Welcome everyone. I'm Alex Goldfarb, Senior REIT Analyst at Piper Sandler. With us today, we have Howard Hughes, we have Carlos Olea, CFO. We also have Eric Holcomb, IR. Unfortunately, David O'Reilly, the CEO, had a conflict, was unable to attend, but certainly, you know, is available, and Eric can schedule a meeting or a call, you know, in the next few weeks if anyone has more specific detailed questions for him. But really appreciate, wonderful time, to be talking about Howard Hughes. For those of you not familiar with the company, it's one of the leading master-planned community builders with projects in Columbia, Maryland, 3 down in Houston, 1 outside of Vegas, the newest one in West Phoenix, and then a successful, multi-phase condo project out in Honolulu.
Right now, they're in the midst of spinning off the Seaport. The filings were just made public, so these guys cannot hide behind the, "No comment," which we've been hearing. They now actually have to answer some questions, which is wonderful. So with that, maybe I'll just let Carlos give a quick minute or two update on the latest thing going on in Howard Hughes. We have questions, and then certainly welcome your participation. I believe there's someone with a microphone, so no one has to scream and shout. We'll leave that for your objection to any questions I raise. So with that, if you wanna
Thank you, Alex, and a pleasure to be here with all of you. I wanna start by saying we were dying to be able to talk about the spin-off. We were not hiding behind it. The council didn't let us talk about it. So any and all questions, please. I'm happy to tell you as much as we can right now. So obviously, that is one of the main projects that we're working on at Howard Hughes right now. It's taking a lot of time, focus, and dedication. We're in the last stretch of the spin-off, and we're really looking forward to separating the Seaport, which includes... It's the name of the company, Seaport Entertainment Group, and it will trade under the ticker SEG eventually, when it starts trading.
But it's not just all of the assets in New York, it also includes the baseball stadium and our Triple-A baseball team in Summerlin. For those of you who don't know, as part of what we do as a master planner, is that we make sure that all of our communities have all of the amenities that people need to have a full, safe life. That means we have schools, we have health and safety, we have hospitals, and we have also sports and cultural amenities. In Summerlin, about, what is it? 7 years ago, 6 years ago or so, we built a Triple-A baseball stadium, where the Las Vegas Aviators play. They are the Triple-A affiliate of the Oakland Athletics. And while that might feel to some, like, "Why, why is a real estate developer building a baseball stadium?
What's the yield in that?" Well, when we're building a city like we do, sometimes you build assets that might not have a great yield standalone, but that accelerate other aspects of the community. What I mean by that is that we have retail across the street, where we have a lot of restaurants and typical retail as well. The stadium accelerated their performance. It helped them get through the pandemic, and it helped us even increase the quality of tenants post-pandemic, so it's performing even better than before the pandemic. It accelerated land sales. Just more people wanted to live in Summerlin, a community that has amenities like your own baseball stadium and your own local team. Similar to that, we're building a Whole Foods in Summerlin. Whole Foods is incredibly attractive for multifamily and for single-family residents as well.
So we build this type of amenities to create an environment where people want to live, where you can literally spend your life inside the community and never miss anything. I can honestly tell you, as a resident of The Woodlands, that I never go to Houston, and I have nothing against Houston. I'm 30 miles north of Houston. That city is vibrant, it's big, it's diverse, but I have absolutely no need to go to Houston. I live in The Woodlands. When I go outside The Woodlands, it's to the airport and come see you. Then I fly back, and I go back to The Woodlands. That, that is a key component of a Howard Hughes community. We have all of the amenities that you need to spend your life and have a rich life inside of Howard Hughes.
So, in addition to the spin-off, what else are we focused on? Exactly that. What else can we continue to build in the master plan to make life in our communities even more attractive? There's a reason why we outperform the markets of the surrounding markets. If you look at our rents, if you look at our vacancy in our leasing operations, we do better than all of the surrounding markets, better than Houston, better than Las Vegas proper. And why is that? Precisely because of what I said. You build something that has amenities, where the amenities are not just inside the building, the amenities are an entire community, it becomes a really attractive proposition. Part of that is also following the life cycle of our residents, and just stop me if I'm going too much into many detail.
But, we're building We launched pre-sales on the first condominium project in The Woodlands. And some of you might know, we've been very successful selling condominiums in Hawaii. We have never done it anywhere else. Ward Village in Hawaii is a vertical master plan community, as we call it, where we have multiple towers that have been incredibly successful. Well, we took those learnings and we brought them over to The Woodlands. And it was about a month and a half ago, we launched pre-sales, and in one week, we've sold more than 50% of the units. That just doesn't happen because we have pretty renderings of a building. It happens because there's a team that is very experienced in this type of product, because we time the market, we believe.
