Howard Hughes Corporation (The)

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.

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.

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.