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spk01: 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.
spk04: 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.
spk03: 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.
spk13: Thank you, David. In the third quarter, our operating asset segment delivered $61 million of net operating income, which was a $2 million or 3% decline from the same period last year. This was primarily due to the sale of non-core assets, including the three woodlands-based hotels and the river walk outlet in New Orleans. These assets generated $3 million in the prior year's quarter. Excluding these divested assets, NOI was up $1 million, or 2%, year over year. The largest increase in our portfolio was seen in our multifamily assets, which produced quarterly NOI of $12 million, representing a 27% increase versus the prior year. This improvement was primarily the result of strong lease-up at our newest communities, as well as strong performance at our stabilized properties. At the end of the quarter, these assets were all leased in the mid to high 90% range, despite market pressures many multifamily properties across the U.S. are experiencing today due to rising rents and affordability. We believe this is a testament to the demographics of our MPCs, as well as the attractiveness of our upscale, highly amenitized multifamily properties. With these robust leasing percentages and exceptional demand for rentals in our MPCs, we continue to see strong multifamily rent growth. In the third quarter, our in-place effective rent increased nearly 13% on average when compared to the same period last year, and we commanded some of the highest rents in our markets. During the quarter, we completed and began leasing units at our latest multifamily development, Starling and Bridgeland, which is experiencing strong initial demand. With additional multifamily projects under construction in Bridgeland, Summerlin, and downtown Columbia, we continue to see meaningful opportunities to drive incremental NOI growth as these new projects are completed in the coming quarters. Office NOI of $29 million increased 3% versus the prior year. This improvement was primarily the result of the roll-off of free rent and new leasing activity at our Class A office buildings in the Woodlands and downtown Columbia. In these markets, as well as Summerlin, we continue to see heightened demand from companies who are looking for a business-friendly environment with a talented pool of employees and high quality of life. Our premier office assets, which offer high-quality amenities in a walkable urban setting with convenient access to shopping, dining, and entertainment, continue to attract new tenants. As evidenced, during the third quarter, we executed nearly 94,000 square feet in new office leases in the Woodlands, including 60,000 square feet at 9950 Woodlock Forest, bringing this building to 59% lease. In Summerlin, we've had similar success with our newest Class A office tower, 1700 Pavilion, seeing unprecedented pre-leasing ahead of its completion later this year. Jay will talk more about that in a moment. In retail, NOI of $13 million reflected a $2 million decrease compared to the prior year. This reduction was primarily due to one-time rent payments at Ward Village during 2021, which were associated with recovery from the COVID pandemic. The remainder of our retail portfolio performed well with improved occupancy in all of our markets. Finally, the Las Vegas ballpark generated $4 million of NOI, representing a reduction of $1.6 million compared to the prior year period. The decline was primarily due to poor weather during the quarter, fewer games played in the current year, as well as outsized fan attendance in 2021 after COVID restrictions were lifted. With that, I will now turn it over to our President, Jay Cross. Thank you, Dave, and good morning.