We time the market right, to the point where there's people in The Woodlands that have lived there for decades, whose kids grew up there, who are now empty nesters, that want high-quality product. They don't need a 7,000, 10,000 sq ft house anymore, but they don't wanna move into a typical multifamily. We timed it right to when there's enough critical mass of that type of market inside our community to develop this product, and that's why it's been so incredibly successful. So there's a lot that goes inside of Howard Hughes, day in and day out, by all the different teams in all the different regions, in planning the next product, measuring the timing, and then delivering successfully.
So when we say, like, "What's going on at Howard Hughes?" I can talk for three hours to give you a proper answer of what's going on at Howard Hughes. In general, we have flashy projects like the spin-off, but then we also have the day-to-day, just executing on our projects and continuing to measure the timing and the product that the residents of our community want.
By the way, the only reason he won't speak for three hours is if you promise to buy some condos. He won't talk that whole time. But maybe we can talk on pre-pandemic versus post-pandemic. Interest rates spiked, you know, home sales were supposed to collapse. No one can get construction loans, so technically, you shouldn't be in the condition that you are. But in contrast, as O'Reilly has said, you know, ironically, condo construction loans are the easiest loans to get. Your home sales have been, and land sales have been, you know, at elevated, you know far, far surpassing pre-pandemic levels, and you're seeing the condo success down in Houston. So what's gone on in the MPCs that in this inflationary, high-interest rate, bank tightening world, your operations and the investments have actually done quite well? What explains that?
That's a great question, Alex. I mean, we before pandemic, we always had the thesis, right? That living in a Howard Hughes community was attractive because we gave people the opportunity to have a better lifestyle. And what do I mean by that? Well, our average commute in The Woodlands, average, is seven minutes. I'll take a seven-minute commute. That feels pretty great. I used to live in Washington, D.C., for 11 years, and seven minutes got me out of my driveway and into the next, the first traffic stop. So seven-minute average commute. We have access to nature everywhere. In a Howard Hughes community, every single resident has retail of some sort within walking distance, at most two miles. You know, some people say two miles is too long, but, I mean, you can walk to retail.
So we had this thesis that our communities are very attractive because they have all these amenities and allow you to have a rich life. But it was a thesis. Now, when the pandemic happened, perhaps the only benefit, and trust me, I don't want another pandemic, but perhaps the only benefit is that it helped us prove the thesis correct. And what do I mean by that? People from East Coast, West Coast, and Midwest, living in cities that they love because they grew up there, because they like the urban environment, started thinking: This feels... I feel too isolated. I don't feel safe anymore. I need to be somewhere else. And they flocked to our communities. The Woodlands, Bridgeland, Summerlin, just saw this amazing inflows, and they continued to see it.
So what the pandemic proved is that people, when push comes to shove, people want more from life than long commutes and stress. And we can offer a high quality of life that is very hard for others to replicate. So that's, let's say, that's like the soft side of this. Like, what happened financially? Obviously, when there's demand, when people are moving in, closing down their houses in California and Washington State, et cetera, and moving to Summerlin, then that means that we have to have land ready, because those people are going to need a place to live. So we have to have land ready to sell it to our home builder partners.
All of the home builders that you have in your mind when I mention home builders work with us in our different communities. They need to build homes so that these people can move in. And that significantly accelerated during the pandemic and has continued, because now, the best marketing that we have, and trust me, we do a lot of marketing, but the best marketing that we have is word of mouth.
All these people that have moved from California, from New York, from Massachusetts, from Washington State, et cetera, are telling their friends and family how great their life is, how great it is to have a seven-minute commute, how great it is that they can just walk and feel safe, how great it is that they can play a round of golf before going to work in the morning, how great it is they can play one after work. More and more people continue to be attracted to that.
Maybe you can talk a little bit about what's going on from the bank and lending side, because in the rest of real estate land, construction loans are punitive because of the reserves. Certainly, no one even dares mention office, and yet, you know, you're building condos. You know, you're contemplating a studio project. You know, you're still underway and still getting construction loans.
That's right.
Maybe you can talk about-
That's right.
about that.
So it's very interesting. And then, Alex, you mentioned that this is the only time in my career, I'm sure in all of ours, where it's easier to get financing for condos than a typical multifamily. But the reason why it's easy is because by the time we go to close on a loan and break ground, we have pre-sold 60% of the units already. That's a typical condominium project in Hawaii. Based on renderings and virtual sales office, we sell 60% of the units. Well, that's attractive for a lender, right? You have 60%. We have a significant amount in escrow.
