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

[Audio Gap] Jeff Elliott with Three Part Advisors. I am going to welcome Howard Hughes Corporation as our next presenting company. The ticker is HHH, was HHC, recently changed as they did a reorganization. Based in Houston. Here from the company today, we have Chief Financial Officer, Carlos Olea; and the Senior Vice President of Investor Relations, Eric Holcomb. And with that, I'll just turn it over to Carlos.

Thank you.

Thank you very much and good morning, everybody. Have a bit of a challenging task here because I only have 35 minutes to talk about a company that I love more than anything else and I could go on for hours and hours and hours but I'll try to be efficient and leave some time for us for questions at the end. Well, here we are, the Howard Hughes Corporation, Howard Hughes Holdings now. Who are we? I can throw a lot of stats at you. But when you first think about what really truly makes us different. You know of a lot of real estate companies, I'm sure, either because you lived in apartments, because you own your home, for a number of reasons. Well, we are a developer of cities. So when you think about investing in an apartment REIT, for example, you have fractional ownership in apartments. And if you invest in an office REIT, you have fractional ownership in offices, invest in us, you're a part owner of several cities across the country. So that's what really makes us different. We don't build just one building at a time. We build one city at a time. And our cities are spread throughout the entire country like, we would like to say from Wall Street to Waikiki. So we have a neighborhood in Manhattan. I'm not going to pretend that we own New York City, we don't. But we own a neighborhood in New York City. It was called the Historic Seaport District. If you ever have a chance to visit, it's not only a very beautiful real estate development, it's also an incredibly historic part of New York that I believe does not get as much credit as it should because that's the place where the city started. That was our first port and you can visit the Seaport and go to the Seaport, when you see them and see how we've integrated the history to the development that we have at the Seaport. We also have Columbia, Maryland, with amazing historical significance. This was one of the first master plan community started by Jim Rouse, a gentleman and a legendary real estate developer, who was the first one several decades ago, "There will be no red lining in my city." Rouse, a visionary, not just in real estate development but also in social justice. When it was common for banks to not lend to people of color, Jim Rouse said, not in Columbia. And it's a very mature city that we have the honor and the privilege to own. And then we have our 3 communities in Texas, right outside of Houston; Bridgeland, The Woodlands Hills and The Woodlands. Next year, The Woodlands will celebrate its 50th anniversary. It carries forward the legacy of Jim Rouse because George Mitchell of oil wealth in the state of Texas, wanted to replicate a lot of what he saw in Columbia, Maryland but do it in the Woodlands in a different environment, in an environment that was his own. And so ours -- this -- it's a city on its own. It's outside of Houston, north of Houston but it has its own employment center. More people commute to work to The Woodlands than out of The Woodlands for work every single day, which was one of George Mitchell's objectives, that 50 years ago, people thought like, just a rich person that gets to think crazy thoughts. 50 years later, we accomplished that actually 3 years ago -- 2 or 3 years ago. We became a center of employment in our own right. We have Ward Village in Hawaii, which is a different type of master plan community. It's a vertical master plan community. And I will show you in a little bit, some of our towers that we have there. Hawaii being the island that it is, there's not the abundance of land. So in 60 acres, we are building up. We have an incredibly vibrant condominium development business there that continues to just exceed all expectations. Then we have Summerlin outside of Las Vegas, Nevada, which is really where our name comes from. Summerlin is the name of Howard Hughes' maternal grandmother. And we are the Howard Hughes Corporation, now Howard Hughes Holdings because we have Howard Hughes' real estate portfolio, which is in Summerlin Nevada. Incredibly vibrant, one of the greatest beneficiaries of in-migration from the West Coast and the East Coast, people trying to find places that have lower cost of living and that also have access to nature. And Summerlin, along with the Woodlands and Bridgeland, have been incredible beneficiaries of that. And then finally, we have Teravalis, the first MPC that we get to start ourselves as Howard Hughes Holdings. Every other MPC that we have, I mentioned the founders of those MPCs and I would be remiss, if I didn't say -- mention Victoria Ward in Ward Village because their legacy of stewardship and caring for nature is something that we take very, very seriously as well, while