spk15: During the third quarter, we continued to make great progress with our development pipeline of multifamily office and medical office buildings in Houston, Las Vegas, and downtown Columbia. At Ward Village, we completed construction at Kahula, our sixth condo tower, and we launched pre-sales at our latest condo development, Kalai. Starting with Houston, we completed three projects during the quarter, the largest of which was Starling F. Bridgeland, a 358-unit multifamily development in Bridgeland Central. We welcomed our first residents in mid-September and experienced a solid initial lease-up with the complex already 16% leased as the quarter ends. In the Woodlands, we delivered the 20,000-square-foot Memorial Hermann Build-A-Suit medical office building ahead of schedule. And lastly, we completed construction of the Kirby Ice House, which is located in the heart of the Woodlands. This venue, which boasts the longest bar in Texas, opened in late September with much celebration. Elsewhere in Houston, we continued to make good progress with Creepside Park Medical Plaza in the Woodlands, which we expect will be completed in the fourth quarter. In Bridgeland, our 263-unit single-family built-to-rent project, Wingspan, also continues to advance with initial construction well underway. We expect to start welcoming residents in early 2024. Just last week, we announced our plans to develop Village Green at Bridgeland Central. This 23-acre mixed-use site will be anchored by an HEB grocery store and will also include our first office project in Bridgeland, which will also be our first mass timber development. We will provide more information on these projects as construction begins in early 2023. In Las Vegas, we are nearing completion of 1700 Pavilion, our newest Class A office tower in downtown Summerlin. This 267,000 square foot building has seen tremendous demand and was already 51% leased with another 40% in LOI or lease negotiation at the end of October. We expect this building will be completed late in the fourth quarter. We're also making steady progress with Tenager Echo, our newest multifamily offering in Summerlin. This 294-unit LEED silver development will be unlike any other in the Las Vegas Valley. We expect this project will welcome its first residents in the first quarter of 2023. Switching to downtown Columbia, our newest multifamily project, Marlowe, is also nearing completion. This LEED Platinum Complex, located in the Merriweather District, will have 472 units with another 32,000 square feet of ground floor retail space. We started leasing in October and have already welcomed our first residents. In the Lakefront District, we commenced construction on our 86,000 square foot medical office building during the third quarter as well. This development is already 21% released and will serve as the next health and wellness destination for this MPC. We expect to complete construction in early 2024. Looking quickly at the Seaport, as David mentioned, we completed the Tin Building and celebrated its grand opening in late September. In the Uglins, design development and initial foundation construction continued at 250 Water Street. However, during the summer, a third party lawsuit was filed challenging the City of New York's approval of the project and a temporary restraining order was granted pending a hearing in early December. Until that time, we have paused construction efforts, but have been allowed to continue with site remediation work. We believe this case has no merit and will continue to vigorously contest the claims. We'll keep you apprised as more information becomes available. Turning to Ward Village in Hawaii, we generated $418.6 million in condo sale revenue during the quarter, including the closing of 398 units for $413 million at Karula, which was completed in mid-September. As of quarter end, this tower was 97% sold with 19 units remaining. And subsequent to quarter end, we closed on another 146 condos at Karua, representing an additional 202 million in net revenue. These closings will be reflected in our fourth quarter earnings. In the third quarter, we also closed on six units at Aalii, generating another 5.6 million in revenue. This tower ended the quarter 95% sold with 37 units remaining. Despite headwinds in the housing market, pre-sales activity at the Park Ward Village and Ulana have remained strong. We contracted 42 units at these towers during the quarter. As of September 30th, the park was 91% pre-sold and Ulana was 96% pre-sold. In October, we broke ground on the park and we expect to start construction on Ulana late in the fourth quarter. With significant demand for quality housing in Honolulu, we launched pre-sales at our 10th condo tower, Kalai, in late September. We have already pre-sold more than 40% of the units for this tower, and we expect to see strong pre-sales momentum as we progress through the fourth quarter. All of the pre-sales at these towers, as well as Victoria Place, which has been fully sold out for some time, represent significant revenue in 2024, 2025, and 2026. that is secured by non-refundable cash deposits. These projects are expected to provide meaningful profit contributions to the company, which will be used to fund future developments in our pipeline. And with that, I will hand the call over to our CFO, Carlos Zelaya.