Maybe you can talk about the difference between Hawaii escrow versus, like, California, Florida, the difference in the hard money timing.
Well, because we don't operate in Hawaii and California, I really honestly don't... I'm not into the details. I can tell you a difference in Hawaii, when you pre-close on a unit, and you put money down after 30 days as a developer, we get to use it towards construction costs. So we can build a condominium project, and this is something that we've shown in Investor Day, and we probably will show you again later this year. We can build a condominium tower for very little equity because between the construction loan and buyer deposits that we can use for construction, we're not out of pocket for a significant amount, and that's after 30 days, it becomes hard money, and we can use it.
I think that's the difference. I think Eric has mentioned that that's the difference between, like, a California or Florida, where the deposit money is refundable up until the day of closing. It's a significant advantage that you have.
That's right. And in Texas, it's even more lenient toward the developer. I believe it's 10 days? Six. 6 days. 6 days. Actually, I thought it was 10. 6 days, the money becomes hard.
Texas gives people six days? I thought it was that, Six days.
Six days. You thought it was six minutes? No, six days. So it becomes pretty attractive for a lender to lend, to loan for a condominium project because of this dynamic of the cash going hard so quickly.
Maybe you can talk a bit about the housing market. Despite 7% mortgages, your new home sales, you know, have been incredibly strong. The home builders, you know, are coming at you for land. Obviously, you restrain them so they don't get too far over the skis. You have the builder participation, which you've been booking healthy profits. How are people buying new homes at 7% mortgages?
So this is another part of the thesis that we got to prove recently. Again, don't get me wrong, I don't want this environment. I want us to go back to low interest rates, but it helped us prove the thesis. Everybody was talking about how nobody was ever gonna buy a home, a house again, right? With 7% mortgages. Well, two things happened, and one is very easy to see. One, the home builders started offering buydowns. So it's become clear that it's almost like the psychological line for the buyer. If you're at around 5%, people are making the leap and buying a home. So the home builders have gotten very, very astute at doing that buydown to, like, right around 5%, where people are going to be able to buy.
Now, they've protected their margins by at least, and I can speak for our communities, designing and building a different type of product. We've all heard about shrinkflation, right? In retail and consumer products. There's an equivalent that has happened in real estate development. These homes are a little bit smaller. They're a little bit more efficient inside, but they still allow people the opportunity to buy a home, a new home, at 5%. And look, if you... I know you can look it up, but there's about 5,000 or so people buying homes for the first time every single day in the United States. Sometimes we tend to forget, which again, was part of our thesis, that people are going to have needs.
People continue to form families, kids continue to become school age, and people need to make decisions on moving from whatever they are to better school districts, et cetera. And so the combination of buying down to around 5% and designing a slightly different product that still results in a healthy profit margin. Because if you follow the home builders, you've seen the profit margins haven't dropped significantly. In fact, some of them have increased. That's- it's because they're designing a different product that even with the buydown, it still gives them a very healthy profit. And so that's, that's, that's how we've been able to continue to have a robust land sales business driven by this home demand.
Actually, just sort of curious, show of hands for anyone who's recently bought a home and took out a market rate mortgage. Anyone in the audience? What was the mortgage? What cost? 6.125. 6.125 About 6 and a buydown. 6, 6 and a buydown? Was there It was 3.25. Oh, yeah, that's not today. That's just a show-off. But that's, that's cool. Real-world examples. Maybe you can also talk about, you know, the pre-Howard Hughes ownership back in the GGP days, you know, and even in the Morgan Stanley days preceding.
The communities were looked at for earnings gains for the quarter. "Hey, we need," you know, Bernie would say, "I need a quarter or a nickel for the quarter. Like, whatever, sell something." You guys don't follow that, but yet you do. You sold the hotels, you have sold some items. So maybe you can just talk a little bit about how you think about the MPCs, what components are integral to you retaining ownership of, and the decision and how you think about a decision, like, even the ballpark, right?
Right.
The ballpark has better attendance than, there's a baseball team in Miami, I think. Or is it, or is it a T-ball? It's a T-ball team in Miami. But, you know, their, their, AAA, the Aviators in, in Vegas, much better attendance. So even downtown Summerlin hinges around the stadium, and yet you're contributing that to the spin-off. How do you think about what parts stay versus what parts you're willing to relinquish?
