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

Good morning, everyone. Thanks for joining. It's 10:15 our start time. You are here for the Howard Hughes Corporation discussion panel. My name is Tony Paolone. I work at JPMorgan in equity research. I cover the Howard Hughes Corp, and it's my pleasure to have a conversation here with David O'Reilly, who's Chief Executive Officer of the company. While not up here on the days with us, Eric Holcomb and [ Tal Man ] from the Howard Hughes Corp here as well in the audience. We look forward to this being pretty interactive. Hopefully, you all have some questions, and we can keep the dialogue going, but I'm happy to just keep going and drive the ship. If not, -- but let's start with kicking it over to David, why don't you to spend a minute or 2 just to level set, give us a quick description of the Howard Hughes Corp. and what you all do.

Yes, absolutely. Thank you, Tony. I really appreciate you taking the time and offering the Hostess panel. So the Howard Hughes Corporation at the end of the day, we're a community builder. We build small cities, large-scale communities in key markets throughout the country. We play SimCity. We put in the roads, schools, homes, office buildings, apartments, shopping restaurants and curate these communities into what have been ranked some of the best places to live in this country. As a community builder and as someone that has unique control over these large swaths of land, we have some meaningful competitive advantages. One, we're spending about $1 billion to $1.5 billion a year, building, developing, creating value for our shareholders, and we're able to do it entirely self-funded with our free cash flow. Two, we're seeing a value appreciation cycle that's unlike any other company that's public in this conference today. We sell land to homebuilders. Those homebuilders build homes and residents move in. The residents want commercial amenities places to work, apartments, restaurants, shopping amphitheaters. We build those at outsized risk-adjusted returns, which, in turn, make our communities more valuable. More people want to live there. Our land becomes more valuable. More people live there, more amenities and that cycle goes on and on and on. So that self-funding cycle of value creation is something that's unique to us and something that we take a lot of pride in, in terms of building out our communities. Our portfolio is from Wall Street to Waikiki. We are here in New York at the South Street Seaport, the master plan community of Columbia, Maryland, 3 master planned communities outside of Houston, the Woodlands, Bridgeland and Woodland Hills. The master plan community outside of Las Vegas known as Summerlin. We just started our most recent community called Terra [ Villas ], which is 36,000 acres just west of Phoenix, and we own Ward Village on Oahu in Hawaii.

Thank you for that. And so I do think, genuinely, this is one of the most interesting stories. I think you're going to come across here at the conference because it is so unique and you started off by talking about you placed SimCity effectively, you're building cities. So let's start with some of the master planned communities because you are in the business of developing land and creating these environments. But at the same time, I think we're all aware of the housing market that slowed down. So maybe talk us through like what is happening with lots and demand within your communities today and try to distill that from maybe what we're seeing with the headlines.

Yes, absolutely. So in the fourth quarter, clearly, there was a housing slowdown, but it was more of a pause. And I would tell you that home purchasing, the perception is far from reality. The perception is that higher interest rates means less people buy homes. When I think the reality is the volatility of interest rates causes homebuyers to pause. Because in the fourth quarter, we saw that happen as rates spiked and moved pretty rapidly, cancellations were up at 38%, 39% in our communities. They're up about the same level nationally and home sales cost. But in the first quarter, despite the fact that rates are still pretty elevated, but there was stability in rates, home sales rebounded very quickly. We were up 120% sequentially. Our master plan communities in Houston had the best first quarter in their history of home sales despite higher rates. Cancellations came down to about 18% in the first quarter, and they're trending at 15% or just below this quarter. Home sales have actually accelerated April, May and even in this first week of June. So the headlines of higher rates means that folks aren't buying home has been far from reality. Our home sales have been nothing short of incredibly resilient and bounce back very quickly this year. As a result, I'm expecting land sales to continue to pick up throughout the year. What we do is we sell land to homebuilders to keep up with underlying home sales. And when those home sales are strong, as strong as we've seen in the past 5 months of this year, land sales are going to be right behind it, and we're expecting to have an excellent year.