spk07: Thank you, Jay. Our results in the third quarter demonstrate the strength of our business model, as we continue to benefit from strong demand throughout our communities, despite headwinds in the real estate market. In summary, during the third quarter, We reported net income of $108.1 million, or $2.19 per diluted share, compared to net income of $4.1 million, or $0.07 per diluted share, during the entire year period. Our MPC is generating strong EVT of $75 million, an increase of 39% year-on-year, despite reduced SuperPAT sales in Summerlin. This improvement was primarily driven by landfills in Bridgeland, favorable builder price participation revenue, strong appreciation in the average price per residential acre sold, and the equity contribution from the summit. Our operating assets delivered $61 million of NOI with improvements in multifamily and office. While this represented a 3% year-on-year reduction when excluding the impact of our diverse hospitality assets and the outlet collection on Riverwalk, operating assets NOI increased 1.2 million, or 2%. At Ward Village, we closed some 404 condo units, resulting in $123.3 million of condo profit at a 30% margin and continued a strong pace of pre-sales for our projects and development. At the Seaport, we recorded a $9.5 million NOI loss, primarily as a result of startup costs within buildings. However, we have seen tremendous increase in food traffic and sales for our managed restaurants, concerts, and private events, as evidenced by a 57% increase in revenue compared to the prior year period. Overall, we are very pleased with the performance of our business segments in the third quarter and year to date. Together with our favorable outlook for the fourth quarter, we have increased our 2022 full-year guidance for the MPC and operating asset segments. In MPCs, in spite of significant challenges in the housing market, We now expect full-year EBT will decline only 10% to 17% year-on-year, which compares favorably to our prior guidance of a 25% to 30% reduction. Understanding the range provided, MPC EBT can be inherently more uncertain due to market conditions and the timing of closings for large land sales transactions. In operating assets with strong rent growth and lease-up in multifamily, new office leases in favor of retail results, We now expect full-year NOI will increase 3% to 5% compared to 2021. This is an improvement relative to our prior guidance, contemplated as 0% to 2% year-on-year NOI reduction. With respect to share buybacks, during the third quarter, we purchased nearly 369,000 shares of stocks for $25.4 million. These shares were repurchased at an average price of $69, which is well below its intrinsic value. At the end of the quarter, we still have $15 million available for other capacity. Looking at our balance sheet, at the end of the quarter, we have $355 million of cash in hand. The timing of condo closings at Coahuila, of which nearly 150 units were completed in early October, will generate more than $150 million of additional cash flow in the fourth quarter, providing us with plenty of capital to advance our development pipeline. At the end of the third quarter, the remaining equity contribution needed to fund our development projects was $372 million before anticipated new financings for Wingspan in Bridgeland and the Columbia Medical Office building, which we expect will close later this year or early in 2023. From a debt perspective, we had $4.6 billion outstanding at the end of the quarter, with limited near-term maturities and approximately 82% due in 2026 or later. On the financing side, we closed on a $392 million construction loan for the development of the park or village in Hawaii. During this rising rate environment, it is important to note that 86% of our debt is either fixed or swapped to a fixed rate, which significantly mitigates our interest rate risk. With that, I would like to turn the call back over to David.
spk02: Thank you, Carlos. And with that, let's begin the Q&A portion of the call. We'll start by answering the first few questions that were generated by State Technology and voted on by our shareholders. They're going to be read by Eric Holcomb. Eric, will you read the first question?
spk04: Sure, David. The first question is, can you give an update on the debt and covenant compliance? Carlos, you want to take that one?
spk07: Sure. Thank you, Eric. In the third quarter, we did not meet the debt service coverage ratio for one Hughes Landing, two Hughes Landing, and four Waterways Square. So let me first say that none of them have a material impact on our liquidity or our ability to operate the assets because the consequence of not meeting the ratio is to trigger a cash trap, which means that the cash generated by the assets have to stay at the assets and cannot be swapped up to corporate, but we can use them to run the assets. In the first two buildings, the issue is related to tenant move-outs that we're actively working to release, while in the case of Fort Waterway, it's the result of an early renewal with free rent, so that issue will cure as the free rent burns out.
spk04: Okay. Thanks, Carlos. The second question is, with rates rising and T-bills now at 4%, what are the parameters for moving forward with a new development project? Does the 7% or 8% return on cost model still work? Jay?
spk15: Well, it's very much a project-by-project decision. I mean, like everyone else, we're being squeezed by higher cap rates and increased construction costs, but we still benefit more than most by the strength of our master plan communities, which allows us to outperform in terms of revenue and also avoid overbuilding. So if we believe the project's economics are feasible and favorable in the long term and it can add value to our portfolio, we'll continue to develop where possible, always based on current market factors and appropriate risk-adjusted economics. It's worth noting that each of these projects, while important on their own, are also important in terms of how they combine to impact the rest of the community. and drive greater value in our enviable land bank. So that drives a lot of our decisions.
spk04: Thanks, Jay. Third question is, on your investor relations page, you have a set of key metrics. One of those is historical return on equity, and it's reported to be 25%. Could you provide some guidance on how this number could be verified? An example of numbers for an actual project would be great as well. Carlos?
