Howard Hughes Holdings Inc.

2025 earnings conference call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question answer session. To ask a question during the session you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Joe Villane, General Counsel, please go ahead.

Good morning and welcome to the Howard Hughes Holdings Second Quarter 2025 earnings call. With me today are Bill Ashman, Executive Chairman, David O'Reilly, Chief Executive Officer, and Carlos Olaya, Chief Financial Officer. Before we begin I would like to direct you to our website .howardhughes.com where you can download both our Second 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 Second Quarter earnings press release and the risk factors in our SEC filing for factors that 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, Joe, and good morning. On our call today I'm going to begin with a recap of the Second Quarter and cover segment highlights from the master plan communities, operating assets, and strategic development. Carla will review our updated failure guidance and balance sheet. Following our comments on the operating results for HHC, we'll hand the call over to Bill Ackman, our executive chairman, who will discuss HHH's future strategic direction before we open the lines for Q&A. As we discussed on our last earnings call, the Second Quarter marked a significant milestone for Howard Hughes Holdings, with Pershing Square investing $900 million in exchange for 9 million shares of HHH stocks. These funds will be strategically used to transform Howard Hughes from a pure play real estate company to a premier diversified holding company. Before Bill discusses this in a few minutes, I'm going to shift to talk about the results for HHH's real estate development business to Howard Hughes Corporation in more detail. The Second Quarter was another exceptional quarter for Howard Hughes as our team delivered outstanding results across our business segments, highlighting the strong demand in our portfolio of master plan communities, and further solidifying our strong 2025 outlook. For the Second Quarter, we delivered adjusted operating cash flow of $91 million or $1.64 for diluted shares. Our MPCs continue to see strong homebuilder demand, executing land sales at record prices for acre in both Summerlin and Bridgerton. Operating assets also set a new record quarterly NOI across office and multifamily, with solid -over-year segment growth of 5%. In strategic development, condo presales remain strong at the Lanou, and we launched presales at Malia and Alima, which are undoubtedly two of the most anticipated luxury residential towers ever to come to market in Honolulu. With these strong results, we are raising our full-year guidance for adjusted operating cash flow, driven by the current and expected strength in our MPC land sale business and operating asset NOI.

Carlos will discuss guidance in a few minutes.

Turning to our MPC segment, we delivered solid MPC EBT of $102 million in the Second Quarter, fueled by the sale of 111 acres of residential land across our communities at a new record high average price per acre of $1.35 million, a 29% increase over last year. Land sales were led by Summerlin with two super pad sales totaling 65 acres, achieving a record average price per acre of $1.6 million. We also sold two custom lots in Astro, Summerlin's newest luxury community, for an impressive average price of $7.7 million per acre. Looking at new home sales, we continued to see solid demand across our MPCs, with a total of 487 homes sold in the Second Quarter. While this was a decline from last year, the reduction was due to a reduced new home inventory in Summerlin and regulatory delays in Bridgley. As both of these issues are currently being resolved, we expect to see home sales for the second half of the year remain strong. While the national housing market has shown signs of softening during the quarter, our record price per acre highlights the strength and desirability of our MPCs. We're seeing steady demand for new homes across our communities. We believe this demand will drive home builders to look for more land to develop in our communities. This will drive what we expect to be a continued record residential land sales, price per acre, and

MPC EBT for the full year in 2025. In our operating asset segment, we delivered NOI of

$69 million, representing a 5% increase compared to last year, driven primarily by a record-breaking quarterly NOI in our office and multifamily portfolios. Looking closer at office, we reported NOI of $35 million, or a 6% -over-year increase. As we previously mentioned, this growth was primarily the result of last year's strong lease-up activity at 9950 Woodlock Forest, 6100 Merriweather, and 1700 Pavilion, which ended the quarter 99%, 98%, and 92% leased respectively. During the quarter, we acquired 7 Waterway, a 186,000 square foot Class A office building and adjacent structured parking located in the already strong market share of the Woodland Town Center sub-mark. With this market share, exceptional basis, and net rents in the high 20s, this asset is expected to provide outsized risk adjusted returns upon stabilization. Our multifamily portfolio also performed well, delivering record NOI of $17 million, or a 19% increase -over-year, driven by strong lease-up efforts at our recently completed assets and improved overall leasing at our stabilized properties, which were 97% leased at quarter end. In our retail portfolio, NOI was $13 million, which reflected a 7% -over-year reduction, primarily due to non-recurring collections on tenant reserves at Ward Village in the prior year. Excluding this impact in 2024, our NOI would have seen a modest increase -over-year. In downtown Summerlin, we continued to make progress on our tenant upgrades and recently signed new leases with Biore and Paris Spaghetti. At quarter end, we had only five retail spaces available, most of which are currently in negotiations, representing only 17,000 square feet. Turning to our strategic developments, in the second quarter condo presales were solid, with 17 units contracted, representing incremental future revenue of approximately $35 million. We expect to break ground later this year with an anticipated delivery in 2028. Presales at our condo projects under construction, which are 96% pre-sold on average, were largely unchanged in the second quarter, and we remain on track to deliver OUANA, a workforce housing development that's 100% sold the fourth quarter of this year. At the end of June, we launched presales for Malia and Alema, Ward Village's 12th and 13th condo developments. We've seen exceptional demand for these towers in a very short period of time, and we look forward to discussing these results as soon as the launch is completed and the pre-sold units are beyond their rescission period. With that, I'll turn the call over to