Yeah, sure. That's integral to the master plan and the execution of the master plan. So there's basically two questions: What type of assets do we need? And you think about anything, again, hotels, hospitals, a baseball stadium, a cultural facility, et cetera. And then the second question is: Do we have a competitive advantage by owning it? And so when the answer is no, we do not have a competitive advantage by owning it, then we will still most likely develop it because the community needs it. And again, keeping in mind that these assets, these amenities that we might not even want to retain, but they attract people to the communities, are important to us. So those keep retail and office and then eventually land sales as well, going. That's the engine that keeps them moving, so they're very important.
But when we see, for example, a hotel, we didn't see any competitive advantage in us owning hotels. That's not our business. We're, we're much better at land planning, condo development, office, and typical retail than we are at running hotels, so we dispose of them. In the case of The Woodlands, there is a lot of retail in The Woodlands, was sold by our predecessor entities precisely for what Alex just described. So there's not a lot of critical mass that we could say we should control all of the retail. It's already been sold even before us. So when you look at inline retail in one of the neighborhoods in The Woodlands, we could sell it. That is not critical for us. It's important for us that it exists.
That's part of having access to retail that everybody can walk to. That's very, very critical, but we don't have to own it. And then something very important for us as well is that everything that we sell has deed restrictions, very strong deed restrictions. So in a way, I sometimes think about it like it's almost like a ground lease. It's not a ground lease, but what I mean by that is that we sell... When we sell something, 10, 20, 15, 30 years down the road, pretty much the only person that can buy it back is us, or we make sure that we're always first in line.
And people can turn retail into a hotel. They can take a hotel and turn it into multifamily. They can do that. That's part of our deed restrictions that we put on the asset. So we continue to protect it because, again, if we care about the amenity, say, the hotel, deeply, we don't have to own it, but we need to make sure that it's always a hotel.
Maybe you can talk a bit, and then we'll open up for questions. I have two more questions, then we'll open it up. Maybe you could talk a bit about the funding. Certainly, you rarely issue equity. It's been, yeah, obviously the pandemic, but, you know, you don't really issue equity, but you do a lot of development. You self-fund. Maybe you can just walk through the funding model.
Absolutely. So the funding model is twofold. There is a significant component that is internal. What I mean by that is that when we sell land to our home developers, that does two things. One, it helps us fund some of the infrastructure costs, but it also provides funding for the future development pipeline. The condominiums in Hawaii are the same. The future condominiums in The Woodlands are going to be the same. When we sell them, that cash is cash that is now available through our capital allocation committee process for future development. In addition to that, we do what everybody else does, typical construction loans on projects, and then we have mortgages and operating assets.
But what is really unique about us is that beginning of the flywheel effect, it starts with selling land, harvest cash, selling condos, harvest cash, and that is the, the first dollar, so to speak, that comes into our development pipeline is self-generated. So that even allows us to, for example, when credits are tight and underwriting has tightened significantly, and if we used to get 60% loan to cost, now we're getting 50, 45% loan to cost, we're one of the few people that can actually still go ahead because we have cash on hand from land sales and condo sales to help us bridge that gap of 45%-60% that we used to get for the right project.
Now that the Seaport filings are public, you can once again do buybacks, stocks trading at a material discount to NAV. I think on our numbers, it's 50% or so. What's your outlook for stock buybacks?
It's always part of the plan. I can't, I can't, I'm not-
You've got inquiring minds out there. They want to know.
Yes. I'm not gonna give guidance right now. I think counsel would be very upset with me.
Counsel's not here. They're not listening to this. It's only live stream.
It is. It is. And this is not a secret. Again, we've said it on our Investor Day, and our analysts support us on this. Their analysis supports ours, that we're trading at a significant discount. So what I can tell you is that we have a very disciplined process where we meet every two weeks to analyze new uses of cash. Every two weeks. Everybody, all regions, meet with the C-suite and others to analyze uses of cash. Buybacks is always part of the equation, and it's only going to become even more attractive investment decision in the near term. It already is, and we have the first Capital Allocation Committee meeting this coming Monday. It's the first one after we filed. I can assure you that it's going to be even more attractive investment option than before.
Perfect. And let's look for attractive questions. Anyone. My colleague, Connor, will come around, so you don't have to scream. No worries.
So I have kind of a general question. You mentioned that you have these empty nesters, if you will. Is that potentially why we're seeing a lot of communities now, the 55 and older? Because I'm seeing a lot of that. Is that something similar? Just kind of curious.