Teravalis is the first one that we start. And we have 36,000 acres ahead of us in development there, approximately 50 years of development. I will not be around to talk about Teravalis when we sell the last plot of land. But somebody else will. And much like we are here and not Jim Rouse, not George Mitchell, not Victoria Ward, we plan to do this right so that whoever is here talking about Teravalis in 50 years, is talking about the great things that the Howard Hughes Holdings, Inc. did for Teravalis and how we developed that, how we cared for nature and how we thought about the future. In every one of our communities, approximately 20% of the area is preserved for nature, parks, trails, et cetera. We take it very seriously. And it's not just -- this is not -- this is before ESG and everything else. This is sound development because when you do that, not only do you care for nature, which is very important, you care for the environment, you also build places where people want to live. They are less dense, they feel more comfortable that you can have a healthier lifestyle. So it's not just something that is nice to put on a glossary right now that everybody is focusing on ESG over the last 3 to 5 years. It's always been the way we build because it just makes it a nicer place where people want to live. And when you have a place, like our communities where people want to live, companies want to be there because their workforce is there. When companies want to be there, we get to build those buildings. When we build those building, we manage them and we get recurring income from leases. So everything is another piece of the puzzle that feeds this value of -- this cycle of value creation that we have at Howard Hughes. These are some of the main components that we have. As you can see, it starts with thinking about people. When we go to start a community, we're not -- or even a neighborhood inside one of our existing communities, the first thing we would think about is this, is this a place that affords the ability for people to grow, live, work, play, learn, worship? In other words, are we covering all the aspects of the human experience inside of our communities because again, when we do, retail space that we develop is going to be successful because it has -- it will have customers, the people that live there, who want to be there. Because if we do this, then offices will come because there's people there already. Their workforce is there. If we do this, we will sell land to homebuilders because people will want to live in our community. So this is very key. And this is -- as you can see, there's nothing financial here. We're first thinking about how do you build a city that has staying power because people want to be there. And that's -- this is what we focus on. How we executed is through this, through our 4 segments. And the cycle of our creation goes with the master planned communities segment, it's our land bank. So our land bank sells land to home developers. We don't build homes. We work with all the homebuilders that you can think of, all the national ones and some regional and local ones. We sell them land and they build homes. And that happens through the master planned communities segment. We take that cash that we harvested from our home sales and we deploy it to our strategic development segment which is our in-house merchant developer. So we build our own buildings with cash that we harvested from land sales. And then when those buildings have competed, the [indiscernible] office, multifamily or retail, they get transferred to our operating assets business for management and that's where we get recurring income from leases. So we're integrated in-house to go from selling a plot of land to managing developments that we developed ourselves. That's the cycle of value creation. Those are our 3 segments. Then we have a fourth segment, which is the Seaport. We call out the Seaport separately and distinctly because it's a little bit of everything. Even though it's small, the Seaport has components of master planning. It is a neighborhood after all that has to have components of master planning. It also has office space. It has retail space. And it has some other things that are very unique to it, like a concert venue, for example. We don't have concert venues anywhere else that we own. And so Seaport is unique in and of itself and it also has very special dynamics within the island of Manhattan in the City of New York. And so we carved it out as a separate segment so that people can understand that easier. But the other 3 segments at the end of the day, the model is not complicated. Sell land, harvest cash, take that cash to build commercial amenities of all types, manage them for income. That's the business model [indiscernible]. These are some statistics about our business model. I'm not going to stay here. Again, here, the main point we're trying to make is that, if you see that tag line, how you live, how we built, we take that very seriously. But then -- and I talked before about how it starts with making sure that we're building a place where people want to live, that's