spk07: Thanks, Eric. I'll explain it first, and then we'll move on to the example because it is very helpful. So this is the cash-on-cash return, essentially the cash after debt service divided by the equity in a project. And it's something that we update on a quarterly basis. So the number being quoted right now, 25%, is what we had as of June 30. And again, it will be updated every quarter. And this is the result of the cash-on-cash returns for all assets developed by us over time, including those that have been sold. Now, to get to the example, using One Lake's Edge, one of our multifamily projects in the woodlands, One Lake's Edge has a 42% cash-in-cash return, which is calculated by taking the stabilized NOI of $7.2 million, which you can find in the supplemental, less the debt service of $3.3 million, which is not directly found, but we do publish the principal amount in the rate in the property-level debt section of the supplemental, And that net 3.9 million of cash, 7.2 stabilized NOI minus 3.3 of debt service, 3.9 million of free cash, which is divided by the equity in the project of 9.3 million. And that's how we get to the 42% return for one late touch.
spk04: Great. Thanks, Carlos. The next question is, how should we think about the value of your 1 million square foot of retail in Hawaii after fully stabilized?
spk13: Dave, you want to take that one? Sure. Sure. Well, given that I lived there for seven years, I feel like I have a pretty good feel for it. You know, the location in my mind is irreplaceable. It's across the street from a 100-acre beach park. It's at the base of our vertical MPC, which is halfway between downtown Honolulu and Waikiki. We currently have a mix of older legacy assets and then new retail assets. As we continue to develop the community, we demolish the older product and replace it with newer, better retail at the base of our condo buildings. When we do this, we increase the rental rates from around $20 triple net on average to somewhere around $75 triple net. And as more people move into the neighborhood, we expect this retail performance to continue to increase.
spk04: Okay. Thanks, Dave. All right. We'll take one more say question. Does the company maintain its position as a price maker and not a price taker regarding land sales? Do new economic conditions change who has the power in these negotiations?
spk03: I think this past quarter's result can clearly demonstrate that we're still a price maker. We had a tough economic environment this past quarter, but we continue to experience increasing price per acre sold in all of our MPCs. Clearly, as we said in our prepared remarks, we're going to only sell land to keep up with underlying home sales. And if we don't like the price that home builders are willing to pay, we won't sell. We have the precious limited resource, especially in an area like we're sitting in today in Summerlin outside of Las Vegas, which is very much land-constrained. And we're going to wait because we have that precious resource that we'll continue to appreciate if we don't like the price on any given quarter or any given year. With that said, we haven't seen deterioration. We've seen increases, and we're excited about what we'll see for the rest of this year.
spk04: All right. Thanks, Dave. All right, Sarah, with that, we'll open the lines for Q&A. Can we have the first question, please?
spk01: Thank you. My first question comes from Anthony Pallone with J.P. Morgan. Please go ahead.
spk08: Thank you. My first question is just on builder price participations in, like, I think $52 million year-to-date. I just want to try to get ahead of 2023, and as we think about where that could go, like, Does that kind of fade away because, you know, perhaps, you know, whatever the base pricing was for the stuff that might get sold next year is different? Or, you know, I guess, how should we think about just the risk around, you know, that number looking ahead? Because it just seems to be running pretty high.
spk03: It's a great question, Tony, and I appreciate you asking. Look, it's a number that is in this year and last year very high, outsized relative to our expectations. And I'm going to do my best to answer this question without giving you any sort of guidance on 23 because we're not in a position to do that in this call. But I do think that our expectations would be that that would return to more normalized levels. This is clearly elevated over the past several quarters. And if we're really good at selling land at the absolute right price, that should be zero. Luckily for us, people continue to invest in upgrades in their homes, pay for view premiums, and we've seen a price appreciation in the underlying home sales in each of our MPCs, which has driven a very favorable builder price participation over the past several quarters and years.
spk08: Okay. I understand. Thanks for that. And then just a question on the condo pre-sales, you know, 40% in a month in a tough market. Can you just talk about maybe where the demand is coming from and just, you know, comfort that, you know, kind of get the rest of that done?
