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spk09: Good morning and welcome to the Howard Hughes Corporation fourth quarter 2021 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to John Saxon. Please go ahead.
spk03: Good morning, and welcome to the Howard Hughes Corporation's fourth quarter 2021 earnings call. With me today are David O'Reilly, Chief Executive Officer, Jay Cross, President, Carlos Alea, Chief Financial Officer, Dave Strife, Head of Operations, and Peter Riley, General Counsel. Before we begin, I would like to direct you to our website, www.howardhughes.com, where you can download both our fourth quarter earnings press release and our supplemental package. The earnings release and supplemental package include reconciliations of non-GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP financial measures. Certain statements made today that are not in the present tense or that discuss the company's expectations, are forward-looking statements within the meaning of the federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statement disclaimer in our fourth quarter earnings press release and the risk factors in our SEC filings. for factors that could cause material differences between forward-looking statements and actual results. We are not under any duty to update forward-looking statements unless required by law. I will now turn the call over to our CEO, David O'Reilly.
spk07: Thank you, John, and good morning, everyone. Welcome to our fourth quarter 2021 earnings call. We're glad you could join us today. Before we dive into the results, there are a few things I'd like to mention. First, Today, we welcome our new CFO, Carlos Alea, to his first HHC earnings call. Carlos has been with Howard Hughes since 2017 and was appointed to the CFO position in January. He has been an integral part of our senior leadership team over the past few years, most recently having served as our chief accounting officer. He has an extensive understanding of our business, and we are very fortunate to have Carlos' talent and expertise on our executive team. So welcome, Carlos, and we look forward to hearing from you later on the call. Second, we are always striving to make it easier for you, our investors, to evaluate our performance. With this in mind, we are making some upgrades to our quarterly disclosures that we hope you will find helpful. In our fourth quarter earnings release, we have introduced two notable additions. The first is a link to our HHC quarterly spotlight video. Every quarter, we will be releasing a new video that takes a look at some of the ongoing development activity taking place in our communities. This will help provide a visual sense of the progress taking place across the country in our various development projects, an aspect that cannot easily be presented on an earnings call. We are also now including in the earnings release our full-year guidance by segment for 2022. We feel that disclosing these metrics within our release will allow you to readily view our expectations. Lastly, in our supplemental package, we've added a new page to include the same store NOI of our operating assets. to help provide additional clarity to the performance of our properties. We hope that all of these new additions to our disclosures will add transparency and be helpful in providing the clearest possible view into the value creation opportunities that Howard used. All right, let's move on to 2021 results. I will begin with a recap of the incredible year we had at HHC and cover the highlights of our master plan communities in the Seaport. I'll then hand the call over to our head of operations, Dave Stripe, who will cover the results of our operating asset segment. Our president, Jake Ross, will provide updates on our development projects in Ward Village. And then Carlos will conclude the call with a review of our financial results before we open the lines for Q&A. I'm pleased to report that 2021 was the strongest year in Howard Hughes' 11-year history. Our performance during the year was nothing short of outstanding, with record-breaking results across virtually every segment of our business. Even after facing numerous headwinds that impacted several industries throughout the year, our various segments prevailed and either met or exceeded all guidance expectations for the full year. Land sales within our MPCs generated record high earnings that rose 51% year-over-year. Our operating assets notched their highest NOI figure to date, with a 19% increase from 2020. Ward Village saw its highest condo sales volume in the community's history during 2021. And at the seaport, Pier 17 foot traffic increased 68% compared to the pre-pandemic level seen in 2019. Even more impressive is that all of these results were achieved with 33% less overhead compared to 2019. representing $40 million in GNA cost reductions. Over the last two years, the communities in our portfolio have seen an influx of people fleeing high density cities as they migrate to lower cost areas, offering a better quality of life. This migration pattern has persisted for some time and the pandemic has only helped accelerate the trend further, which was a significant contributing factor to the record high results we produced this past year. Our strong operating results generated significant cash flow and a balance sheet equipped with nearly $850 million of cash that we were able to deploy into our business, a new acquisition, and our shares over the last year. We started 2021 with a launch of over 2 million square feet of new developments, including office, multifamily, and for-sale condominium projects. Throughout the year, we continued to see