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

Hi, everyone. Welcome to the second day of IDEAS Conference. I hope everyone is having a great experience so far. With us today, we have The Howard Hughes Corporation. They trade on the New York Stock Exchange. Their ticker is HHC. And with us today, we have here Mr. Carlos Olea, the Chief Financial Officer; Mr. John Saxon, the Chief of Staff; and Mr. Eric Holcomb, the Senior Vice President of Investor Relations. I'll turn it over to Mr. Carlos.

Thank you. Good afternoon, everybody. Thank you for your time and the opportunity to talk to you about our great company. Excited to be here for the first time. So thanks again for your time. We hope to make it really interesting for you. Let's get the legalese out of the way. I'm sure you've seen this many times today. I'm not going to read anything there, but some things in the future tense are forward-looking statements, and you know the drill. This is the company at a glance. Over the next few minutes, I'm going to take you through each one of our communities, talk in more detail about everything you're seeing here. But in general, 6.5 million square feet of office in place, 2.5 million of retail, 5,600 multifamily units. What does that mean? Well, that's what's next. We are geographically diverse. We operate, as we like to say, from Wall Street to Waikiki. We have our Seaport District in New York, literally 2 blocks away from Wall Street. So I think we can make that claim even though we're not technically on Wall Street. And we do have condominiums in Hawaii, given us this range. We are, as you can see there, we say, we're a real-life Sin City. If you want to be a little bit more modern, you can say we build real life metaverses. We create cities, we build communities. And on the chart, you can see them, the Seaport, as I said; Columbia, Maryland, what is affectionately called in that geographic area as a third city between Washington, D.C. and Baltimore. Columbia is one of our communities. We have The Woodlands, where we're based, where we have our corporate headquarters outside of Houston, Texas in the north. We also have The Woodlands Hills, the little sister of The Woodlands. We have Bridgeland, one of the more dynamic and newest communities that we have in our portfolio. We have Summerlin, outside of Las Vegas, Nevada, incredibly exciting place with a lot of activity. And then recently, last year, we acquired 37,000 acres outside the city of Phoenix, it's called Douglas Ranch. That is in addition to 37,000 acres, we bought 50 years of future development. So for us, it's an exciting opportunity. It's a great challenge. We'll talk about it a little bit more. And it is our chance as this current management team to learn from everything that our founding fathers of this company did in Columbia, in The Woodlands, in Summerlin, and now apply all of that to Douglas Ranch. But let's get into it. So what does Howard Hughes do? Well, at a glance, this is what we do. We have these large tracks of land that where we plan on being a city. We're a master planned community developer. What does that really mean? Well, everybody knows what it is to build a house, I think. Some of us have done that. Even if you haven't, it's pretty simple to know what it is to build a house. Well, we go a few steps further than that. We develop an entire city with all the components of urban planning that go with it. So when we look at something like Douglas Ranch, the 37,000 acres, much like George Mitchell with The Woodlands and Jim Rouse did in Columbia, it's not about just thinking where you're going to build a house. It's about thinking where you're going to put the roads, whether there's going to be schools, where you're going to have hotels, where you're going to put commercial amenities, where the office buildings need to be. And the interesting thing is that you're planning now for 50 years into the future. So that is what is unique about what we do. And yes, we're in real estate and we are a real estate developer; and we're also a landlord, but we do it with a long-term view. It's not quarter-over-quarter, it's not even year-over-year. We're building communities. It's a long-term view. It's a different type of play. We obtain our cash flows from what we call MPC EBT, Master Planned Communities earnings before taxes. Those are our land sales. So in our communities, we don't build the homes. We sell the homes to home developers, all of the names that you would recognize, Toll Brothers, you name it. They buy land from us and they are the ones that develop homes. Now once we have residents in our communities, we build retail. We build office. We designate spaces for parks, we designate spaces for schools, all of which makes the community more attractive to future homeowners. If you think about it, if you are the first one to move, like some of us were, to move into one of our communities, it's almost like a pioneer feeling, right? You're there and there's nothing there and you're there because you believe that this is going to be a great community. Well, we're the ones who are in charge to turn it into a great community. But as we bring offices, as we build more retail than other people, they don't have to take so much of a leap of faith. Now they know that if they move to The Woodlands, they move in the future to Douglas Ranch, they're moving to a place where there's great schools, where the grocery stores within walking distance, where their -- hopefully, their office is within walking distance or a short drive. So that's what we do. And as we're building these commercial assets, we start to generate operating asset NOI, net operating income. That might be familiar or not, but it's basically whatever real estate investment trust does. Build buildings, run buildings, collect rents, do it again. So develop land, sell land, homebuilders build homes, we get residents, we build commercial amenities and then we're the landlord. So that's our second way that we generate