And maybe can you talk a bit more about like the nature of the buyers of your lots you're not necessarily selling them to individuals so much as to builders and others that are creating this community. So maybe take us inside like what's driving their thinking right now and what's happening there?

So I would tell you the builder mindset, they're as positive as they've been in a long time. in the second half of last year before the pause, if you will, they saw record high margins. In fact, the average margin of the public homebuilders is 28% or 29% in 3Q last year. In a business that's historically been 15% to 17%. And they're still making very healthy margins, and they're still aggressively bidding on our land. We're selling a lot to a lot of the public homebuilders as well as the large private regional homebuilders in Houston and their appetite is very strong because they're moving their product very quickly and doing so at very healthy margins.

And so if we -- you mentioned some of your master plan communities around Houston, Las Vegas, Phoenix, maybe start with Houston. Like what are some of the drivers that are underpinning sort of the demand in your Houston markets? Like who's going there? What's driving that population shift to a Howard Hughes community?

Yes. And I don't know that the dynamics for Houston or Summerlin or Phoenix are that much different. The folks that are coming into our communities are seeking the quality of life that they can't get in big cities or coastal markets. They're coming for lower taxes, better education, connectivity to nature, short commutes to work things that just don't exist in some of the large cities. Our new buyer surveys that we do across our communities every year for the past 5 years up until the pandemic, let's say, so up until 2000, there was always a tie for first, and it was education and connectivity in nature. Into the pandemic and coming out of it, we now have a 3-way type for first, education, connectivity in nature, safety and security. And to be able to raise their family in a safe environment, to have a short commute where they can get home in 10 minutes versus an hour train ride, low or no state taxes. And that trade has been something that we've seen pretty consistently across all of our communities. I would say that if there's a difference between our Houston and Summerlin, Las Vegas community, is that we see a greater in-migration from California buyers in Summerlin than we do in Houston. About 50% of our homebuyers in Summerlin are out of state, a little bit over half of that are California. In Houston, it's more diverse between Northeast, Midwest and West Coast.

Okay. And I think one of the things in the last couple of quarters, and we talked about this on your call is you sold some large parcels of commercial land. How important is that to driving sort of just the activity levels and bringing people to these communities?

And to be candid, I load selling commercial land. I would much prefer to build it myself. And the commercial land parcel that you're referring to in Bridgeland is to a user, a company out of California that's relocating and building an R&D campus, creating thousands of high-paying engineering jobs on the site that we sold the land to. Unfortunately, they wouldn't entertain a ground lease. They wouldn't entertain a build-to-suit. They wouldn't entertain any way where I would have continued to own the land. But the user is so strong. It's incredible credit. And once the confidentiality expires, we'll be happy to talk about who the company is. But it was such a -- we think, a catalyst for Bridgeland that we swallowed hard and I think made the right decision to sell them the land so they can build their own campus. We think it's a catalyst for Bridgeland in a couple of ways. First, those thousands of jobs will require homes and we're happy to sell the land to the homebuilders to build them homes. But those thousands of jobs are just the beginning of the other companies that will come in and want to be around them. And the other companies and their employees that will need homes and places to shop and restaurants at dine in, and those are the things that we're going to continue to build that outsized returns in Bridgeland. Bridgeland is a younger community. It's only about 11 years old right now. compared to our other community in Houston, the Woodlands, which has started in 1974. The Woodlands is 120,000 residents and 60,000 people commute into work every day. It's not a bedroom community for Houston, it's its own employment center. We have over 1.5 jobs per rooftop in the Woodlands, and that's where we want Bridgeland to get to as well. And we think that this is the first step in creating that true commercial live-work-play environment in Bridgeland that has historically just been a residential community.