what makes us successful. If we started backwards, thinking about yields and returns only, we probably wouldn't build a pleasant place where people want to live. Making a quick point here. If you look [indiscernible] on the left, our operating asset NOI, it's net operating income, which is a recurring income that comes from leases, has been steadily increasing throughout from 2011 or inception to now. And in a further slide, I can show you what we expect that it's going to be. But that increase has been very, very significant. And again, it comes from because we're deploying that cycle of value creation that I've already covered before. And you can see it as well a very significant land appreciation on the right. In 2011, an acre was $364,000. By 2023, we're at $2.2 million. And you can see that. I don't need to drive through, read out, every one of you -- every one of them I know. But the point is that this cycle of value creation does create in the long term to the value of the company and obviously to the value of an open investment in HHH. This is one of my favorite slides because this makes the point even more concisely. So in 2017, our land bank was valued at $3.7 billion. Using the same valuation assumptions, we calculated what would be in 2023. And what you can see here is that even though in those 5.5 years, 6 years in between, we've sold more than 2,700 acres. What is left, which is 2,700 acres less than where we started, it's worth more, right? Why is that? Well, there's -- land is finite. So scarcity plays a role. But also because all of those commercial assets, all of that thoughtful master plan that sets aside 20% for natural preserves, that partnership with the right home developers makes remaining land more valuable. So this doesn't happen without our thoughtful master plan. And quite frankly, we have a lot of discipline but also, it requires us to think, which we love and that's why a lot of us gravitated to this company, requires us to think long term. We don't think about the next quarter. We don't think about what's going to -- how we're going to -- if we're going to beat consensus or miss consensus in 3 months. We don't think about it in that way because we can't. You can't build a city like that. We have to think long term. And then we have -- we can demonstrate with information like this, that the thesis works that over the long term, we generate value. Again, we're selling inventory. We sold 2,700 acres. And what we have is worth more than what we had in the beginning. A little bit more stats about who we are, again, pretty sure you can see this at leisure and we're happy to interact with you and outside this session, if you want. I'll stop here, given -- for a moment, given the environment where we are. We hear about rates all the time. I just woke up this morning to a push notification saying, "Oh, we'll see what Powell says at Jackson Hole, we'll see." It's very important. But for us, we're in a very strong financial position. Look at our maturities there. As you can see, we've pushed out -- we've refinanced, we did significant amount of refinancing in 2021 at really attractive rates and you can think of where rates were, 2021. So a lot of our debt is -- has really, really favorable terms and we've been able to push most of our maturities to past 2027. And then we have virtually no floating rate exposure, only 2% of our debt is floating. Most of it, as you can see there, is fixed. And for the rest, we have put hedges on top to fix them. So we have minimal risk and this is going to be -- this has always been our philosophy. We strengthened the protection against volatility -- risk volatility during this year or a little bit more than a year that we've been through. And we continue to evaluate the need to hedge our variable debt. So we're in a very strong position, which is -- thankfully for us, it's different than what some other participants in real estate [ might hear ]. So I wanted to take a moment here to show you that we protected our balance sheet very significantly. All right. Very quickly, these are our 5 master planned communities. We've mentioned them before. You can pick anything from the East Coast to the -- what would we call Hawaii, not the West Coast, it has its own coast. I don't know what to say but we have all -- we have different markets. Now one thing that is not perhaps immediately evident when you look at this, is this, particularly in Houston and Las Vegas and it's going to be in Phoenix as well, we're talking about areas with a really -- with a lower cost of living compared to other markets where taxes are low, where cost of living as a whole is low. And that's part of what has also created a lot of attraction, immigration from, I don't want to name states because I don't want to hurt anyone's feelings but let's just say from the East Coast and the West Coast that have higher taxes and higher cost of living into our communities as well. Some accolades, we'll run through them real quick. Just a quick visual, these are actual, real pictures of our communities. So you can see some of the dedicated green space, the top left is in