income from being a landlord. Then the third one is from selling condominiums. And that is particularly focused at the time in Hawaii, and I will show you some really nice renderings of what we're doing in Hawaii, where it's a market condo. And throughout the pandemic and before and after, it has been incredibly resilient, and there continues to be a lot of interest for the condominium product in Hawaii. So with those 3, those 3 revenue streams give us the opportunity to then make capital allocation decisions, and that's where we end, equity for future developments. So the cycle continues. We go to a different part of the community. We develop more amenities. We develop more office buildings so people have employment centers near them, more people want to live in the communities and you keep developing the cycle. And here's a more graphic representation of this cycle where you can see on the bottom left, what I just explained, then our NOI, how it keeps growing from rents. But then on the bottom right, that's one of the most telling examples of the long-term value creation and why we are a long-term play, not a short-term play. If you see there from 2011 to the second quarter of this year, an acre in The Woodlands, Summerlin and Bridgeland has significantly increased in value. Said differently, if you had been one of our residents that bought in 2011 and you bought an acre to build your home, that land was worth an acre, $364,000. By now, it has tripled. People that have -- we create value creation over time. This is more than 10 years of value creation, again, further underlines we're building communities, so it's not a short-term play. But over the long term, we have delivered significant value creation through less curated communities where we, again, are the master plan developer, and we have a long-term view. These are our communities, I'm not going to stick too much here because I want to have some time to get into each one of them individually. Again, this -- you already see it -- saw this office, 6.5 million, retail, so let's move on. Okay. And this is where you start to see, from a financial standpoint, where we're different from a typical real estate developer. And if you look at the first chart at the top, the circular chart, our NOI mix is mainly driven, half of it, roughly by office. Then we have 25% around multifamily, 20% of retail and 7% of others. So investing in Howard Hughes, again, because you're investing in somebody that's building communities, gives you exposure to different asset types. It's not the same as if you just go buy a REIT that does office, you're only getting exposed to office in those geographies. With us, you're getting exposure to different asset types that we're building as amenities in the communities that we control. Now at the bottom, you can see by community, how they contribute to our NOI. Most of it, 48% comes from The Woodlands, which is one of the most mature and very successful Master Planned Communities; followed by Summerlin, outside of Las Vegas, Nevada; then Columbia, Maryland; and then Bridgeland, which is relatively new, and it's growing outside of Houston as well. This is -- I don't want to bore you with numbers. I want to get you to the communities to start showing you what we do in each one of our communities. And then we'd be very happy to take any and all questions that you might have when we open it to Q&A or even after this conference. Really quickly, because we're a capital-intensive business, we have -- we spend significant amount of money on developing the infrastructure that goes into our cities in addition to developing commercial buildings. It's important to show that while we have debt on our balance sheet, as any other developer will, 83% of that is swapped to our fixed to our -- is fixed to swap to a fixed rate. And what is not, what is variable, that 12%, it's because it's related to construction loans, which there's not much of a case where sometimes fixing those when they're shorter term and they tend to be hard to put a color or anything on them. And then our maturities also, we have very lot of maturities until 2027. So there's been a very significant focus on making sure that we're in the best position, the best balance sheet position possible. Very good. Let's get into the community. So the first one, The Woodlands. Again, one of our older communities, started by George Mitchell in 1974. It's 28,000 acres, almost 29,000 acres. It's a beautiful place. It's not only where we work but where we live. And we invite any and all of you to come visit us and we'd be happy to show you around and tell you what we're so proud of The Woodlands. It has been named the best place to live in America for the last 2 years. And if you look at the demographics, it outperforms the market when it comes to average household income and median home value. Why is that important? Well, it's important because the reason why the median home value outperforms the market is precisely because they're built in our communities that are curated so well, where we have planned every single aspect to give the best quality of life even to the point of being, as you can see in the top-right corner, the first LEED precertified community in Texas and the largest precertified community in the world. And this is something that we achieved recently. It's not something that happened by chance. It's something that started in 1974, and it continues every single day. We have different housing options because in every one of our communities, it's important that they feel like a real community. We don't want it. We don't just want something for the superrich. We don't just want -- we don't want something where people feel like they've been left out or priced out or that feels inaccessible. So in every one of our communities, you'll see this, we like to have a variety of housing options to drive that vibrancy of different people. It improves retail. It just helps with the overall community feeling of The Woodlands