Carlos to discuss our updated full-year guidance and balance sheets. Thank you, David, and good morning, everyone. Today, we are increasing

our adjusted operating cash flow guidance driven by current and expected continued strength in our MPC and operating asset segments, as well as reiterating our condo sales and GNA guidance for the year. As David mentioned earlier, this was an excellent quarter led by the up-performance of our MPC and operating asset segments, and we now project our adjusted operating cash flow will range between $385 and $435 million in 2025 with a midpoint of approximately $410 million, or approximately $7.32 per share. This represents an increase of $60 million at the midpoint compared to the original guidance with a corresponding increase of $0.32 per share, despite a higher share count resulting from the version square transaction.

In our

MPC segments, led by robust demand from homebuilders and continued low inventory of vacant developed lots, we now expect full-year MPC-EBT to be approximately $430 million at the midpoint, reflecting an increase of $55 million compared to our prior guidance driven by strong anticipated super-pass sales in Summerlin and improved residential lot deliveries in Richmond in the second half of the year.

In operating

assets, we are increasing full-year guidance from our previous $262 million midpoint to $267 million led by the strong leasing activity of our office and multi-family portfolios. This guidance would represent a new full-year record. We are reiterating both our cash GNA and condo sales guidance for the year. Cash GNA is expected to be in the range of $76 to $86 million with a midpoint of $81 million. As always, our guidance excludes non-cash stock compensation and one-time items, representing approximately $15 million and $10 million certain expenses with respect to it. Our guidance also excludes the version square variable advisory fee. However, it does include $10 million for Persian Square's base advisory fee, which we have substantially offset by future savings resulting from a reduction in our workforce and other cost reduction initiatives we have recently implemented. Condo revenues remain projected at approximately $375 million for 2025, reflecting the scheduled closings at Ullana in the fourth quarter, with no gross profit expected from this workforce housing tower. Turning to our balance sheet, we had $1.4 billion of cash and $515 million of under-run lines of credit. Combined, we had approximately $2 billion of available liquidity. Together with our strong guidance expectations for the full year, we are well positioned to further strengthen our balance and deploy capital appropriately. At the end of June, the remaining equity contribution needed to fund our current project, which will not all be spent in 2025, was approximately $279 million. From a debt perspective, we had $5.2 billion outstanding at quarter ends, of which 92% was fixed or hedged at an average rate of 5.1%. During the quarter, we made meaningful headway on reducing our near-term maturities, successfully completing two major financing to lower our 25 maturities to $282 million. Notably, we extended the construction loan on our Marlowe multifamily property to April 2027 and secured a new $75 million five-year fixed-rate mortgage for $1,700 pavilion, replacing a construction loan previously scheduled to mature later this year. With this extension completed, our remaining maturities for this year primarily consist of Meriwether Row, 6100 Meriwether, and -O-Reco. We expect all of this will be successfully refinanced during this year, with advanced discussions already underway. And finally, we closed on a sale of mat receivables during the quarter, generating cash proceeds of $180 million. These funds were used to pay down the Bridgeline notes, reducing their balance to $85 million at quarter ends, and leaving $515 million available for drawing the facility. With that, I will now turn the call over to our Executive Chairman Bill Ackman to provide an update on Howard Hughes' holding strategy.