Before we kicked this off, we talked a little bit about Las Vegas, and you had mentioned Summerlin earlier about that, having a bit more of a draw from folks outside of the state there. Can you talk a bit about what's happening in Summerlin and just the Las Vegas Metro in general, which as we were chatting about, has just become so robust, and it seems to be firing on all cylinders right now.

There's no doubt about it. It's really coming into its own over the past 3, 5 years with professional sports franchises with diversity of the economy away from just gaming and the strip. We've seen so many talented employees leave the coast, leave California, the Midwest and move to Summerlin, move their families there that now we're seeing companies chasing them. We're hitting an inflection point in this country where there are more folks retiring out of the workforce than entering it and a declining employment labor pool. And if you're the CEO of a large company and you're thinking about where you're going to find the talent to execute on your growth plans, you can't make the decision that we made 10 or 15 years ago and say, I'm planting my flag here. This is where the headquarters are, and everyone would take their spouses and dogs into the wood grain station wagon and drive to where the jobs were. That doesn't work. Today, CEOs are faced with the decision of having to figure out where they're going to put their office, where they're going to put their headquarters, chasing the labor pool. Because the labor pool has made the decision, we don't want to live in certain places with long commutes where I don't feel safe, where I can't give a great educational opportunity to my children. And we're going to go to those markets like the Woodlands and Summerlin. And as a result, companies are chasing them. And we're seeing more and more companies coming into the Las Vegas Valley, calling at home with a satellite office or a headquarters, chasing that talented workforce that led the way.

Is that the impetus because I think everybody is probably aware of the office business having its fair share of challenges that you all started a spec building in Las Vegas. As you think about that?

We just finished leasing our last spec building. And that's our job. Build a building, fill it, build the next one. create value for our shareholders, drive NAV growth. So if we see demand and we're full, we should be building the next building to meet that demand as long as we can build it at outsized risk-adjusted returns. We could have had the same conversation 18 months ago when we started the last spec building in Las Vegas and say, "What are you doing? We're full at rates well in excess of what we underwrote, driving unlevered returns and value creation to our shareholders beyond our expectations. And given the success of that and given how many other companies are looking to be in Summerlin, to have that great office. We're starting our next building. Now our next building is more modest. It's less than 150,000 square feet. It's in a slightly different submarket than where the last building was . So we're not taking, I don't think, outsized risk by any stretch, but we're building to meet demand, and that's our job.

And I think maybe folks were aware of the [ Oconee ] moving to Las Vegas, you all own the minor league aviators there in the stadium. Any spillover benefit to you all? How does this...

Yes. We have an agreement in place with the -- as that we have agreed not to relocate out of the market that we agreed to stay there, and they're incredibly supportive. We think the model between major and minor league teams where they're in a similar market, 20 minutes to 40 minutes down the road has shown great success. Whether that's Minneapolis, St. Paul, Dallas or Allen, Seattle, Tacoma, those teams have thrived as a result of having a family-friendly, affordable experience where you can see the stars of tomorrow, today in the Minor League part . So we're really excited. Our Minor League ballpark in Summerlin average is just under 9,000 fans. We actually had higher attendance in the [indiscernible] days last year. I try not to rub that in. And it's a vibrant community amenity. 9,000 people come with their kids, [indiscernible] nights a year to experience baseball for the first time, walk across the street shop in our shopping centers, go into our restaurants meal and it create experiences for their family that they don't do in other communities or they may not feel safe doing in other communities, and that's part of the draw of why building these communities, I think, is so powerful.

Yes. You had your Investor Day event there last year. It was a fantastic part. I highly suggest going if you haven't been there. May be let's shift over to your newest master plan community in West Phoenix Terra Villas. Very early stages. Can you talk about just the thinking there, the time line and may be what we could expect in the near term?