and the rest of our communities. As I said before, we generate NOI through our commercial properties. We have 4 million of office in The Woodlands. And in each one of our communities, including The Woodlands, we still have development capacity sufficient to target corporate relocations and to continue driving that cycle of companies coming to where people want to live, which the pandemic accelerated that trend. Before, people had to follow companies. And I'm one of them. I've moved twice for this company, right? Thankfully, the second one was to The Woodlands, where I'm now very, very happy. But what we've seen since the pandemic is that companies are having to follow people. The talent went to work from home. A lot of the talent moved, as we know, from California or from other places, to areas like The Woodlands, like Summerlin, where they could have bigger homes, smaller mortgage payments, access to nature, short commutes. So we've been the beneficiary of that. And what's happened now is that we have significant talent in our communities, and companies are following them. It's something that started probably a year ago. We see it as a trend that continues, and we've been the beneficiary of some of this, either relocations or spoke and hub. New regional offices that some of these corporates are now getting into because the talent moved to our communities. They don't want to lose the talent, so companies are following them. So new phenomenon. I don't remember seeing that in my lifetime, but definitely, we've been the beneficiaries of it. And even though The Woodlands is one of our most mature communities, we still have almost 2 million of square feet that we can develop in the very near term. And then in the long term, we have 749 acres. If some of you have been following us or if you do now, you'll hear sometimes people say, well, The Woodlands is done, right? What -- you don't have anything there. No, we're then selling land for homes, but we have 749 acres, which is much more than most REITs can say that they even have on their pipeline. So we're not done by any means. We still have 20 years left in The Woodlands to build exciting things and continue making it very successful. The Woodlands Hills is a little sister of The Woodlands, and I like to say that because only in Texas would you say that 2,000 acres are little. But it is a 2,000 acres, very small community for our standards. It's north of The Woodlands. It's more of a starter home. Think about it like first home for new families, young professionals. That's mostly the market of The Woodlands Hills. It's still curated in the same way with the same type of care and the same type of long-term thought. If you look at the third or fourth bullet there, out of 2,000 acres, we have 112 acres of open space, 20 neighborhood parks. I mean there's a significant commitment of a land inventory that is not, again, 2,000 acres where our scale is not that large. However, we're dedicating a significant component of it to amenities, to parks and trails and open space for the community. Bridgeland is 11,000 acres, 12,000 acres, so definitely larger than The Woodlands Hills. At full completion, we expect that we'll have about 18,000 residents. And similar to The Woodlands, the demographics also outperformed that of the market. And while the Bridgeland is at a much earlier stage of development than The Woodlands, people in the market recognize that because it is a Howard Hughes community, they -- it also adds a lot of value because they trust that it's going to be curated in the same way that The Woodlands is. And the median home value also outpaces that of the market. In addition, it is LEED precertified as well. So we take our commitment to sustainability very seriously. Bridgeland is in the path of Houston growth. If you see it to the left, you will see that blue box where it says Bridgeland. And it's very strategically located for people that either commute north to The Woodlands or that commute south to the Energy Corridor or to Downtown Houston. And as it has been transversed by the Grand Parkway, which is Highway 99. It's given people a lot of options to commute from Bridgeland to different parts of Houston, and that's part of the success that is located in a way that allows people to get to the airport relatively quickly, to get to Downtown Houston relatively quickly as well. But at the same time, it's far enough and it's curated well enough so that it feels like it's far, far from an urban center and you feel like you're in something different. It has its own identity as a community. It's not just another neighborhood of Houston. It also has different housing options. Again, this is something you're going to see everywhere. It is a newer -- like I said, it is a newer community, so we have 1 retail center so far. We have multifamily in Lakeside Row, and we're building more multifamily. We're in fact going to build our first single-family to rent product in Bridgeland, which is a product that may not -- I don't know how popular it is here if it exists, but it is a product that we see in the market, in the Houston market really wants and really needs. So we're going to start developing that type of product now. We have 1,300 acres left to do in Bridgeland. So quite a bit of work over the next 20 years to continue developing this community. Moving on to Summerlin. Summerlin is outside of Las Vegas, Nevada, and this is part of why we are named the way we are named. This land was acquired by Howard Hughes himself in 1952 for $3 an acre. So 22,000 acres for $3 an acre, he paid $67,500, which it's an amazing value creation now when you just look at the median home value of $480,000 per home and he paid $67,000 an acre. Truly a visionary man. And Summerlin was the name of his maternal grandmother and bought by him, so we kept the name. And we kept his name as well as the name of our company. I like this to show you this view a lot because I think it shows you not only how -- not only the size of