Howard Hughes Corporation (The)

Good day and welcome to the Howard Hughes Corporation Third Quarter Earnings 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 touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Eric Holcomb, SVP of Investor Relations. Please go ahead.

Good morning, and welcome to the Howard Hughes Corporation's third quarter 2022 earnings call. With me today are David O'Reilly, Chief Executive Officer, Jay Cross, President, Carlos Alea, Chief Financial Officer, Dave Streif, Head of Operations, and Peter Reilly, General Counsel. Before we begin, I would like to direct you to our website, howardhughes.com, where you can download both our third 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 third 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.

David O' Thank you, Eric. Good morning, everyone, and thank you for joining on our third quarter earnings call. To start off today's call, I'm going to provide a brief overview of our third quarter segment performance, highlight the results of our master plan communities in Seaport. Dave Strife will cover the performance of our operating assets, and then Jay Cross will provide an update on our development projects in Ward Village. Finally, Carlos Alea will provide 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 really well relative to the same period in 2021, despite these ongoing economic headwinds. MPC EBT rose 39%, and operating asset NOI remained elevated, despite the impact of divested assets. At the seaport, Revenue increased 57% and generated a net operating profit before equity losses related to the startup costs at the tin building. At Ward Village, we completed Kaula and closed on a total of 404 condominium units, generating net revenue of $419 million with a strong gross profit of 30%. In addition, we launched pre-sales at Kalai, our 10th condo tower, at the end of September, which was met with exceptional demand, having already pre-sold more than 40% of the units. Overall, our strong results both this quarter and year to date are a testament to the resiliency of our business model and our one-of-a-kind portfolio, which continues to withstand economic volatility like we are experiencing today. Before I dive deeper into some of these results, I first want to congratulate Gautam Iqbalanki, who leads our ESG efforts, and the entire Howard Hughes team on the progress made to further our sustainable and inclusive communities. Bresby, whose assessments are a benchmark of sustainability performance and best practices for real estate companies worldwide, ranked Howard Hughes number one in the U.S. diversified listed peer group. We were also recognized as a sector leader in the America's diversified category. I'm ecstatic that our efforts and commitment to environmental and social best practices, which are integrated throughout our communities all across the country, are being recognized. Now, looking to our NPCs. We had another strong quarter despite considerable headwinds in the housing market. In our core markets of Houston and Las Vegas, new lot supply remained at historically low levels, prompting home builders to continue purchasing land and replenish inventories to keep up with future demand. Although new home sales in our MPCs were down significantly relative to the unprecedented levels seen during 2021, we continue to see solid demand for new homes at premium prices. This was reflected in our quarterly results, with continued appreciation in land prices and strong growth in builder price participation revenue. Overall, our MPCs recorded earnings before taxes of $75 million, a 39% increase compared to last year. Looking at the details in Houston, both Bridgeland and the Woodland Hills posted strong results, which contributed to a 61% year-over-year EBT improvement in this market. In Bridgeland, we saw steady residential land sales, which were complemented by a 25% increase in price per acre to $520,000. Together with a 17-acre commercial land sale and a near doubling of builder price participation revenue, Bridgeland's EBT grew to $15.9 million, a 72% increase versus last year. In the Woodland Hills, EBT grew 31%. fueled by a 6% improvement in residential acres sold and a 17% price per acre increase of $412,000. Shifting west to Summerlin, we sold one 23-acre residential super pad and one custom lot for a combined implied price of $1.3 million per acre, a staggering 75% increase from the third quarter of 2021. Summerlin also saw 59% increase in builder price participation revenue as new home values remain strong. At the summit, we only closed one custom lot during the quarter, which compares to eight lots in the prior year. With this premier gated community nearly sold out, we reached an agreement with our joint venture partner, Discovery Land, to launch phase two of the summit last July. As part of this expansion, we contributed 54 acres of land which will be used to develop 28 additional custom home sites. Our land contribution, which was marked up to fair value, resulted in a $13.5 million gain in MPC equity earnings, signifying the strong inherent value of future land sales in this ultra-luxury community. Finally, in Phoenix, West Valley, we celebrated the official groundbreaking just last week, where we unveiled the new name for Douglas Ranch, Terra Vallis. We continue to work diligently in Florio, the community's first village, formerly known as Trillium, to install the infrastructure needed to contract the first 1,000 lots to home builders. During the