Howard Hughes Corporation (The)

Good morning, and welcome to the Howard Hughes Corporation first quarter 2022 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, Chief of Staff. Please go ahead.

Good morning, and welcome to the Howard Hughes Corporation's first quarter 2022 earnings call. With me today are David O'Reilly, Chief Executive Officer, Jay Cross, President, Carlos Olea, Chief Financial Officer, Dave Streif, Head of Operations, and Peter O'Reilly, General Counsel. Before we begin, I would like to direct you to our website, www.howardhughes.com, where you can download both our first 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. We see the forward-looking statement disclaimer in our first 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 overlooking statements unless required by law. I will now turn the call over to our CEO, David O'Reilly. Thank you, John.

Good morning, everyone, and thank you for joining us on our first quarter earnings call for 2022. To start off today's call, I will provide a brief overview of our first quarter segment performance and highlight the results of our master plan communities in the seaport. Our head of operations, Dave Streif, will cover the performance of our operating assets, followed by remarks from our President, Jay Cross, who will provide updates on our development projects in Ward Village. Our CFO, Carlos Alea, will conclude with a review of our financial results before we open up the lines for Q&A. Looking at the results for the quarter, each of our operating segments performed well as demand for both residential housing and commercial amenities continues to remain plentiful. MPC land sales revenue rose 64%. Operating asset NOI increased 19%, and condo units contracted at Ward Village were 33% higher, all compared to the first quarter of 2021. These strong results are impressive, especially considering the challenging macro backdrop that was present for much of the first quarter, and is a testament to our business model that has, time and again, proven its ability to outperform during periods of volatility and uncertainty. In March, we sold our equity stake in 110 North Wacker, generating $169 million in net proceeds. The sale of this 1.5 million square foot office tower marks one of the final non-core asset dispositions from our portfolio and adds a considerable amount of cash to our already robust balance sheet. To date, we've generated $570 million in net proceeds from non-core asset dispositions, with only a few select retail assets remaining to be sold. During the first quarter, we repurchased 1.8 million shares of stock for $171 million. These shares were repurchased at an average price of $97, well below our intrinsic value, target of $170 per share, as we outlined during our investor day in April. In February, we completed our initial $250 million share buyback program. With our shares still trading at a wide discount to NAV, we received authorization for an additional $250 million repurchase in March. Subsequent to quarter end, we repurchased an additional 1.1 million shares for $109 million, leaving us with $124 million in available buyback capacity. Moving over to our MPC segment, our performance this quarter saw significant price per acre growth across each of our communities. This price appreciation coupled with a large commercial land sale in Summerlin, had a meaningful impact on our first quarter results with MPC land sales of $61 million, marking a 64% increase versus the same period last year. These rising prices have also impacted home sales in our communities. As the value of these new homes rise, the implied value of land rises with it. Once a new home is sold in our MPCs, we receive our participation from the builder based on the increase of the implied land value. This builder price participation revenue was $14 million in Q1, up over two times compared to the first quarter of last year as prices continue to escalate. While MPC revenue was up substantially during the quarter, segment EBT of $60 million was 6% lower compared to the first quarter of 2021, due to a decrease in earnings achieved at the summit, our premier gated community in Summerlin. Earnings from the summit came in at $6 million during the quarter versus $28 million reported in the same period last year. This reduction in earnings is largely the result of the 555-acre community, during the end of its remaining inventory, having closed on just under $900 million in sales since its inception in 2015. Looking at the performance of Summerlin more broadly, we sold a couple of custom lots during the quarter at an implied price per acre of $4.6 million. This is in comparison to several custom lot closings during the first quarter of 2021 that sold for an average price per acre of $1.7 million. These results clearly demonstrate the robust price appreciation at this MPC. Summerlin also saw an 85% increase in builder price participation revenue during the quarter as home values continue to escalate higher. Additionally, we sold 17 acres of commercial land to Rosemond University at $1.6 million per acre. Rosemond is using this land to develop a medical school campus that will house over 800 students and employees and adds to the growing list of amenities and educational opportunities to continue to set Summerlin apart from other NPCs in the Las Vegas Valley. In Bridgeland, we saw similar trends as a residential price per acre rose to $495,000 during the period, an 8% increase compared to the first quarter of 2021. This growth in land value helped push Bridgeland's EBT 18% higher versus last year, despite selling approximately 10% fewer acres. And finally, The first quarter results in the Woodland Hills continue their strong performance. EBT was 9% higher compared to the prior year period, fueled by strong land sales that achieved a price per acre increase of 17% over the first quarter of 21. Another growth component was builder price participation revenue of $1.1 million in the quarter, compared to only $78,000 during the same period last year. Overall, we continue to see positive signs of demand in our MPCs as home builders remain willing to pay a higher premium for our land and home buyers continue to purchase homes in an accelerated pace. More broadly, supply still remains at historically low levels in each of our markets. This supply-demand imbalance has created a unique situation. From our view, we expect to see continued strength in housing despite the recent rise in mortgage rates. Historically low inventory and materially higher home prices from a year ago. Due to the strong demographics of residents who are migrating to our MPCs and predominantly from higher cost states, mortgage rates and higher home prices have been less of a concern given their pricing power. While we saw our quarterly new home sales fall to 604 homes compared to 929 homes in the prior year period, we are still seeing activity at elevated levels compared to historical norms. When it comes to residential land sales, we have not seen and do not expect to see a slowdown anytime soon as home builders still need to replenish their record low inventory to meet home buyer demand. Given these dynamics, we remain confident that demand will persist and supply constraints will ease over time, thus leaving our full year MPC guidance intact for 2022. Shifting over to the Seaport, we continue to see a pickup in revenue, with the first quarter delivering $10 million in sales, a 44% increase over the same period last year. This sharp rise was largely driven by the opening of new restaurants at Pier 17 that continue to draw more traffic to the area. Seaport reported a net operating loss of $8.3 million during the period, compared to a net operating loss of $4.4 million during the first quarter of 2021. This was largely due to increased operating expenses from the opening of these new restaurants, as well as $2.3 million of pre-opening costs at the Tin Building as we prepare for the grand opening of this much-anticipated marketplace, which remains on track to open this summer. To further expand our John George partnership at the Seaport with the Tin Building and Fulton, we acquired a minority stake in John George's restaurant during the quarter. This investment offers us the unique ability to expand new restaurant offerings, both within our existing MPCs and globally, with significant upside potential. With that, I'll hand the call over to our head of operations, Dave Streit.