spk03: Yeah, absolutely. So the demand we've seen is largely consistent. It's, you know, half to 55% of buyers local to the island. It's still about 30% Asian buyers primarily out of Japan. And we saw an increase compared to our past couple of towers, modest increase through our Tokyo sales gallery. And we're still seeing strong demand from mainland US buyers. It's a very consistent mix of what we've talked about and published in the past across our towers. Fluctuates a couple of percent here or there. In terms of our optimism for contracting and selling the remaining 60% of the building, we feel great. Look, there's only so many days you can contract, and it takes a while for those deposits to go hard. And we had a very short window this quarter. we feel very good that that's a number that will continue to climb throughout the rest of this year.
spk08: Okay, got it. And then just last one, if I could, on 250 Water Street, I understand how it's tied up in the lawsuit, but does that mean in December we get an answer, or can that just drag out a lot longer? And I know you've got some debt that's on that, just trying to understand what you do with that.
spk03: I really can't comment on the timing of the temporary restraining order, our ability to get it lifted, or what will happen in the court system. We strongly believe that this is a suit without merit and that we're going to fight it vigorously. And as we have an update on the timing, we will absolutely be sure to communicate it. The loan that we have on the asset we feel is completely supported by the value that's there, especially given that since that loan was put in place, we've had the approval of the transfer of the air rights, which has done nothing but increase the value. So we feel strong that we're going to be able to refinance that debt, whether or not we have the temporary restraining order lifted, which again, like we said, we believe is without merit.
spk11: Okay, got it. Thank you.
spk09: Our next question comes from Alexander Goldfarb with Piper Sandler.
spk01: Please go ahead.
spk06: Hey, morning down there. David, know i appreciate that you don't want to talk about 2023 guidance and uh you know me well enough to know probably where i'm going but my question is this you guys took up your land sale you know land sales are not going to be down as much as you expected this year we all know it's a mix quarter to quarter you know if some super pads or high-end land closes that obviously uh impacts appreciate your comments that the high end you know the bulkier home sales you know, prices continue to go up, the low end, which I'm going to guess is more Woodland Hills, you know, is more affected. But in general, it sounds like not that you're immune from the 7% mortgage world, but that your communities are far less impacted. So maybe you can just give some perspective, because it sounds like, you know, the operations of the business are going well, the NOI, the land sales pricing is holding up better. So I'm just trying to see where the weaknesses are. And as we think about next year, should we plant, you know, are we thinking about, you know, major declines in land sales because you don't like pricing or what you're hearing now from the builders is they're willing to pay the prices per acre because they really want to be in your communities and they don't really have a lot of inventory. So they sort of need to be there because that's where the buyers are. I'm just trying to get a sense of how your communities are performing relative to the markets. and maybe you're increasing share because your communities offer more than the average MPC out there?
spk03: Alex, it's a great question, and it's one that I'll try and answer as best I can. Look, I think that our home builder partners and home buyers want to be in our MPCs. You know, we have an unmatched quality of life, incredible amenities, short commutes, improved work-life balance, And just a lower cost of living that's driven so many home buyer decisions and therefore home builder demand for our land. Clearly, home sales are slowing. We have higher interest rates. We have inflationary pressures, fear of a recession. It's having an impact. I believe we've been outperforming and I believe we'll continue to outperform based on the quality of our communities. We're in a much different spot in this potential housing downturn than the last. Going into the last housing downturn, we had meaningfully overbuilt new homes ahead of household formation. And that trend is completely different today. And if you look at some of the data that comes out of Freddie and Fannie and national research, we estimate that we're short almost 4.5 to 4.8 million homes today. Couple that with record low vacant developed lot inventories in the hands of our home builders, where I would argue 20 months is equilibrium. And in Phoenix, we're at 14. In Houston, we're at about 13. And here in Summerlin, we're at seven to eight months of supply, which is record lows. So I think the strength that we saw this quarter and our confidence in being able to take up guidance for the remainder of this year is the result of the outperformance we've seen in our communities, the record low land inventories home builders have, and the continued demand for homes. And unlike the past cycle, Alex, where a home buyer coming into the market new had their choice of way too many resales on the market, we see fewer and fewer resale inventory as those people that are sitting in their home locked into a 3% mortgage aren't in a rush to trade out to a 7%. So new buyers coming into this market are really left with new homes as their choice.
