Howard Hughes Corporation (The)

Good morning, and welcome to the Howard Hughes Corporation's first quarter 2023 earnings call. All participants will be in a listen-only mode for the duration of the call, and should you need any assistance at that time, 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. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Eric Holcomb, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to the Howard Hughes Corporation's first quarter 2023 earnings call. With me today are David O'Reilly, Chief Executive Officer, Jay Cross, President, Carlos Alea, Chief Financial Officer, and Dave Strife, Head of Operations. Before we begin, I would like to direct you to our website, 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. Please 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 forward-looking statements unless required by law. With that, I will now turn the call over to our CEO, David O'Reilly. Thank you, Eric.

Good morning, everyone, and welcome to our first quarter earnings call. On our call today, I'm going to start with a recap of the quarter and cover the segment highlights for our master plan communities and for the seaport. Dave Streif will cover our operating assets, followed by Jay, who will update our development projects in Ward Village. Then finally, Carlos will review our financial results before Q&A. I'm pleased to report that our MPC and operating asset segments had a strong start to the year, with both reporting favorable financial results with year-over-year growth. Considering the numerous market headwinds in the latter part of 2022, our first quarter results further exemplify the resiliency of our unique portfolio of assets, which continue to prove its ability to perform throughout various market cycles. Compared to the prior year, MPC EBT increased 5%, aided by continued strength in our residential price per acre, strong builder price participation, and a sizable 109-acre commercial land sale in Bridgeland. Our operating assets delivered NOI of $59 million, a 6% year-over-year increase when excluding the impact of asset dispositions. At Ward Village, we contracted to sell 35 units and closed on the sale of five homes. And at the Seaport, the Tin Building is now open seven days a week, which drew improved efficiencies, and significantly reduced equity losses despite winter seasonality. During the quarter, we experienced a positive shift in homebuyer sentiment, with new home sales in our MPCs rising 120% compared to the 2022 fourth quarter. While this did not immediately translate into higher residential land sales, it did improve homebuilder interest for new acreage, which points favorably to land sales going forward. Looking at our MPC segment, we delivered $62 million of EBT, a $3 million year-over-year improvement. This performance was impacted by continued growth in residential price per acre, which rose 49% to $836,000. MPC land sales, which totaled $59 million, reflected a modest 3% reduction, primarily due to fewer residential acres sold. The rising value of our residential acreage also carried over into new home sales in our MPCs. As the value of the new homes rose, the implied land value has also increased. When new homes are sold, we receive a participation payment from the builder based on the increase in the implied land value. In the first quarter, our builder price participation revenue remained strong at $14 million. a 3% year-over-year reduction despite a 9% decline in new home sales. In our Houston region, Bridgeland delivered another excellent quarter with more than 22 residential acres sold at an average price of $542,000 per acre. We also closed on a significant 109-acre commercial land sale, which generated nearly $28 million of revenue. With continued strong builder price participation, Brisbane reported over $31 million of EBT in the quarter. In the Woodlands, we continued to sell custom lots at Aria Isle on Lake Woodlands, which generated $10 million of revenue at nearly $2.9 million per acre. In the Woodland Hills, we sold only five acres of land in the quarter. These lots were sold, however, at a record price of $431,000 per acre. Turning to Summerlin, We reported $28 million of EBT in the quarter. Much of these earnings were the results of strong builder price participation, totaling $12 million. And at the summit, we commenced selling the first custom lots in Phase 2, which includes another 54 acres of land for 28 custom home sites. We expect this new phase of development will have a meaningful impact on Summerlin's EBT as the year progresses. Finally, in our newest community of Terra Vallis in Phoenix, West Valley, we continue to lay the groundwork for Florio, mass grading and installing infrastructure needed to contract the first thousand residential lots. We continue to expect these lots to be contracted in the second half of the year. Looking at new home sales, as we previously mentioned, we experienced 120% increase compared to the fourth quarter, selling a total of 552 homes. The sequential improvement was attributable to Summerlin, which experienced a sharp 229% recovery, and Bridgeland, which more than doubled the number of homes sold in the fourth quarter. These increases can be attributed to stabilizing mortgage rates, as well as homebuilder incentives attracting new homebuyers. Also contributing is the lack of available resale homes, with many homeowners reluctant to sell their biggest asset, their historically low mortgage rates. As evidence, according to the National Association of Home Builders, new construction in the U.S. currently makes up about one-third of the available home inventory. This compares to the historical norms of a little bit more than 10%. With many homebuyers forced to turn to new construction, spec home inventories have quickly depleted, and cancellations have significantly declined. In our MPCs alone, cancellations declined from 39% in the fourth quarter to 18% in the first quarter. When combined with a 28% year-over-year decline in new home starts in March, negotiations for purchases of new residential acres have increased. As a result, we anticipate improved residential land sales in the coming quarters as home builders will need to purchase new lots to meet the sustained demand. Shifting over to the seaport, we achieved seven day per week operations at the TIN building throughout the first quarter with strong foot traffic and sales despite the normal winter seasonality. Although we continue to experience increased employee expenses and elevated startup costs, equity losses from this joint venture improved by $6.5 million sequentially for a total loss of $9.2 million. We remain confident that we are on the right path and anticipate considerable financial improvement in the coming quarters. Overall for the Seaport, we reported 27% year-over-year revenue growth in the first quarter, generating $12 million in sales. Excluding losses from unconsolidated joint ventures of $9.6 million, which primarily relates to the TIN building, Seaport NOI losses improved to $5.6 million. With that, I'll hand the call over to Dave Stray to review the performance of our operating assets.