third quarter, JDM partners exercised its final option on Terra Vallis, repurchasing approximately 3% incremental ownership interest for $15 million. This takes JDM's total ownership interest in the non-Florio portion of Terra Vallis to approximately 12% or $65 million. JDM and HHC continue to have a 50-50 joint venture in Florio, which comprises approximately the first 3,000 acres of Terra Valles. Looking at new home sales, as expected, we experienced a sharp decline in the quarter with a total of 284 homes sold, representing a 48% reduction when compared to the prior year. This reduction was largely attributed to Summerlin, which saw a 57% decline in new home sales. In Houston, lower home sales were also recorded in the Woodland Hills. In Bridgeland, however, home sales remain favorable with volumes in line with the third quarter of 2021. Overall, the pace of new home sales within our communities continue to trail behind the unprecedented levels which were experienced in 2020 and 2021. Clearly, this is a result of high mortgage rate, record inflation, and recessionary fears, which are impacting new home affordability. Additionally, home builders continue to encounter supply chain disruptions, as well as slow municipal approvals, which are impacting the pace in which they're able to deliver new homes. Despite the reduction in sales, we continue to see solid demand for homes at higher price points, as these buyers, who are often moving from higher-cost states, tend to have strong purchasing power, and allows them to better withstand rising mortgage rates and inflationary constraints. This has contributed to further increases in median home sales prices in all of our communities, as well as the strong levels of builder price participation revenue realized this year. As an example, in the third quarter, the median home price in Bridgeland was $595,000, or an increase of 19% year over year. Similarly, The median home price in Summerlin was nearly $750,000, a 13% increase compared to the prior year. Conversely, we are seeing headwinds in lower-priced homes where buyers are more likely to be impacted by mortgage rates and recessionary fears. Throughout our MPCs, we offer a wide variety of new homes at various price points, providing prospective homebuyers multiple options to meet their budgets. However, with record low inventories in all of our core markets, we're actively working with our home builders to ensure we have the right balance. As a result, we're developing new lot programs, which are designed to target additional homes at affordable price points for the purpose of increasing the pace of sales in the near future. With this in mind, we may encounter some periods of reduced land sales in the short term as we continue our discipline of only selling land to meet the underlying demand. The long-term intrinsic value of our MPCs remain extremely strong, and we believe people will continue to be attracted to our highly desirable communities, which offer an unmatched quality of life, abundant amenities, short commutes, and improved work-life balance. Shifting over to the seaport, we continue to advance our vision to revitalize this historic neighborhood, most notably with the highly anticipated opening of the Tin Building by John George. We are extremely pleased to make this one-of-a-kind marketplace a reality, together with our joint venture partner, world-renowned chef, John George. With more than 20 different food and beverage experiences from around the world, there's something for everyone at the Tin Building. In early August, we launched a soft opening for the Tin Building, which was met with large crowds and much acclaim from the media. In late September, we celebrated our official grand opening and ramped up operating hours. With strong foot traffic and sales since the grand opening, I'm pleased to report that we're making steady progress in our efforts to onboard and train additional employees. As a result, we're adding more service days, and we anticipate that the Tin Building will operate at full capacity by the end of the year. At Pier 17, we had another strong quarter with significant increase in foot traffic, driven by private events and an extremely successful summer concert series. This quarter's lineup, which included 38 concerts, 30 of which were sold out, netted over 110,000 guests to the rooftop. All of this helped drive increased concession revenues as well as higher customer volumes into our restaurants and retail businesses. As a result, we saw a 48% increase in our restaurant sales per square foot versus the prior year quarter, helping to drive a strong year-over-year NOI improvement. Overall, Seaport revenue increased to $32 million in the quarter, reflecting a 57% increase over the same period last year. This improvement resulted in the seaport generating net operating income of $1.6 million before the company's share of equity losses, which totaled $11 million during the quarter, primarily due to the startup of the tin building. Overall, we see significant progress at the seaport. With the tin building now open, we expect to see continued growth in volumes in the month ahead as more and more people come to experience New York City's hottest dining and entertainment destination. All of this should continue to benefit the seaports financial results going forward and help to bring the segment closer to stabilization. With that, I'll turn the call over to Dave Strife, our head of operations, to review the operating asset segment results.