Bridgeland. The top middle is in Summerlin in Nevada, where you have -- we have trails. One of our characteristics is, all our communities have this network of interconnected trails where people can go jogging, walking, biking, whatever they want to do. I happen to think that the views from the ones in Summerlin are just unbelievably beautiful because we have the Red Rock mountains as a backdrop. And if you're jogging the other way, you have the lights of the of the Las Vegas Strip. So either way, you pick which view you want and you have an amazing view. But another point that I wanted to make here is the short commutes. Part of the master planning in becoming, like I said before, an employment center on our own right is that, if you live in The Woodlands and you work in The Woodlands, your average daily commute is 7 minutes, 7 minutes. I don't know what your commute is. I used to live in Washington, D.C. My commute was not 7 minutes. I don't think I was past the first 2 lights out of my house in 7 minutes. It's an amazing benefit. And it accrues to us when it comes to leasing as well. We all hear about how office is never coming back. Office is gone, it's a bad asset class. It's not, when your commute in 7 minutes. And that's what we see, day in and day out. When your options are to work from home or maybe you have a nice home office but maybe you don't and maybe you're using a break. If you live in a metro area where your community is going to be 1 hour on train or 1 hour and 40 minutes driving or whatever it is, 2, 3 hours a day, back and forth, you probably stick with it even if you don't -- it's not the most conducive environment perhaps to be home with all the distractions whatever for some people is. But with 7 minutes away and your total round-trip commuting is 14 minutes a day, you go to the office. And that's what we've seen. That's where our leasing has been incredible in The Woodlands. We barely have -- we have almost no vacancy in The Woodlands office because of that. And in Summerlin, contrary to everything that you might hear about office as well, we're building an office building. Now it's the only one that we're building in the portfolio but there is demand and it's a very similar concept. If you can build the right office building with the right amenities, of course, it's almost a given now that almost any Class A office building is going to have a nice gym and it's going to have some other amenities. That's fine. But our location is unbeatable because what others can't give is that 7-minute commute. And so for the right office building in the right location, they're thriving, they're thriving. Now that doesn't make the news. What makes the news, what sells print is that the office has gone and Armageddon is coming. And the reality is that, it might be in some cities. And we don't need to talk about them. I'm sure you heard about them but some cities don't have that 7-minute commute , don't have the dynamics that we have. They might be in trouble. But our office portfolio, we're actually getting the tenants that are leaving those buildings from those cities that are going to have issues, they are coming to us. And it's part of building in a proper master plan. Here are some comparisons about what I was talking about. And one of the ones that I want to focus on briefly is just the cost of living index. If you look at Houston, Las Vegas and Phoenix, where we operate or plan to operate and compare to the other metros, I mean, it is very clear. And that's part of what people get when they come to us. If you say, I mean, the proposition, it almost feels like it should sell itself. And in a way it does. Do you want to live in a place that is cheaper where you have a very short commute, where you can have a healthier lifestyle and a bigger home? And the answer has been yes, very resoundingly. And that's why over the last 2 years, we had record sales in MPC, which is our land sales, because people continue to want to live in that environment. And also about -- when we had our last earnings call some -- a couple of weeks ago, we raised our guidance for MPC because we're going to sell more land than we were expecting last year when we thought that the credit crunch is going to have more of an impact on the land sale business. Now our homebuilding partners are coming back and saying, we need land and we have the land. We're going to sell them the land. And therefore, we raised our guidance because people again continue to want to live in our communities. I'm going to go quickly through some of this because I want to leave -- want to leave some time for questions. Happy to talk about anything else, again, offline, even if you want. I just want to show you this really quickly because this is the inventory. This is what we have ahead of us. We get the question a lot of, when are you going to buy another master planned community, are you looking to add another one? And we say, well, we always look at all the options. But this chart tells you that we have plenty to do. We really don't have to be looking for the next Teravalis, although again, we're always looking for