Yes, sure. I'll hit the time line question first because that's easy. It's going to be 50 years to build out this community. 37,000 acres roughly 3x the size of Manhattan, we're entitled for 100,000 homes, 300,000 residents and 55 million square feet of commercial space. This is a community that will be roughly the size of St. Louis when we're done. We are well under construction, grading and putting in roads, what we call water campus, which is the water that serves all the homes. And we're in process of contracting to sell our first 1,000 lots to homebuilders this year. And that will be the very first stages of our community and our new city called Terra Villas just West to Phoenix. We're incredibly excited. And this is a project that over the next 40 years, will drive meaningful free cash flow to the company, allowing us to reinvest that in building great commercial amenities and creating value for our shareholders. We have 15-ish years left the residential land to sell in Bridgeland and Summerlin, and Terra Villas will be just kicking into full speed as we run out of land in those other communities, continuing this great machine that we have of self-funding.

And so is there a existing product nearby that homebuilders could point to and say, we have an understanding of price, we can what these price points look like initially to get this going?

Yes. So like most communities, you start out with more affordability and then over time, continue to diversify the product from affordable to more upscale. So this community out of the gate will be at the more affordable level. There are smaller communities on either side of us that are purely residential that have had incredible success selling homes. And we're going to increase the level of competition and build to a higher quality than we think some of the other products that are out there and create a new great community.

Great. Question in the back.

Phoenix is one of the forward [indiscernible] markets and currently, I think in [indiscernible], I know you said 50 years and [indiscernible] And can you address [indiscernible], we've heard the story about the value of [indiscernible] in years. This stuff has gone [indiscernible] down for the last 8 years, what is going to change from the near term or medium term to change that?

There's a lot of questions there. I'll try and take them one at a time.

Maybe to break it into 2 pieces, if I heard right. So first is on Phoenix, a market that's perceived sometimes is always just having a lot of new builds in homes. So maybe think about maybe just address supply demand and how you're thinking about that kicking off. And then I think the second set was more or less around catalyst for the stock.

Yes. So Phoenix question, first of all, I can tell you that right now, I don't believe it's an overbuilt market from a residential standpoint. It's grown by 100,000 new residents a year for the past 10 years, really driven by affordability. The income to afford an average home in Phoenix is 1/3 of San Francisco, half of L.A., half of New York. And I don't see that dynamic changing. Today, homebuilders don't have in terms of vacant developed lots, their inventory on the ground, about a 10 or 11 month supply. I'd argue equilibrium is about 18 to 20 months. Because 18 to 20 months is a time frame from when they close on a lot, build to model home, sell that lot and build a home and deliver to the home buyer. So I think that it's an undersupplied lot in terms of residential units, consistent with the overall country that's undersupplied by about 4 million housing units today. In terms of catalysts for the stock, look, I can't give you the exact reason why the stock is traded where it is. I don't sit on the other side of the table. I agree with you that it's been disappointing personally, and it needs to change. We're changing every day in terms of our disclosures, increasing our transparency, simplifying the story, selling off over $1 billion of noncore assets to focus on what we do every day, which is create value across our communities. Look, I would tell you that we trade at a discount to NAV and as important as closing that discount may be. I think what's more important is growing our NAV. We're generating hundreds of millions of dollars of free cash flow every year that we're able to reinvest that will drive the value per share higher, drive our intrinsic value higher, and that's where we're focused. As a more complicated story, admittedly. And as a company that doesn't have a great peer group or any peer group, not even in this building right now. There is the potential that we could always trade at a discount. Our job is to try to minimize that discount. And more importantly, our job is to grow the intrinsic value of the company. Because even at a constant discount, if we're growing the NAV by a double-digit rate every single year. We're going to drive more value for shareholders than any other public real estate company.

We have a woman back here. Go ahead.

This is really [indiscernible] not at all?