strong signs of underlying demand in our communities. and announced additional developments, including three medical office buildings, a single family for rent community, and another condo tower, which we will begin construction in 2022. In October, we acquired Douglas Ranch in Phoenix, West Valley for $600 million. This new shovel-ready MPC spans 37,000 acres in one of the nation's fastest growing regions and becomes the largest MPC in our portfolio. We were able to recycle the capital generated from our non-core asset sales into this fully entitled MPC that will develop from the ground up over the next several decades. In Trillium, the first 3,000-acre village of Douglas Ranch, we have been working at a breakneck pace to install the infrastructure needed to contract the first 1,000 lots of homebuilders in 2022. In November, we announced our $250 million share buyback program. During the fourth quarter, we purchased over 1 million shares for $97 million. We continued buying back more shares after the new year and completed our full $250 million buyback program in early February. In total, we repurchased 2.6 million shares, or nearly 5% of HHC's total shares outstanding. At an average price of $96.05 per share, a sizable discount to our intrinsic value. Now let's turn to the results at our master plan communities. Our MPC segment had a tremendous year, generating $317 million of earnings before taxes, the highest in the history of the company. As more and more residents flocked to our communities, home builders raced to replenish their land holdings. And in 2021, these builders purchased a staggering 565 acres of residential land, a 50% increase over 2020. During a period when most experts thought home sales would taper, we saw an acceleration with 2,761 new homes sold in our communities. 37 homes ahead of 2020, which was a record year at the time. Summerlin had a standout year and made up 78% The most notable performance driver was the sale of a massive 216-acre super pad that closed in December for $135 million. It's important to keep in mind that large super pad sales of this size only occur once every few years. This 216-acre super pad was unique in that we were able to deliver the parcel fully undeveloped. allowing us to bypass the cost and added time of installing the infrastructure ourselves. Because we did not incur additional costs on this bulk sale, the pricing was altered accordingly, causing Summerlin's residential price per acre in 2021 to decrease by 9% year over year. Had we taken the typical approach of putting the infrastructure in ourselves, we would have achieved a higher price per acre, but it would have taken an additional two years to deliver with net proceeds almost identical to the undeveloped SuperPAD sale. Robust results in Summerlin were also fueled by the Summit, our exclusive gated community developed in partnership with Discovery Land. In 2021, we saw an accelerated pace of the closings of custom lots and condos, driving $59 million of earnings to HHC, an increase of over three times what was generated in 2020. In Houston, we saw continued strength out of Bridgeland and the Woodland Hills. Despite facing a challenging year with inclement weather, slower permitting, and supply constraints, Bridgeland saw an uptick in activity during the fourth quarter, driving EBT 4% higher year over year. As this community matures, we continue to see steady increases in its price per acre, and in 2021, the price of Bridgeland's residential land increased nearly 7% over the previous year, to $468,000 per acre. In the Woodland Hills, EBT for the full year rose 66% compared to 2020, as more and more residents migrated to this community. New home sales increased rapidly by 50% versus the prior year, signifying the strength of demand in this MPC. This robust pace has corresponded to higher prices. as we saw the residential price per acre rise 9% over 2020 to $337,000 per acre. Despite all of this heightened activity, there still remains a significant housing imbalance between supply and demand. On the supply side, we see a severe lack of lot inventory on the ground that has reached all-time lows in Houston and Las Vegas. The demand side of the equation, however, remains strong, and we don't expect to see this slowing anytime soon. At the seaport, we saw a tremendous increase in activity. In 2021, we had 2.6 million visitors at Pier 17 versus 1.5 million in 2019 prior to the pandemic. This increase is a testament to the iconic destination and the appeal of what we are creating. through our revitalization efforts at this historic neighborhood. The opening of two new restaurants in 2021, as well as the reopening of the summer concert series and the attraction of the greens on the Pier 17 rooftop, the seaport has generated a lot of excitement and attention throughout the city. In 2021, the seaport reported a 4% greater NOI loss from 2020, primarily related to our landlord operations. due to the lingering impacts from the pandemic. Our restaurants, events, and sponsorships, however, saw a meaningful increase in activity, driving seaport revenue higher by 130% year-over-year, as this one-of-a-kind location continues to draw crowds. The increase in our top line is impressive, especially when considering the constrained labor market and adverse effects of the Delta and Omicron variants that impacted New York City. C4 closed out 2021 with two huge milestones on the development front, including the completion of the core and shell of the TIN building and the final approval of our Euler at 250 Water Street, both of which Jay will speak to in more detail. With that good news, I'm going to turn the call over to Dave Streif.