spk06: Okay, so David, let me ask you this. If you break out your portfolio, you said the low end is being impacted. What percent of your portfolio of land sales or however you want to mention it or break it out? Is it 80% of your land sales target the upper end that aren't really being impacted? Is it 50%? Just trying to get sort of a breakout as far as how much of your land goes towards the homes that aren't seeing an impact by 7% mortgages versus the lower end homes, the starter homes that are seeing it. an impact?
spk03: Yeah, so our land sale strategy is to meet the underlying home sales and to fill the deepest pocket of demand. So in any given quarter, our land sales could be directed to more higher-end homes or it could be directed to more starter homes. And our land sales will adjust to meet that demand quarter over quarter. And to that end, I think based on the results that we've seen that we mentioned in the prepared remarks, for the next several quarters, we'll see more lots sold to those that are still driving the home purchasing, and less to the more starter homes. But it's incumbent on us, Alex, and we do this, and we've talked about this, I'm sure, that we push to make sure that we have all price points available on the ground to the best we can in all of our communities. It maximizes absorption. It maximizes vibrancy of the community. It maximizes the diversity of the new families that we welcome into our communities. So our job is to make sure that we have lots on the ground to meet all those price points at all times.
spk06: Okay. Next question is, this is probably a yes, no. Sounds like the condos in Hawaii, there's no impact there. Like, they sell regardless. They're sort of immune to mortgage rates, et cetera. Is that a fair assessment?
spk03: I would say based on the sales that we experienced this quarter, both closing out Kula, continued absorption at Aali'i, continued pre-sales at the Park Ward Village and Ulana, as well as launching Kalai, so far, we haven't seen a meaningful impact or change or dampening of demand based on any of those other factors.
spk06: Okay, final question. Appreciate your time, but final question. You have a labor shortage, as you mentioned, around the Tin Building, and obviously, you know, labor in general at the Seaport. Does this delay, does this push out by a few years, your plan stabilization? Because it doesn't seem like the labor market is going to get better anytime in the near term. So are you guys now assuming a longer stabilization to profitability? Or what's your view, given what's gone on so far with labor?
spk03: Yeah, you know, it's tough for me to quantify what that delay has really changed in terms of the timeline to stabilization. Alex, it's not years, it's months. You know, as we said, we expect to be open fully at seven days by the end of this year, early January. And we're chipping away at hiring every week, adding, you know, 15 to 25 new folks that are coming to join the team and learn from, you know, probably the best culinary art expert in the world, in my opinion, in John George and helping out at the Tim building. So we're chipping away. We feel good that we're on a roadmap now to getting open to seven days. We would have liked to have been open seven days in September. But if that becomes January instead of September, Sure. Could the stabilization be pushed off three to four months? Absolutely. I don't know that my crystal ball is accurate enough to say exactly the day that we expect it to be stabilized. So it's really hard to quantify what this could mean.
spk10: Thank you.
spk09: Okay.
spk01: If you'd like to ask a question, please press star, then one at this time. Our next question comes from Thomas Corson with BWS Financial. Please go ahead.
spk12: Good morning. First, a follow-up on the Ward Village. You sold a couple more units in Kalua and Q3. Are you seeing any feedback from these customers and from sales associates as to the sales process that you're seeing there?
spk02: Look, I think that our job is to constantly...
spk03: take the feedback throughout that process to try to improve it. And, you know, it's something that our sales team that's led by Bonnie Wiedemeyer on the ground there and Ward Village does an excellent job at. And I think that that excellence has shown up in our results and our ability to continue to sell.
spk12: Okay. And then there were some reports the last few months, some new home builders were seeking out investors to buy homes in bulk for rental homes. Are you exploring ways to expand Howard Hughes' footprint in single-family rental space?