Well, it is. The demographics of the baby boomers are pretty much reflected everywhere in the country, right? And a lot of them are getting to a point where they're now, they've accumulated significant wealth over the past decades, and yes, they're looking for that next home for this phase of their life. And these type of communities are definitely stepping up to fill in that gap, and you see them at all price ranges, right? But people have enough wealth to move into those. And then in our case, even though we don't have, we don't own one of those communities in The Woodlands, that's pretty much what the condominium is going to. Well, it's not just that.
The baby boom was what? 1965 and older, I think.
I'm sorry?
Baby boomers, what? 1965 and-
Postwar, like 1946 to mid-1960s.
Okay. Okay, thank you.
But if you want a condo in The Woodlands, they're happy to sell you one.
No, thank you. It comes with the weather that you have there.
Oh, well.
They have air conditioning.
We have air conditioning.
Yeah, well, I, I know. But it goes out when the hurricane comes.
You know, that, that's an important point, though. All kidding aside
Yeah
not as much in The Woodlands. And that's... Our infrastructure is a lot more resilient than the greater Houston.
So, like, I know you have, like, Houston, and you have, like, what is it? Bay... Where is The Woodlands?
North of Houston.
Okay, that makes sense. That makes sense. All right.
Other questions?
Just to follow up to Alex's question, what had kept you from doing buybacks previously, outside of the filing with Seaport?
Well, it's just what has the highest risk-adjusted return. A lot of our decisions that could have gone to buybacks went to condo towers, that have a decidedly higher return than buybacks. Again, it's a case-by-case basis, and we're gonna look at an office product very differently than a condo product, and you haven't seen us build many offices for that reason. But we have deployed capital to condominiums over buybacks so far.
I think there was a question in the back.
Yeah, and I apologize for harping on that same point, but, you know, over the last 10 years, right, the stock's down over 50%. Have a very frustrated base of shareholders who believe in your business model and see the fruits of its labor, but we haven't seen any results. And it would be helpful to understand what your plan is for generating- for closing the gap between your value today and what you believe to be, and I believe to be, your net asset value. It seems to me that you have the, the share buyback tool, which we've talked about, dividends, which you can you could do a dividend.
You've plenty of cash flow to generate a dividend, or at some point, people will start asking, "Why don't you sell the company?" Right? If you're worth twice or more than what the stock is trading at today and it refuses to move, you have to have some sort of future monetization plan, where you set yourself a deadline for the achievement of your objectives or the realization of that value. I, I don't mean to be confrontational
No.
But if you could speak to that, it would be great to understand.
Look, I completely understand, so no, no hard feelings. It's a very good question. Let me start by saying that I agree with you. We have to have a plan, and we do have a plan. Hopefully, we'll talk more about this during Investor Day later this year. Our challenge, or, like, the main challenge is, it's a timing challenge, to be honest. We see that the greater, the best way to generate significant cash flow to give us optionality to potentially do a real buyback program without stopping our development pipeline. Because we have to remember, or I'd like to make the point, that because we're building cities, we cannot completely stop the development pipeline. If we do that, land sales drop.
We have to continue to have a development pipeline that is at least meeting the needs of new residents and to continue to program land. What we see as the best way to get to the point where we can start to have something significant is to continue building out the NOI pipeline to a point where it cash flows sufficiently for us to be able to have a significant buyback program. Two years ago, for the first time in the history of the company, our NOI was able to cover G&A and debt service. It's a very significant milestone for us. We continue to build that pipeline.
If it's already covering G&A and debt service, if the existing pipeline is covering G&A and debt service, if we continue to build the NOI pipeline, it's going to cash flow enough to allow us to take advantage of market conditions and perhaps do a significant buyback program. Or, like you said, even though it's not necessarily my favorite option, institute a dividend. But we need to get to that point, because at that point, it's sustainable. When it is being generated by signed leases generating NOI, we can think about a longer-term program, and that's part of what we're focused on.
So basically, what you're saying is that the flywheel has taken a long time to generate sort of the results, right? And there's an amount of time that we need to continue to be patient for that flywheel really to generate the kind of NOI that would basically permanently support a higher valuation. So from that perspective, if you looked out 3 years, 5 years, and 10 years, what will your earnings per share or NOI per share look like relative to where the value is today, sort of given your long-term financial forecast?
We're running out of time, and unfortunately, I can't give you a proper answer to that question. That doesn't sound like I'm giving you guidance here on this meeting. I hope you understand that. I do look forward to giving you a better answer if you join us for Investor Day later this year. It's part of what we'd like to talk about and what we'll explain, but right now, unfortunately, that's the best answer I can give you.
And with that, we unfortunately, we're running out the clock, but thank you, everyone. Feel free to stay after and ask questions. Really appreciate your interest.