spk08: Thank you, David. In 2021, our operating assets delivered their highest NOI on record, bringing in $227 million. We ended the year with all stabilized asset types leased above 90%, largely ahead of pre-pandemic levels. On a same-store basis, NOI grew 14% over 2020, primarily driven by continuous improvements in retail, accelerated leasing at our latest multifamily developments, and the return of minor league baseball at our ballpark in downtown Summerlin. As you can see, we have published same-store NOI for the first time. However, we do not believe this is the best way to measure our progress. Unlike most real estate companies, we have the enviable ability to continually develop new product as demand dictates at outsized, risk-adjusted returns in our master plan communities. When these new projects go through their initial lease-up, we do expect a slightly negative impact on our existing supply, which obviously affects same-store NOI. The long-term value we are creating by developing these new assets far exceeds any short-term impact on same-store NOI. So, when you see a decline in same-store results, it likely means that we are creating additional long-term value for our shareholders. Our retail assets have made a substantial recovery, with NOI rising 44% year-over-year to $58 million in 2021. The increase in NOI was driven by our tenant mix, which strengthened coming out of the pandemic. in addition to the consistent improvement in retail collections, which rose to 89% during the fourth quarter. The majority of this recovery has occurred in downtown Summerlin and Ward Village, which together make up two-thirds of our retail footprint. We are hopeful that the impacts of COVID-19 will continue to dissipate, which should further support improved travel and tourism in areas like Ward Village on the island of Oahu and contribute to additional retail growth in 2022. Turning to multifamily, these assets produced NOI of $33 million in 2021, representing a 75% increase compared to 2020. While a portion of these results was driven by achieving higher rents at our existing properties, the majority of the increase was attributed to the lease-up of new product. To put this in perspective, in 2020, we had four newly constructed multifamily developments in the Woodlands, Bridgeland, and downtown Columbia that were in the beginning stages of leasing up. These assets generated a combined $398,000 of NOI in 2020. Flash forward to 2021, and these assets were leased up and fully stabilized just a year later, generating $13 million of NOI during the full year. These types of results clearly demonstrate the level of demand in our communities, and with over 1,100 additional units actively under construction, we can expect to continue to see our multifamily NOI expand. In downtown Summerlin, Las Vegas ballpark generated NOI of $6 million in 2021, well above the $3.6 million loss reported in 2020. During the second and third quarters of 2021, our minor league baseball team, the Las Vegas Aviators, hosted a full season of games at the stadium, most of which were at full capacity. This drove NOI significantly higher year over year as there was no minor league baseball season in 2020 due to COVID, causing the ballpark to report a loss for that year. Our office assets produced NOI of $110 million in 2021, a 4% decline from 2020. This decline was primarily related to one of our office towers in the woodlands, 9950 Woodlock Forest, which had a short-term leaseback agreement in place with Occidental Petroleum, for five floors of temporary space during the first half of 2020. Excluding the reduction due to the ending of this short-term lease, our office NOI was largely flat year over year. In the back half of 2021, the office environment began showing signs of strength, as more and more companies had employees returning to the office. In the fourth quarter alone, we signed full-floor leases with two companies in the energy tech and crypto space in the Woodlands. In downtown Columbia, a leading investment bank recently signed a lease to relocate its headquarters to one of our office buildings. And in Summerlin, we're developing a new spec office building with pre-leasing activity already underway. We view these trends as strong catalysts for additional office leasing in 2022, which we expect to intensify as more residents and businesses migrate to our communities. With that, I will now turn the call over to our president, Jay Cross.
spk06: Thanks, Dave, and good morning, everyone. 2021 was also an excellent year from a development standpoint, with the launch of several new projects across various product types within our communities. Because we only build to meet demand and the fact that we have over 2 million square feet of new development underway with additional projects coming down the pipeline, this speaks to the immense growth we are experiencing in our regions. We currently have three multifamily projects under construction, totaling 1,100 units in downtown Columbia, Summerlin, and Bridgeland. along with a 267,000 square foot office building in Summerlin that is already 25% pre-leased. Despite supply disruptions and escalated material costs, we remain on time and on budget and expect to deliver these projects between the middle of 2022 and early 2023. Also in 2021, we announced the introduction of a new product to HHC's portfolio, medical office buildings. We recently commenced construction on two medical office buildings in the woodlands, totaling 53,000 square feet. which we expect to be delivered in early 2023. These projects bring additional health and wellness amenities to the community and reinforce healthcare as the number one employment sector in the woodlands. Building on the success of the Meriwether District, we have turned our attention to the Lakefront District in downtown Columbia, and last month announced a $325 million development opportunity consisting of medical office, residential, and retail offerings. For the first phase of development, we are launching a state-of-the-art medical office building, encompassing 86,000 square feet, which is 20% pre-leased and with strong interest for the balance. This project will commence construction during the first quarter of 2022. It kickstarts our major development pipeline in the lakefront district and establishes the area as a prominent healthcare destination. As part of the lakefront rejuvenation, we will also bring 675 multifamily units to market to capture the growing residential demand in downtown