spk03: Yeah, I think the launch of our first single-family for rent community, Wingspan in Bridgeland, is evidence of that. We very much make sure that as we sell land to homebuilders, that those homebuilders are selling homes. We don't typically allow spec buildings, And we're pretty maniacal about what we allow our home building partners to do long term. And that's building homes. It's not flipping land or using it for another purpose. It's clearly demarked that this will be for this set purpose with these size lots and these price zones. So we haven't seen that phenomenon in our community. But look, we're optimistic about our single family for rent community, Wingspan and Bridgeland. We think there's tremendous demand and we can't wait to get that project completed.
spk12: Okay, and the last question is regarding the maturities that are coming up. Any plans on how to deal with that? Do you want to refinance and add more debt at a higher interest rate, or are you just going to divert cash flow from stock buybacks to the debt maturity? Anything you'd add there?
spk03: Our expectation is that all the near-term maturities, and we're always thinking about two years ahead, will be refinanced at similar or – you know, either slightly higher, slightly lower proceeds than what currently are outstanding.
spk12: But does the current environment actually allow that, though? I mean, interest rates have gone up quite a bit since the maturities were coming up.
spk03: So far, so good. We feel comfortable with that comment. Okay. Thank you. I mean, look, similarly, the NOI and the rental rates that we're achieving on these assets have also gone up meaningfully over the past several years. So our ability to refinance at similar proceeds has not been impeded to date.
spk10: Okay, that's helpful. Thank you.
spk09: Our next question comes from John Kim with BMO Capital.
spk01: Please go ahead.
spk05: Hey, good morning, guys. It's Eric on for John. Can you just, just thinking about the builder price participation, can you just remind us of the dynamics and the drivers behind that?
spk03: Sure. Yeah, absolutely. So when we sell land to home builders, whether that's in a super pad or a lot, the typical contract that we sign is based on a hard deposit, a takedown schedule, a price per acre, and a residual participation known as builder price participation, which is typically between 16% and 20%. So illustratively, if we assume that builder price participation is 20%, And we sold land to a home builder where we thought the end home price would be $500,000. So our implied land value there, based on 20%, is $100,000. If, in fact, that home is sold for $600,000 as a result of view premium, upgraded quality of finishes that the home buyer elects to put in their home, or other areas that drive the price higher, just depreciation, for example, we're going to participate in 20% of that delta. So if the $500,000 dollar home is sold for $600,000, we would receive a $20,000 check of builder price participation.
spk05: Okay, that's helpful. And then, you know, just based on the large super pad sold in the fourth quarter of last year, you know, and given the housing prices relatively strong in the upper end market, is it safe to assume that there's a potential upside in the builder price participation when those houses do come online and are sold?
spk03: You know, Eric, it's really hard for me to predict what the price of a home is going to be when they're sold. It could be three, six, nine, or 12 months from now. Sure, I'd love to think that they're going to continue to go up and we'll see participation, but that's not something I'm willing to predict.
spk05: Okay, that's fair. All right, maybe switching to condos. On the margins, they came in a bit above expectation. Just kind of curious what were the drivers there and, you know, how should we be thinking about what was closed in the fourth quarter?
spk11: You know, look, I think it tends to bounce around a little bit.
spk03: And what we've always said is that we're targeting a 30% margin on average across all of our towers. Some of those towers are front row, which typically have a higher margin. Some are second row and third row, which are typically a slightly lower margin than the front row. You know, in general, we expect to achieve about 30%. And This past quarter, we were able to get there, especially on Kuala, and I think some of the price appreciation and price increases that we've had as we've gone through the sales process of these towers has helped solidify strong margins.
spk05: That's helpful. And then last one, on the same store that you guys provide in the breakout for the office segment, it seemed like occupancy was up year over year, but same store NOI ticked down just a little bit. I'm just curious, is there any lease termination fees embedded in the numbers there? Can you just walk me through the results?
spk03: In the office or overall?
spk05: In the office.
spk03: In the office, we've seen positive absorption as noted by the increase in occupancy, but with new leasing and positive absorption comes free rent. Our same store results will be published on a cash basis, not a GAAP basis. You know, I can't pay my bills with gap rent. I can only pay with cash rent, which is why that's what we publish.