opportunities. But really, we're talking about, even excluding Teravalis, we have 22 to 23 years of development ahead of us. And then if we throw Teravalis in, I mean, again, 2080. So -- and this shows you also the different levels of maturities of our communities where The Woodlands is almost done with residential sales. We don't have that much anymore, has commercial, decent but then you go all the way to Teravalis that is just starting. So this is what we have in front of us, without even have to think about another acquisition, M&A or anything like that. We have more than enough to continue with the value creation cycle. We always strive to have all different price points in our communities. They're not intended for the overrich only, they're not intended for a certain socioeconomic strata. That's not how you build a city, a city has to have diversity. And we accomplish this by working with our homebuilding partners and making sure that they have all the different price points in our communities. Now I'll show you this one and then I'll jump to Hawaii, so I'm going to be skipping some things. This is a real comparison of how much home you can get in L.A. for [ $500,000 ] versus Las Vegas. We don't have the animation here but if you go to our website, you can see it. That home in L.A. fits in the garage of their home in Las Vegas. All right. Let's go to Ward Village. Here we are. This is Ward Village, 60 acres, 9 million square feet of development. And what have we done in Ward Village? Well, so far, we've completed these 6 beautiful towers. If any of you ever finds yourself in Hawaii, you're going to Waikiki on vacation or something and you want to take a visit through our towers, we'd be very happy to give you a tour. They are just unbelievably beautiful buildings. And the resiliency of this market and this product has been nothing but spectacular. I mean as you can see there, we've sold -- we already sold -- we sold these 6 buildings but I don't think that anything shows it more than this slide. If you look at the 3 under construction, Victoria Place is going to be completed next year and is 100% presold and it's been for quite some time. It actually -- people were buying on a drawing even before we broke ground. The park, which is the next one, is already 93% presold, even though it's not expected to be completed until 2025. Ulana, 99%, again, 2025. And like staggering, Kalae, 2026, already 83% presold. It's a very strong market that shows no signs of abating. People from the island need housing. We're offering housing that they can afford. People from the Mainland want to move to Hawaii or have it as a second home. This is their option. This is the best inventory on the island. And then the Asian market, see it as an investment, their future retirement play and they're not going away. They continue to be very, very strong. Again, I don't know about you. I've been in real estate my entire career. I've never seen anything like this. We're on a drawing, you're at 80%, 90% presold. And then a couple of months later, you're already 100% presold, when you're 3 years out from delivering. It's unbelievably impressive. One last thing and then I'll open it up for questions, if you have any. The Seaport is, again, our very unique district in Manhattan. And I want to spend some time with the Seaport because we always get the question of like this one is different. Why do you have it? What are you going to do with it? What are your plans? Well, our plan is to continue doing what we focus on doing what we know how to do. We have approximately 80,000 square feet left of office space to lease in the Seaport and that building that has the #1, which is our Pier 17 building, that's where we have the concert venue. There's some of the best office space you can find for my money, not only in New York City but anywhere else because the views that it has of the river, it's just unbelievable views, wherever you are in this space. So we need to focus on finishing listing of that inventory 80,000 square feet, and we're very actively engaged in many different conversations. And then we need to work. We'll continue working with our partners and making sure that we're -- we support them in any way that is necessary to stabilize the Tin Building, which is #2 on the slide. That's our marketplace, run by Chef Jean-Georges Vongerichten, one of the most renowned chefs internationally. It's an incredible place. I would invite all of you, if you ever have the opportunity to go visit it. It's beautiful. Food is of the utmost quality and it's also a very fun experience. We need to stabilize it. We also said in our last earnings call that it's going to take us longer than we expected. So our focus for the Seaport is to stabilize the Tin Building, lease the 80,000 square feet and stabilize the entire district by doing those 2 things. We think there's a lot of value in the Seaport. And if we do those 2 things, it will start to show, hopefully, in our financials as well. We have 8 minutes left. So I want to open up for any questions. I know I skipped a lot of slides. So if there's anything else, please feel free.