Columbia. Lakefront North represents over 600,000 square feet of residential development divided among three buildings. We expect construction for these units to begin within the next 12 months. All of the projects that we either have underway or will be commencing soon represent 3.4 million square feet of development. And this is just to keep up with the pace of demand in our communities. At the seaport, we have completed construction on the core and shell of the Tin Building, our 54,000 square foot marketplace curated in partnership with Jean-Georges. The Tin Building, spread over three stories, will offer 21 different restaurant experiences in addition to an e-commerce platform for mobile ordering and delivery. We continue to make steady progress and remain on track to celebrate its grand opening this spring. As David mentioned, in December we obtained the final approval from the City of Newark for our 250 Water Street development project after navigating through the rigorous ULIP process. This approval allows for the transformation of an underutilized parking lot into a mixed-use development. spanning 547,000 zoning square feet. The project will include affordable market rate apartments, office space, and community-oriented spaces. In 2022, we expect to begin a comprehensive remediation of the site and commence construction of foundations. In December, we also received approval for a 48-year ground lease extension at the seaport, moving its expiration date from 2072 to 2120, which is a significant long-term value enhancement. Shifting over to Ward Village, 2021 saw the highest volume of condo sales in the community's history, with $869 million in sales for units either closed or under contract. During the fourth quarter, we completed construction on the fifth tower, Aali'i, and closed on a remarkable 663 units, generating $453 million in net revenue. Closing on this many units in less than three months is a logistical feat and speaks volumes about our talented team at Ward Village. We are also making great headway in our two towers under construction, Kualoa and Victoria Place. Both remain on time and on budget. Kualoa ended the year 89% pre-sold, and we are on track to deliver this tower during the third quarter of 2022. Victoria Place is now 99% pre-sold with only three units remaining for a tower that will not be delivered until 2024, a truly incredible sales pace. Pre-sales at the Park Ward Village, the community's eighth mixed-use tower, launched in the middle of 2021, and after just six months of sales activity, ended the year with 84% of its units under contract. We have yet to even put a shovel in the ground for this tower, and to contract 459 units in such a short amount of time is unprecedented. The sales pace has been so robust that the park now holds the record for the fastest-selling tower in the history of Ward Village, a title previously held by Victoria Place. Towards the end of 2021, we announced the plans for launch of Yuan Award Village, the company's ninth condo project. This tower will consist of 696 units fully dedicated to workforce housing and satisfies our remaining reserved housing requirements in the community. Between our towers under construction and our latest tower pre-sales, we contracted 603 units in 2021. This represents significant future revenue that is secured by non-refundable deposits and will have a meaningful contribution JHHC's bottom line upon the completion of these towers and will fuel the acceleration of new developments to come within our pipeline. I would now like to hand the call over to our CFO, Carlos Sulea, who will review our full-year financial results.
spk00: Thank you, Jay. Good morning, everyone, and thank you for the kind welcome. In 2021, our business was able to navigate and adapt to the changing market dynamics that surfaced throughout the year, and we delivered tremendous results across the board. In summary, Our MPCs produced $317 million of EBT in 2021, a 51% increase compared to 2020, and generated $129 million of EBT during the fourth quarter of 2021, a 49% increase compared to the prior year period. Our operating assets recorded $227 million of NOI during the year, representing a 19% increase compared to 2020, and produced $57 million of NOI during the fourth quarter of 2021, a 22% increase compared to the prior year period. In Ward Village, we generated annual condo profit of $121 million upon the completion of Aali'i, a substantial increase in profit of the prior year as there were no condo closings in 2020. Finally, at the Seaport, we recorded an $18 million loss in NOI during the full year, resulting in a $770,000 decline over 2020 and a $5.8 million loss in NOI during the fourth quarter of 2021, a $2.6 million decline compared to the prior year period. Now let's take a look at how our actual results compared to guidance expectations and what we anticipate delivering in 2022. As David mentioned in his opening remarks, For the first time, we have included full year 2022 guidance in our fourth quarter earnings release. And in doing so, we have slightly altered the layout to arrive at similar metrics provided in 2021. Over the last year, we raised our MPC earnings target three times as land sales continued to take higher. MPC EBT of $317 million came in well above our target of $275 to $285 million. 2021 was certainly an outside year for van sales, particularly due to the 216-acre SuperPAD sale in Summerlin that closed in December. As mentioned earlier, a SuperPAD sale of this size is not something that occurs every year. With that in mind, we expect MPC EVT to decline 25% to 30% in 2022. Even with this projected decline, the implied EVT range is still noticeably higher compared to our run rate over the last few years, which has been closer to $200 million. Our operating assets also exceeded guidance expectations with NOI of $227 million in 2021, compared to our guidance range of $200 to $210 million. In 2022, we project NOI to decline between negative 2% and 0% year over year. We expect the leasing velocity and recovery in certain asset types to continue, certain items reflected in our 2021 results will not be recognized in 2022. For example, during the third quarter of 2021, we sold our three hotels in the Woodlands, which produced $5 million of NOI during the year and will obviously not be present in 2022. In addition, we received $3.7 million in COVID-related deferral payments from tenants and $1.7 million in determination fees in 2021 that we view as non-recurring items. In