spk10: Perfect. Thank you, guys.
spk09: Next question comes from Alex Barron with Housing Rights Control.
spk01: Please go ahead.
spk02: Yeah, hi, guys.
spk14: Thanks for taking my questions. I wanted to focus a little bit on the new master plan in Phoenix. First of all, can you guys just talk about, you know, what was – forget the fact that rates are going up or, you know, if we're thinking long-term, what was sort of the expected run rate as far as how many lots would sell per year and over how many years would this project, you know, eventually sell out?
spk03: Yeah. Yeah, no, it's a great question. And at 37,000 acres, it's the largest master plan community in our company. And one that we projected a sellout in the 40 to 50 year time range. You know, clearly when you're pushing projections out that far, it's very difficult to be entirely accurate, which is why I kind of gave you that range that you could drive a truck through. Look, we are anticipating that we're going to sell our first thousand lots to home builders this year. We were hopeful that we would be able to get it done in 22. I think that will actually happen in 23 now, just based on some of the labor shortages, time constraints, and ability to get dirt moving on the ground to get those lots into the hands of home builders. We still see demand. We still have great conversations with home builders. We see a need in Phoenix and an undersupply that needs to be met. But again, we're in this for the long game. And unless we're going to be able to sell that land at an appropriate price, we're not in a rush to get rid of anything at a discount.
spk14: Yeah, and that's why I started off, I guess, my questions with the sort of long-term picture in mind, because obviously I think we all can agree that Phoenix is a good long-term attractive market. That said, you know, short-term, that market, I think, is under a lot of stress. So I'm curious... Where do you guys see the range of prices starting off for those homes that you would anticipate selling lots to the builders in 2023? How low would the builders need to price those homes, I guess, for things to sort of work and get going on the right foot?
spk03: Look, our expectation is that we're going to be able to sell lots at $80,000 to $85,000 per lot, which based on lot sizing today, which is more modest, and we're talking about entry-level homes in that market, translates to, you know, call it $3,000 to $325,000 per acre. You know, clearly in the early stages of any new MPC, you're welcoming residents, residents that are typically new homebuyers, more moderately priced homes. And over time, we believe, based on the quality of the master plan communities that we develop, we continue to diversify and command a premium from those areas around us. We've seen it time and time again. And even in the Woodland Hills, which is only really in its fourth year of selling, we're at a meaningful premium compared to the overall North Houston market around us. And we expect to see similar performance in Terra Valles. With that said, again, we're not in a desperate situation. We don't need to sell that land unless there's demand there from homebuilders. unless we're getting the appropriate price per lot and price per acre. And we're not going to sell that land because we very much value maintaining the quality standards, desirability, and the amenities that we think make our community special.
spk14: Okay, great. And so in terms of lot size, like what's the minimum lot size that, you know, a builder would be able to start an entry-level community?
spk11: You know, it's the type of number that can be all over the board.
spk03: You know, I don't want to... I mean, the range of what we're looking at right now in the first phase of Florio and the lots that we're talking about are across, you know, 10 to 12 different smaller subdivisions with varying lot sizes and varying prices of homes so that we don't have, you know, 10 different home builders building all the same size home at all the same price point. So our job is to maintain that diversity, even if that diversity is in a tighter band of new homes and entry level versus a much wider band that we see here in Summerlin.
spk14: Okay, but I'm saying like would they start at like 40 foot wide lots? And is there going to be any attached communities as well? Or is it all expected to be more like single family type lots?
spk03: Our expectation right now is that it will be all single family. It will be detached. And, yes, we can have lots as, you know, 40-foot front foots and, you know, going up from there.
spk14: Got it. Okay. Thanks, and best of luck, guys. Thank you.
spk11: Thanks so much, Alex.
spk01: This concludes our question and answer session. I would like to turn the conference back over to David O'Reilly for any closing remarks.
spk03: Thank you all for joining us today. We look forward to seeing you in our investor relations event in the near future. If there's any follow-up or additional questions, we're always here to help.
spk11: Please don't be shy, and thank you again for joining.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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