Summerlin, but that towards the north of Summerlin, we have the Red Rock National Conservation Park. So that is this restricted area owned by the federal government. There will never be development there. So the views that we have of those beautiful mountains from Summerlin will never be obstructed. And it also provides for a very unique environment where if you're on the south, closer to ground level, you can feel about 5 to 7 degrees warmer than when you go up towards the northern edge of The Summit. So even inside, it's not just the diversity, where we talk about a different product, et cetera, but The Summit is even unique in the sense that you can even get different weather, specifically different microweathers in the community, which make it really, really interesting. Plus some lots face the red rocks for people that like the view of nature best, some lots can face the Vegas Strip for people that like the urban view best. We have even more variety of homes in Summerlin. We have a partnership in Summerlin, and we can, through that partnership, develop custom homes -- well, they develop custom homes. We sell the lots for custom homes. So there are homes at a starting point of $300,000 in some of our neighborhoods. And then you can find mansions that go for $20 million plus if they're built in some of these custom homes. So there's much diversity there. But at its core is Downtown Summerlin, which is our retail core, where everything comes together, everyone comes together. In Downtown Summerlin, it's incredibly active, it's very vibrant. If you go without a reservation to try to have dinner on a Tuesday evening, you might have to wait. It is that vibrant and sought-after. And it's across the street from our Minor League Baseball stadium. We don't have a picture here, but in The Howard Hughes Corporation, we own the Las Vegas Aviators, and we own their stadium as well. So we own the baseball team and we own the stadium. They are the farm team of the Oakland Athletics, and for the last, what is it, 3 years, it's been named the best stadium in minor leagues. And for the last 2 years, it has the highest attendance. So it's just another component that has the vibrancy of this community that during the baseball season, obviously, there's a lot of games. But then in the off-season, the stadium is used for many different things like Christmas in Summerlin and farmers market events and all sorts of activations to just keep this community very, very vibrant. I'm going to try to go a little faster to leave you time for Q&A. But moving to Columbia. Columbia is one of the original Master Planned Communities in the entire country, started by Jim Rouse in 1967. And we have as well as everywhere else, we have office, multifamily and retail. In Columbia, we no longer have any land to sell for single-family home development, like we do -- much like we do in The Woodlands. But what we do have is a multifamily -- 3 current multifamily assets, Juniper, m.flats and Metropolitan, all of which are almost completely leased, as you can see there, from 97%, 95% and 98% leased. And we're looking to deliver more of this product because it's a product that the market wants. In addition, tidbit, if you go there, we have to the right, you see the Whole Foods Market. It's one of our tenants. And I can't be positive of this, but I would think -- I think that it is the only Whole Foods Market in the entire country that's in a building designed by Frank Gehry. If you like architecture, you probably know who Frank Gehry is. He designed that building. Here's Douglas Ranch. Douglas Ranch is the newest one, again, 37,000 acres. It's an ambitious play. You can look at the population there. We expect that at full build-out, it will have 300,000 residents and 100,000 homes. To give you a perspective, 300,000 residents, it's about the population of St. Louis, Missouri or Pittsburgh, Pennsylvania. So we're starting with zero, and we truly believe that we're going to develop a very unique community, that it's going to achieve at some point, 300,000 residents. It is in the path of growth of Phoenix. That's very important for us. I'm sure you can see the trend. To always be in the path of growth of the metropolitan areas where we are located, and we believe that this will be an incredible option for people that live and work in Phoenix, to have another opportunity to again have better quality of life, shorter commutes eventually when corporations start to relocate there and just a better experience. All right. Let's go west all the way to Ward Village. Ward Village, we like to call it, it's a vertical MPC. We don't have the expansive lands that we have in Texas and Nevada and Arizona. What we have is 60 acres right by the beach, in a very unique and irreplaceable area. So that white block that you see, that is what we control, that is Ward Village. And that's where we built this amazing, beautiful condominium towers. This file that I'm showing you here have all been completed and delivered. Almost all of them are 100% sold-out. So you can see 'A'ali'i has 5% left. Wayo has 1% left. It's a very beautiful penthouse. And if everybody is interested, I can make sure that you talk to the right people. Get it. It's a beautiful place. We have 2 towers under construction: Ko'ula, which is already 96% presold even though it won't deliver under later this quarter; and then Victoria Place. It's not even expected to deliver until 2024 and it's already 100% presold. We continue to see, throughout the pandemic incredible, incredible demand for this type of product from the mainland but also from Japan and from other parts of Asia. This is Ward Village as a whole. Once they -- I won't keep you too much here. I just want to show you that the white -- the blocks that you see in white are still left for future development. What's in green is what I just showed you, and the blue ones are predevelopment. So we still have some front-row developments in play, and we have 1/3 row development for the future. And