total, we received $10.4 million from items that will not be represented in our 2022 NOI results, or at least not represented to the same magnitude. Fueled by the closing of AALI during the fourth quarter, we delivered counter profit of $121 million in 2021, achieving the top end of our guidance range of $115 to $125 million. In 2022, We expect to deliver condo sales of $650 to $700 million, with a gross margin between 26.5 and 27.5%. The implied condo profit projected in 2022 reflects a 51% increase at the midpoint compared to 2021. The increase is primarily attributed to the closing of our sixth tower, Kohula, which is set to complete construction during the third quarter, as well as additional closings at Alihi, which ended the year 90% sold. Lastly, we reported full-year G&A of $82 million, which came in at the lower end of our $80 to $85 million guidance range. This represents significant cost reductions compared to our pre-COVID run rate of $122 million as we continue to streamline our business and follow the strategic plan we outlined in 2019. In 2022, we expect cash G&A to range between $75 to $80 million. For comparison purposes, Cash G&A in 2021 was $72 million. I would now like to provide a recap of non-core asset disposals in 2021. During the year, we sold five non-core assets, generating $196 million in net proceeds after debt repayment. Since announcing our non-core asset strategy back in October of 2019, We have disposed of 13 non-core assets with net proceeds after debt repayment of $401 million. We are now two-thirds of the way to our goal of $600 million in net proceeds, which we expect to achieve upon the eventual sales of 110 North Walker in Chicago and the Riverwalk retail outlet in New Orleans. Turning to our balance sheet. We ended the year with $843 million of cash, a sizable stockpile that leaves us well-positioned to deploy capital into additional opportunities in 2022. On the financing side, we were able to effectively take advantage of the capital markets given the low interest rate environment, and we closed on $2.7 billion in financings to further strengthen our balance sheet. This activity was made up of $2.1 billion in permanent financing and $628 million of construction financings, to support development spending at our latest projects under construction. Please refer to our 10-K and supplemental package for additional details on specific financing activity in 2021. With that, I would now like to turn the call back over to David for closing remarks.
spk07: Thank you, Carlos. Before we open up the lines for Q&A, I want to highlight just a few key points. First, The record results delivered in 2021 proved just how uniquely positioned we are to generate outsized returns through various market cycles. At a time when inflation, interest rates, and supply pressures have disrupted some businesses, we have experienced an acceleration and are positioned for additional growth thanks to our diversified, self-funding business model. Second, our strategy remains clear. How you live, how we build. The development activity taking place in our communities is a testament to the level of demand we are actively trying to capture. We don't expect that trend to abate anytime soon. Third, the desirability of our communities continues to become more and more apparent as individuals seek to find a better quality of life where they can live, work, and play all in one cohesive setting. In 2021, the Woodlands was ranked as the best place to live in America. Summerlin was ranked as the third top-selling MPC in the country, and Columbia was rated the best city to find a new high-paying job in the U.S. Finally, 2021 was a perfect example of how our capital allocation strategy drives meaningful value creation. We used the free cash flow from our NOI, MPC EBT, as well as condo and non-core asset sales to reinvest into our business by announcing 3.4 million square feet of new developments and outsized risk-adjusted returns, investing $600 million to acquire Douglas Ranch, and repurchasing $250 million of our own shares, all of which will increase our net asset value on a per-share basis. With that, I'd now like to begin the Q&A portion of the call. We'll start by answering the first few questions that have been generated by Say Technology. and will be read by John Saxon. John, can you please read the first question?
spk03: Yeah, sure, David. Our first question asks, can you comment on the state of the rental market in Summerlin? External reports show that broader Las Vegas, rent is up double digits. Is there potential to accelerate the build-out of downtown Summerlin to add more multifamily supply? Dave, do you want to take a crack at that question?
spk08: Sure, great question. We have had Tremendous rent growth in Summerlin, with 2021 asking rents increasing about 14.5% over 2020 at our two existing properties, Constellation and Tanager. Even with rents that are among the highest in the Valley, our nearly 400 units in Summerlin ended the year essentially fully leased. This is clearly a sign of robust underlying demand, which is why we started our third project in Summerlin in 2021, Tanager Echo. ECHO brings an additional 294 units to the market. We expect delivery in the first quarter of 2023. Thanks, Dave.
spk03: Our next question, has HHC considered funding or improving schools into elite college feeders as a way to make NPCs more desirable to live in and increase land values? Jay, would you like to answer that question?
spk06: Sure. Obviously, we consider schools and houses of worship as very critical to NPC success In the case of Summerlin and Woodlands, the K-12 education systems that we've developed over time are among the best in their metropolitan regions. In the case of the Woodlands, which is our most mature community, we have over 30 schools across the 28,000 acres. And in Bridgeland, we recently sold land to a top private school who are relocating their campus to Bridgeland and house up to 1,000 K-12 students. This is in addition to Bridgeland High, which has already sent a football team to the state championship, and an elementary school, which is on its way. And finally, we also would like to pursue, in addition to lower school education, community colleges and universities. And a good example of that is in Summerlin, where we recently sold a 17-acre commercial parcel to Rosemond University, who are building a medical school for over 800 students and employees. So we clearly consider this to be a priority in all of our MPCs.