So the question was about water in Arizona. I'm just repeating for the folks online. No, it doesn't. The restrictions that were put in place by the governor last week those restrictions already existed in Phoenix West Valley. So the only folks at that impacts are folks outside of the area where we're developing. In our community, the first phase of our community is known as Flora. We have certificates of assured water supply for the entirety of that. Terra Villas, the balance of the land is broken up into 9 phases. The first 5 phases, we have an analysis of assured water supply. So we think we're in an advantaged position as it related to water, and we have done a lot of work to secure water rights for at least the first phases of the project, and we'll continue to work with legislature to get the water for their Villas. I think that announcement had a great silver lining. Because I think it's going to force all the residential developers in Phoenix and in Arizona to enact strict water conservations in their development. Things that we do anyway, and it's going to force everybody else to play by our rules, which are the most stringent and the most conservation focus of any residential developer out there. Again, we're not building land for 2 years and leaving town, making our money. We're going to be here for 40 or 50 years. Our employees are going to live there. Our kids are going to go to school there. So we're committed to building to the absolute best standards possible. And if we can enforce the same type of legislation and the same type of conservation that they've done in Las Vegas, Phoenix can go a long way. The Las Vegas Valley over the past 10 years has doubled its population. It uses less water today than 10 years ago. Why? We have great water retention. We have low-flow fixtures. We have no grass. We have all natural desert landscape. We have only used drip irrigation. We do all the things you're supposed to do in a desert environment to conserve our precious natural resources. And I think Phoenix is going to catch up to those type of stringent regulations very quickly.

I have a question on here gentlemen.

It's kind of a same themes, I guess, first question, which has the REIT invested [indiscernible] your company. It's very hard to figure out if talking about going up over the next 5 years, what exactly the intrinsic value is? And then what makes that even more difficult unless you have very detailed local knowledge in each market is as far as I know you don't pay dividend right?

Correct.

So if you're not returning any cash to shareholder's and telling us keep buying our stock because we're bringing on trade value. At what point does that become tangible to us as a shareholder?

So the question was, what's in it for us as a shareholder.

Is it different reason [indiscernible] We asked how you figure our the intrinsic value there, what point do we get paid out?

Yes. So I think the road map to calculating our intrinsic value is within our supplemental and with our Investor Day presentations that we do every year where we lay out an illustrative sum of the parts analysis. I say illustrative because while I put cap rates and discount rates in there, you'll never believe me, that's okay. You'll come up with your own and plug them in and be able to determine your value. We don't pay a dividend, and I don't expect we'll pay a dividend because we used see higher and better uses of that capital than returning it to shareholders because of our ability to invest in our backyard at outsized risk-adjusted returns. I would say that if you're a REIT investor and you're looking for an opportunity to invest in a stock because next quarter's FFO is going to be great, don't invest in us. We're not a story about next quarter. We're not a story about next year. We're a story about long-term value creation. We're in a story about intrinsic value creation over multiple years over a decade. That's our job. That's how we build value. That's the business plan of Howard Hughes. I can't point to a near-term catalyst or to say that there's a patent that we're going to invent and copyright next quarter that's going to move our stock. That's not us. singles and doubles, long-term game.

Just quick to get to a couple of more questions with David. On that front. Just you started off earlier in the conversation with the $1 billion, $1.5 billion that you're putting to work each year. Like is there a way to put brackets around sort of the returns on invested capital you see yourselves earning? And therefore, what that does to the intrinsic value on an annual basis.

Yes, without doubt. Look, our last several multifamily projects that we announced this year, about $200 million worth of gross development. We're developing it close to an 8% return on cost. You guys tell me what the right cap rate is on those assets that are the best in their market in a submarket, which we have 95% ownership of the Class A space and a dominant market share. I think that, that $200 million at a 5% cap creates multiples of what we've invested in it, in terms of return on asset and multiples of that on a return on equity. And if you think about the NAV implication of just that $200 million, we're probably driving $2 a share just there. And that's a fraction of what we invested last year. And we can do that over and over and over again because we have 80 million square feet of entitlement, no competition and free cash flow that we have the ability to invest.