let's end with the Seaport. The Seaport is, like I said at the beginning, it's a neighborhood in New York City. It's very different in scale from everything else that we do. However, curated with the same principles of cohesiveness, of inclusiveness, of diversity of product that attracts different types of people. The buildings, the assets that you see in white are what constitutes the Seaport District, starting with Titanic Park right at the front and then ending at the back with the Pier 17. The one that you see with number 2, I hope you can see it, that's the Tin Building, where we're going to talk about it a little bit more, is the latest component of the Seaport that will open later this quarter. That's a different view of the Pier 17. Pier 17 is unique in that it is a combination of retail, traditional office space and a concert venue. So at the top is a concert venue that we run where we literally have concerts. We have an annual concert series. This year, I believe we have 60 concerts. That adds a lot to the vibrancy of the neighborhood. Every time that there's a concert, this place is an amazing place to be. It's very active, very vibrant. It helps our retail as well. And it's right by the water, as you can see, right on the river with amazing views of the Brooklyn Bridge. If you look around, you can see most of the recognizable landmarks of New York City when you're in the rooftop. So it's just an amazing place to get a New York experience. Some of what it has inside of it, you can see some pictures here. So we have 3 really amazing restaurants, The Fulton, Carne Mare, Momofuku, Mister Dips and Malibu Farms all run by world-class chefs that you would recognize, like Jean-Georges, who you see at the bottom right; Michael Chang, Andrew Carmellini -- David Chang and Andrew Carmellini. And it just -- it's a place where if you go, you have a lot of options, just with those 5 restaurants and there are plenty of other options in your buy. But it's a place where you can just go and spend a really pleasant afternoon, have a drink in one restaurant, have dinner in another one, walk around, go to the pier, take in the views. We expect that it's going to be -- well, it is. It is quite a gathering spot for people in the community along with tourists as well. And this is the Tin Building. The Tin Building is a very special place for us, not just because of what it means potentially financially for us, but also because this is a historical building. This is what used to be the first market building, the historical place where commerce began in New York City, if you want to get a little bit historical and perhaps even poetic. And it had fallen into significant disrepair. And after many years, it's coming back with a grand opening later this quarter. It will now be curated by Jean-Georges. It will have -- it already has because it's open for friends and family and limited service. It has a marketplace where people in the neighborhood will be able to buy fresh fruits and vegetables, fish, et cetera, which is not something this community already has. It's a neighborhood that's underserved from that perspective, and so we will fill that need. But in addition to that, it has several full-service restaurants, quick service restaurants, fast casual restaurants and is just an incredibly beautiful building. And I truly invite you, if you're in the New York area, take a chance and go to the Tin Building, and I think it will exceed your expectations. With the Tin Building being the last component of the Seaport to come online, we are looking forward after this to just stabilizing the Seaport after several years of redevelopment, lease-up after the Tin building, the Seaport District will be finally complete, and we'll get to enjoy all that it can offer to New Yorkers and visitors alike. So that's a quick overview of Howard Hughes. We could talk about our company for much, much, much longer, but I hope that this gives you at least some idea of what we do. And be very happy to take your questions, if there are any.

Yes?

So it's harder to play on the [indiscernible].

Great question. So getting into Douglas Ranch, for example, because it's the last one, it's hard to find opportunities like that. It's probably once in a decade that you find an assemblage of land that is ready for development. In Douglas Ranch, a lot of what you described, getting the municipalities and other local agencies together, that happened before us. We're the second owner. And we like to say that this is a business we're the second owner, where somebody else spent a lot of work. I know that it sounds opportunistic, but let's face it, a lot of investments are, right, where somebody else did a lot of the work to bring their assemblage together. And then like in this case, they looked around and said, "We need somebody that has the expertise to build cities," and that was us. And so then the opportunity came along. As far as what we look at, it has to be in the path of growth. It should be in a metro where we can -- has the right demographics for us to drive value. I mean in the case of Phoenix, for example, there's a significant undersupply of homes, there is purchasing power in the city. There's a lot of young talent that is making attractive amounts of money that allowed them to become homeowners, but they can't buy in Phoenix. Phoenix doesn't have the inventory. So for us, we're in the path of growth, and we can come in and take advantage of that undersupply very, very quickly. So those are some of the aspects that are important for us. And also, again, because we build cities and communities, as you can see outside, outside of The Woodlands Hills, we don't buy 2,000 acres or 5,000 acres. We need to have significant mass where we can really deploy all the knowledge of a master planned community developer. Anybody else? No? Yes?

So given the [indiscernible] changing the [indiscernible] buying house, how do you [indiscernible] affect this end or homebuilders that buy [indiscernible]?