spk03: Thank you, Jay. Our next question, will more stores be built around the Woodland Hills in the near future? Jay, would you also like to answer that?
spk06: Sure. So the Woodland Hills is our youngest MPC, which only began selling homes a few years ago. So generally speaking, the retail follows form. In the case of Woodland Hills, we currently have 2,000 residents, and so we will expect to soon begin to build some convenience retail. In the case of someone like Bridgeland, where we have 8,000 homes, we've now progressed from strip retail into supermarket retail. And as we build up more homes, we'll eventually – move into high street and town center retail. So the retail has to follow the growth of the homes.
spk03: Thank you, Jay. For our next question, can you summarize the current non-condo revenue, such as retail and Ward Village, and outline how, as Ward Village gets denser with more towers, the company can generate recurring profits rather than the one-time profits that condo sales generate?
spk00: Carlos, would you like to answer that? Sure. Thank you, John. So outside of condominium sales, income at Ward Village is primarily derived from a research portfolio that has a stabilized NOI target of 26 million. This portfolio is made up of one million square feet and it consists of existing retail that will be eventually redeveloped and newly constructed retail. When we deliver a new tower, the ground floor typically includes premier retail that commands higher rents and drives up NOI. Out of our 1 million square foot retail in Ward Village, we still have 550,000 square feet pending and slated for redevelopment.
spk03: Thank you, Carlos. We have another question on Ward Village. How does the company price the Ward Village condos? More amazing pre-sales, which is great, but doesn't this indicate robust demand and perhaps an opportunity to price these condos higher? David, would you like to answer that question?
spk07: Yeah, sure, John. It's a great question, and I'm always asking the team the same question, because as much as we love selling, selling fast and hitting our margin targets, we do want to make sure that we're pricing as close to perfection as we can. And we determine pricing not just based on whether a tower is located first row, second row, third row, with the front row closest to the ocean getting the highest price premium, but we're looking at all the recent sales of our existing units and other units across the island. When we first launch a tower, we are a little bit more conscious because we want to generate those pre-sales, those pre-sales that get deposits and construction financing that allow us to move forward on these projects with what we think is a nominal equity investment. The sales pace at Victoria Place in the park, it's been nothing short of tremendous. And it has been tremendous despite multiple price increases across both towers throughout their sale process. So as we see certain stacks and certain units become more popular, we're driving prices higher there, almost reviewing them on a daily basis. And we haven't hit that point where we're really slowing down sales because it's not from a lack of price increases.
spk03: Thank you, David. So now I'll ask our last pre-submitted question through Say. How and when does the company decide to sell superpads versus smaller parcels? When selling smaller parcels, how many acres are typical? Are they sold to a single builder? Are they auctioned? Please help us understand how the land sale process works. David, would you like to answer that?
spk07: Yeah, John, and I think this question is probably driven around our most recent SuperPAL pad sale of 216 acres in Summerlin and what drives the decision-making there. So I'll address that first, and then I'll take a step back and talk a little bit about the process that we go through when we sell land in Summerlin. Super pad sale, as I said in my prepared remark, we were able to deliver that to the home builders, and it was two builders that bought that pad raw. And we were able to get that sale done much sooner than we would have had we invested in that infrastructure to deliver a more finished product to the builder. So from a net proceeds perspective, year and a half, two years to sell it, and absolutely from a net present value perspective. In general, with all of our superpads, which can range anywhere from 20 to 25 acres to, in this case, 216 acres, we're running an auction process, and we're having multiple bidders, multiple home builders bid on those parcels, on those superpads, and we're looking to maximize price per acre, our price participation on the back end, maximize deposits, and the shortest time frame to close. So there's a lot of factors that go into it, but we're always trying to drive the highest net present value in terms of that cash that comes to the company as part of that bid process.
spk03: Thank you, David. Okay, operator, we can open up the lines for those with questions on the call.
spk09: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, Please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question is from Anthony Perrone with J.P. Morgan. Please go ahead.
spk01: Great. Thanks. Good morning. First question is, I was wondering if we could spend a minute on capital allocation for 2022. And can you start by giving us a sense as to what do you plan on development starts and then also – perhaps spending in the year, and then on the flip side, non-core sales and room for buybacks?
spk07: It's a great question, Anthony, and I wish I had the perfect prescription to give you the exact dollar amount for 2022. But so much of our new developments will be driven by the market demand at that 2022 will be similar to 2021 in that you'll see us allocate a meaningful amount of capital into new developments, some of the multifamily that Jay referenced earlier, specifically in downtown Columbia, Tanner Jureko in Summerlin, as well as here in the Woodlands. But I think that if we're able to generate incremental proceeds and hit our guidance targets and potentially generate some capital from non-core asset sales, we could also be back in the market with another buyback as well. And, you know, as we've talked about in the past, we think one of the greatest benefits of Howard's use is that we're able to self-fund this development, self-fund our buybacks and self-fund what we do by generating that net proceeds from NOI, MPC, EBT, profits from condo sale, and profit from non-core asset sales. So depending on the magnitude of those non-core asset sales and the demand for new developments and where we see the highest risk-adjusted returns that will drive the most accretion to net asset value per share, that's where we'll continue to allocate capital. Sitting here today not knowing where our share price will be throughout the year and not knowing what demand will be in the back half of the year for new developments, it's tough to say that we have specific targets in terms of what we would allocate in terms of those capital allocation buckets.