Great. Thank you have a question up here?

Has the discount to any over time has it increased? I mean with this gentleman just asked as a point. I mean usually, it's like as an investor, how you [indiscernible] -- what's the end. I mean, if your discount, I understand you're trying to increasing your NAV. So you can add value by increasing NAV if the discount doesn't increase over time that -- it creates value.

Certainly, yes.

So I'm just trying to understand, what this gentleman just asked you don't pay a dividend, you're not kind of paying dividend. What's the end game in terms of the payoff to the shareholders if the company [indiscernible].

You have daily liquidity and ability to sell your shares every day as a shareholder. And if we're driving the value higher.

The value higher and stock is flat and you're [indiscernible] the NAV is going up on the discount is why?

That would be an accurate mathematical representation. What I think is ...

When is it going to end there, when is it going to -- at some point, when is this count be going narrow or you're going to take some sort of corporate action to force the discount in the house.

The way I would answer that question is to tell you that while the stock is flat over the past couple of years, I would say that discount has narrowed as the underlying value of some of our operating assets, no different than the other companies that are in this room have declined as there's been pressure on office buildings and other assets that have been caused cap rates to increase. And there's been some headwinds in that regard, in the overall asset class away from the underlying fundamentals of our portfolio that I think a lot of folks at this conference are dealing with right now. And over that same time period. Again, I don't have the stats in front of me. Tony can tell you better than I can. But if you looked at office peers, multifamily peers, all those public companies and saw how they traded over the past 2 years relative to Howard Hughes, I think we've outperformed. I think we've done better than them because of the diversity of our portfolio, the quality of our results in the land sale business that has not shut off despite the changes in underlying interest rates.

Yes. I think if 18 months ago, you had have told me that housing is going to really draw down in terms of activity levels. I'd have been a lot more worried about Howard Hughes. If I'd have seen that coming and I think that concern would have been a bit unfounded because I think you've pushed through that in a far better manner than I would have expected if I'd have known. That was going to be the headlines for whatever, 2, 3, 4 quarters or whatever it's been. I mean maybe on this point, maybe go back over the last, say, perhaps 5 years might be the right time frame. And can you talk about the things that you've done. Because you did run a process, you did buy back stock. You did sell assets and try to simplify -- what are some of those things on your mind as you look ahead? Because it seems like you've shown a willingness to both balance things that could drive a catalyst to, I think, some of the folks' questions as well as kind of keeping the business on track.

Okay. In 37 seconds.

Sorry, running out of time.

Yes, it's about 2.5, 3 years ago, our Board led by Mr. Ackman, our Chairman, who ran a strategic alternatives process. Coming out of that, we made the decision to rightsize the company, sell all noncore assets, deleverage the company and focus our business plan on what we do best and away from the extrinsic gas -- we've executed on all of that. We shrunk our G&A from $140 million a year to about $75 million a year. We sold all the noncore assets, and we reinvested that capital both into our backyard and about $500 million of share buybacks as a way to continue to drive value higher. It's an active, thoughtful very engaged board, and I don't imagine that they're going to sit around on their hands and wait for nothing to happen.

We'll sneak one more in here, and then we'll call it.

Can you tell us anything about your office portfolio class a building that we exited also noncore or is that on or...

I could tell you that our office portfolio has performed remarkably well. And I think we're the beneficiary of so many of these companies that are just moving into our markets. We bought a building 600,000 square feet in the Woodlands entirely vacant right before the pandemic, brilliant timing, I know. Today, we're full. And we've done it with a cosmetics company out of California, a benefits company out of New York, a utility company that grew into green energy. And we've done it with a diverse tenant base of out-of-statium migrations, and I think that's going to continue.

Multi-tenant?

Yes. We have a couple of single tenant build-to-suits, but the dominant part of our portfolio is multi-tenant. Great. Thank you all.

Thank you, David. Thanks, everybody.