It's about meeting the demand for industrial, potentially single-family for rent. Once we get that critical mass of residents starting to build some neighborhood retail. And then over time, making sure that we're building the right green space, the right parks, the right amenities, trails and as you highlight potentially sports and/or performing or so.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to David O'Reilly for any closing remarks.

I just want to thank everyone for joining this call this morning on short notice. We are so excited to execute on this transaction to announce Douglas Ranch to partner with JDM and El Dorado and to build the next great master plan community in Phoenix's West Valley. We look forward to talking to all of you in a couple of weeks on our earnings call and hopefully seeing you at the upcoming conferences in the remainder of the year. Thank you, again. And if there's ever any follow-up or questions or concerns, we're always available. Thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.