spk01: Okay. Can you give any update on North Wacker or any other non-core sales that you think are a little bit further along that we could expect?
spk07: 110 North Wacker and Riverwalk in New Orleans are the two non-core assets that are at the top of the list in terms of potential dispositions in 2022. And as we get to a point where we have a transaction that we can announce, we'd be happy to communicate that. As of today, there's no further update other than what we've said previously.
spk01: Okay. And then the other question I had was just at 9950 Woodlawn. I think it shows in the SUP an expectation to stabilize in 2022. So I guess, you know, how realistic is that? And if it is and you get that leased this year, when do you think the actual NOI is captured? Because I think that's probably one of the biggest variances between, like, in place and expected stabilized NOI through the portfolio.
spk07: Absolutely. And that's a building that we bought with a very short-term lease, from Occidental for only six months of the year when we bought it and really inherited the building entirely empty. And we've gotten it to where it is today on a four-by-four basis in the face of a pandemic and a very challenging leasing market for office product in Houston. I'm still optimistic that we can get the balance of the building leased and get to a stabilized occupancy by the end of the year. I do think that the stabilized NOI will take a little bit beyond that as There is free rent in the market, and we don't see that going away anytime soon. So that NOI probably won't be in until late 23, early 24, assuming the leasing velocity continues the way we've seen over the past six months.
spk09: Okay, great. Thank you. The next question is from John Peterson with Jefferies. Please go ahead.
spk02: Great, thanks. Just a couple questions for me. So on your guidance for... Sales at Ward Village, I think the margin is a little bit lower than what we've seen in recent years. I think you said you're doing some workforce housing there. I mean, is that kind of the reason why? I kind of think in the current housing environment, maybe margins would be higher.
spk07: Well, we're driving pricing higher, which, you know, given the demand that we've seen, you would expect margins to potentially grow. But we're also dealing with some cost inflation and some increased construction costs and labor costs that are impacting the cost side of the equation. With that said, the balance of the units that we're expecting to record in 22 are both Kauula, which is entirely market rate, and Ahali'i, which has a mix of both market rate and reserved housing in the building. That combination of both market and reserved housing has had a modest impact on those margins, which has taken it a tick below that 30% that we like to achieve on all of our towers.
spk02: Okay. All right. And I guess sticking with development margins and on the multifamily side, I think we noticed at Starling and Bridgeland and at Tanager Echo, the costs look like they were up. So I'm sure in line with the cost pressures you're talking about. But I think we saw the expected yield at Starling go down to seven from eight. I guess with where apartment rents are moving, I kind of would have thought those would offset each other. So maybe, I don't know if you can talk a little bit more about what we're seeing there.
spk07: Yeah, I would say that we're always updating our costs in terms of how we're underwriting things, in terms of what we're seeing in the market. I'm not necessarily changing our underwritten rents in the projections of stabilized yield. I think we have a great opportunity to outperform that 7% with higher rents. But, you know, I think our job here is to underpromise and overdeliver, and that's what we're going to continue to try to do.
spk02: Okay. And then I really appreciate the same store NOI numbers. So, of course, I'm going to ask you if you can put it in your guidance. is always never enough. But, you know, you talked about the total portfolio growing at zero to 2%. And I realize you have some of the kind of the back, the COVID back rents you got in 21 falling off, but I don't know if you could kind of level set the, with the kind of the non-core moving pieces. I mean, what is kind of a rough same story and why, you know, portfolio growth number as we look into 22?
spk07: Yeah, so there was a couple of factors that impacted the guidance that Carlos mentioned in his prepared remarks. The first is the sale of the hotel portfolio, and that generated $5 million in NOI this past year that obviously won't come in in 2022, as well as the $4.2 million of COVID one-time rent catch-ups that last year and lease termination fees of just over $1 million. So it's just north of $10 million in terms of that non-recurring amount that won't come in. From a makeup of what's driving it, you know, obviously retail will be negatively impacted by those one-time hits. Hotels have a terrible same story and will be falling off the chart altogether, of course. Office, we expect to be roughly flat, which means that growth that's going to offset that negative $10 million hit will be generated almost entirely by our multifamily portfolio.
spk02: Got it. Okay. That makes sense. All right. Thank you. Appreciate it.