[indiscernible]

The question is if we're buying land or developing what we have. We're not buying land. We have, as you could -- as we showed in the land -- in the inventory slide, we have plenty. We have plenty inside our communities. And it's also that by developing what we have inside of our communities, we restrict competition. Like nobody can build an office building in The Woodlands but us. Nobody can build an apartment building in Bridgeland but us. And they have upscale. Our communities are scaled enough that they create their own dynamics. So while, yes, somebody that's in downtown Houston or in downtown Las Vegas, thinking about, I want to move, I want to go somewhere else they're going to think about different options. But once they look at Summerlin, once they look at Bridgeland, once they look at The Woodlands, we're the only game in town. And so our focus is to continue developing our land bank inside our communities.

[indiscernible]

Why -- so the question is, why not sell more land to homebuilders or why don't we develop faster?

[indiscernible]

Well, why not expand the model faster nationwide? Well, there's different things there when -- let me start by why not expand it more nationwide where we are not already operating. It's very hard to find a land assemblage of scale, think 10,000 acres or bigger that is fully entitled and ready for development in the path of growth of a metro with the right demographics. There aren't that many. There's many that you can think of that fulfill almost all of them but they tend to be missing one. And in many cases, it's the entitlement process and the assemblage. And so we'll look at different options and you might find something, for example and I'm making up but for example, outside of Denver, you say, looks great. But then you start looking into it and you realize that it's fractional ownership between 20, 30, 40 different owners and how much time is it going to take you to assemble that and then how much time is it going to take in entitlements, is just not the best use of our time. So when Teravalis came along, we were very interested from the beginning because it was fully entitled and fully assembled. It is in the path of growth of a metro and it's going to be a metro that has the right demographics. So there just aren't that many like that around the country that are ready like Teravalis was. As far as why does it not perhaps speed up inside of our own communities. Well, we keep our pulse on demand. We're very deliberate about analyzing how much land we should sell to our homebuilders because we do not want, we will never allow one of our homebuilders to land bank inside our communities. We only sell them as much as they can deploy and then they have to come back for us. And we will have the land to sell but we sell it on our terms, making sure that we protect our land by not allowing them to land bank in our communities. And it's been -- it's worked so far. I mean and it's worked very well so far. So we're dealing what perhaps looks slow. Could it be speed up with the market demand, so that it will speed up. But if the demand is not there, then the homebuilders are not going to come ask for more land and we're not going to build more commercial buildings. But when the demand is there, our job is to try to stay one step -- 1.5 steps ahead. We don't want to build a lot of spec. We don't believe, if you build, that they will come. We need to stay ahead of demand, yes but not too far ahead that it creates risk.

[indiscernible]

The question is, what is the upfront cost of infrastructure. It's quite significant and it's why you don't see that many [indiscernible] traded companies that have been doing master planned community development of this scale. If I were to show you our financial statements, for say, last year, you will see that it's hundreds of millions of dollars that we spend every year in infrastructure. And you can see it in the statement of cash flows really quickly. Now a lot of the costs that we implement, that we deploy is recoverable. Municipalities and other government institutions, whether it's accounting or whatever it is, they tend to have financing mechanisms. In Texas, for example, we have the municipal utility district. In Arizona, we have a similar concept. In Nevada, we have the special improvement districts. So what we have, most of all is that there is some mismatch in the timing of cash flows, where we first have to spend the money and then we submit much of those cost reimbursement from this different government entities that exists. And the process can take anything from 3 months to 3 years normally. Most of them is -- most of it, we do get to recover within 1 year, 1.5 years. But that first investment is, it has to be -- we have to put the money in the ground first before we get the reimbursement. Anything else?

[indiscernible]

Yes, thank you for asking that. The question is, if there are any water restrictions in Phoenix. I know that you've probably all seen it, maybe ad nauseam in the news. So that --the reality is that -- it's not -- it's a serious issue. It's a very important issue. It's an issue that we are happy to engage in because we actually think that for us it's going to be one of our competitive advantages. It's not a disadvantage. It's going to create a barrier to entry into markets for people that do not have the ability that we have to deal with water -- to excel at water conservation. In our first community in Teravalis, which is called Floreo, we already have what is called the certificate of assured water supply, which means that you have demonstrated through engineering studies that you have water for 100 years. The next phase has the step before and we are confident that we're going to eventually achieve the certificate as well because we -- this was the part of our diligence before buying Teravalis, where we spend the most time. And everything that you've heard in the news right now is -- it was not news to us. It was news to the public. But all of those restrictions that you hear now were incorporated into our diligence. We knew them, we knew about them. But I'll end with this because we're running out of time. But Summerlin is also in a very dry area and we've been leading in water consideration there for years. If right now, if we simply take our building methods from Summerlin and we apply them to Teravalis in Arizona, we exceed the requirements that the government has in place right now. And we're not going to stop there. We're going to go above and beyond. Again, we see this where those restrictions will become a barrier to entry for others. Whereas, for us, we plan to lead so that we have the advantage and be able to develop to even higher standards than whatever the government might set to create a barrier to entry for everybody else. So we're confident we can do it. And again, it's not just saying, we already do it in Summerlin. So we can even exceed that in Teravalis. Well, we're out of time. So I just want to thank you for the opportunity to come talk to you today. And if there's anything else that you have for us, Eric and I will be happy to connect with you over e-mail or offline. Thank you so much.