spk09: Again, if you have a question, please press star then one. The next question comes from Vahid Korsan with BWS Financial. Please go ahead.
spk05: Good morning. Thanks for taking the question. First question, on the summit, could you provide an update on what is left in the partnership agreement in terms of acreage or timeline?
spk07: You know, we still have a little bit of product left to sell there. There's a couple of homes and condos that have not sold yet. And we're trying to think of if there are creative ways that we may be able to potentially expand that partnership and increase the size of the project. You know, it's really difficult to prognosticate at that high end of a level in terms of how many sales we'll generate and what that will lead to in terms of earnings. If you go back in terms of the structure of the partnership agreement, We're into the profit split. The waterfall worked where we received our capital preferred return. Our partner received their capital in a multiple on that capital. And then we've got into where we split all that incremental dollars of profit. We're very much into the split range right now. So everything that we're able to execute on over the coming year will accrue to the benefit of our shareholders on a 50-50 split. Again, it's very difficult to project when you're going to sell that next $8 million lot for $10 million condo. Those are just less programmatic than a typical production home.
spk05: Is that a relationship that you've explored to type of pursue in the other MPCs, whether it's the Willen Hills or Bridgeland?
spk07: You know, look, we have a great relationship with Discovery Land, and we couldn't be more pleased with their execution in some to continue to expand it into other locations we will absolutely try to exploit that I don't know that we see the the buyer makeup with the demographics that would support a discovery like community in Bridgeland or the Woodland Hills but it's something that we're going to continue to to push and see if there are ways that we can you know recreate what has been an incredible partnership at the summit
spk05: Thanks for that. One last question. Just looking at the supplemental on the Ward Village condominiums. And in Q3, you had for ILE $411 million in total development costs. And then in Q4, it's now at 395. But you're still projecting lower gross margins. Could you just provide some color into why the total development cost went down and how that factors into a lower gross margin?
spk07: Well, I would say that the gross margins for Aali'i are remaining consistent with what we've expected all along. I don't know that anything's changed there. Of course, we have meaningful contingencies with all of our large-scale developments. And if we're able to not spend those contingencies and realize cost savings, we'll absolutely do that. Just because we have a contingency, we're not intent on spending it. So as we're able to hopefully deliver without using those contingencies, that cost savings will materialize in what you see in the supplemental. And with the completion of that project last year, obviously if we haven't spent it yet, chances are we won't spend it other than some reserves for whatever small defects could arise over the course of the next year or so. So I think, you know, hopefully we're able to realize other cost savings on other towers in the future, but those are very unpredictable to think about. And Aulii had a mix of both market rate and workforce housing within the tower, so the overall profit margin of that building was slightly lower than what we see in a building that's 100% market rate, like a Kūula, Victoria Place, or Park Ward Village.
spk05: Thank you.
spk07: Thank you.
spk09: The next question is from Connor Mitchell with Piper Sandler. Please go ahead.
spk04: Great, thank you. Could you guys please speak to the housing and rental markets in Hawaii? Just seems like there was and may still be a housing sale boom similar to the other markets mentioned, but clearly the apartment sales are not slowing. So are people moving between the two and just how much you think of the residential markets moving forward?
spk07: It's an interesting question, Connor, and I appreciate you asking. I would say that what we've seen in Hawaii has not changed over the past several years, and that there is a meaningful shortfall of housing units on the island just to meet the local demand, just to meet the population growth. And part of what we're able to do by building this master plan community vertical is to I think that speaks volumes to how this product is meeting that local demand and helping to address that housing shortfall that exists in Hawaii.
spk04: Great. Thank you. And then just going back to the capital allocation as well, how might you guys be thinking about any future buybacks and will it more coincide with any non-core asset dispositions or primarily market and stock price conditions?
spk07: It'll be a combination of those as well as the realization of cash flow from our land sales and NOI. And as that capital comes in to the home team, if you will, from non-core sales, from NOI, from MPC land sales and condo profit, that's where we think about our capital allocation strategy. And there are going to be times where you'll see us invest in new developments and outsized risk-adjusted returns and times, like you just saw this past quarter, where we see a great opportunity to buy our own shares. And it's not all one or the other. It will in all likelihood be a combination, but I think it's challenging to sit here today and say how much that buyback will be, what the timing will be without having great visibility into where our share price will be, and the exact timing of some of those land sales and non-core assets.
spk04: Great. Thank you.
spk09: This concludes our question and answer session. I would like to turn the conference back over to David O'Reilly for any closing remarks.
spk07: We appreciate everyone joining today. Hopefully you've gotten correspondence on our Investor Day in April. If not, please reach out to John Saxon. We'd love to have you attend. We'll be doing an on-site tour in Summerland, getting a chance to see all the incredible developments, including that super pad that we contracted and sold this past quarter, and hope to see as many of you there as possible. Thanks again for your participation. Look forward to talking to you soon.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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