Thank you, Carlos. I'm here with Ryan Israel, who is, as you know, our CIO. We wanted to give a report on what we've been up to for the last couple of, last few months since the transaction closed. Our principal focus has been identifying and doing due diligence on a potential insurance company acquisition. Just to give you sort of context, if you look at Berkshire Hathaway, if you will, the model here, a major part of the success of Berkshire has come from the acquisition beginning in the 1960s of an insurance operation and the growth of that business over the ensuing 60 years. What's interesting about insurance, it's a cash generative business. Generally, you write premium, you receive cash upfront that you can invest. And if you run a profitable insurance operation and you invest the capital well, you can earn very attractive returns on equity. We want Howard Hughes to grow its intrinsic value per share at a high rate over a long period of time. The beauty of a successful insurance operation is it's a business where we can grow at a very nice rate over time without having to issue or raise equity capital in order to grow our business model. So that's been a very high priority for us. If you were to examine Berkshire over the last sort of 60 years, what's interesting is Buffett took a very different approach to the way he managed his insurance operation. A typical insurance company writes about as much premium as equity capital every year and then invests the float in fixed income investments principally, but uses a fair amount of leverage to get an attractive return. So about three times the assets relative to equity is a typical balance sheet structure for insurance operation with those assets invested principally in low risk, fixed income securities. What Buffett did is he ran a very low leverage insurance company. Instead of writing premiums equal to equity every year, he wrote, he's written premiums equal to about a third or anywhere between 20 and 40 percent of equity in any one year. So very, very under levered in terms of the risks assumed and the insurance operation. He took 100% of that float from writing premium and invested in very short term US treasuries basically taking no risk on the insurance company float. But then he invested about 100% of the equity of the insurance operation in common stocks. And Buffett's been a good stock picker and the result has been an insurance company that's earned well into a 20% return on equity over a very long period of time. And the power of compounding has built, really led to the success of Berkshire Hathaway. It's really been driven off of the insurance operations and the investment operations associated with that business. We've taken a page from Berkshire. We are looking to acquire a diversified insurance operation and we intend to run it in a similar fashion. Low leverage in terms of the premiums written relative to equity. Low leverage in terms of the amount of assets relative to equity. Call it one and a half times versus three times for typical insurer investing 100% of the float in short term US treasuries and taking no risk on kind of float balances and then invest in common stocks in very high quality durable growth companies of the kind that Pershing Square has identified and invested in over time. One sort of interesting question would be why don't more insurance companies operate this way? And the answer is what was unique to Buffett is he brought investment skills that really are generally absent certainly on the common stock side of an insurance operation. Insurance companies today really focus on maximizing profitability of their insurer and I would say the asset side of the balance sheet is a bit of an afterthought. And part of that is insurance companies have difficulty recruiting kind of best in class talent to run a successful investment operation, particularly one that invests in equities. One of the things that we bring to this transaction with Howard Hughes is an investment operation and that investment operation comes for free if you will to the insurance subsidiary. So the plan would be we acquire insurer, we run it as a low leverage insurer, we're conservative, extremely conservative in the way we invest the insurance company float and then Pershing Square, Pershing Square team invests the assets of that insurance, the assets equal to about the equity of the insurer in a common stock portfolio that we manage for the company for free. We are looking at a number of potential transactions. We hope to be in a position to find the right company at the right price to have a transaction we can announce we would hope by the fall and at which point obviously we'll be able to share sort of more information. We have our annual meeting will be on September 30th. We're hosting it this year in New York City. It will be at the Pershing Square Signature Center on 42nd Street. It's a theater complex for Signature Theater. It will be in the morning and we really encourage you to attend. We're going to give a very detailed presentation on our plans for the insurance operation. We're going to talk more about the overall strategy of the company. David O'Reilly is going to update shareholders who are kind of less familiar with the real estate story of Howard Hughes. We've had some you know as we spent more time thinking about the business we think we will be able to kind of present some metrics that you know people should be focusing on as we kind of build this company over time to kind of measure our progress and measure our success over time. So really encourage you to come to that meeting. We're also going to have you know an open Q&A session where Ryan, myself, David will be available to answer really any questions you have. I think it'll be really a interesting session so we really think it would be a great way for you to learn more about our plans going forward. One last comment with respect to what I sort of failed to mention as I described our plans for the insurance company. One of the other benefits that this insurance operation Berkshire had is it was part of a diversified holding company and the result of that is that incremental credit support that came from the holding company gave the insurance operation more flexibility in terms of its ability to invest its assets. We believe we offer something quite similar here in the sense that one we have Howard Hughes Holdings as the owner of this insurance subsidiary and a completely unrelated business that will start to spin off substantial amounts of cash over time really unrelated to the insurance operation and then Howard Hughes itself is owned 47% by the Pershing Square funds namely Pershing Square Holdings which is an A-rated company with about 15 billion of equity and the Pershing Square management company which is a basically unlevered business very profitable unlevered business that is not currently rated although we do intend to rate the business but was valued in transaction last year at about 10 and a half billion dollars. You have about 25 billion of equity in terms of the 47% owner of Howard Hughes a very high credit worthy enterprise and unrelated business to insurance and then Howard Hughes itself owning hopefully an insurance operation in the relative short term that we will run in a similar fashion in terms of similar approach that Berkshire has taken over time in terms of low leverage on both the asset and liability side of the balance sheet and a higher return strategy with respect to the assets of the company. With that we would be happy to open it up for questions and if operator you could take the questions please.

As a reminder to ask a question please press star 1 1 on your telephone and wait for your time to be announced. To withdraw your question please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Alexander Goldfarb from Piper Sandler.

Hey morning morning down there two questions the first one's going to be on the MPC business and then I'll get to the bigger picture. David your land sales the volumes have increased that despite what we're all reading about challenges in the single family market. Obviously you have the premium product that you guys sell but there's also a wider array so can you just give some more granularity on you know it's impressive what you guys deliver but still against the higher interest rates housing affordability etc. How do we think about your properties the price points the diversity of buyers versus what's going on the broader market and your confidence that this can endure can continue to endure even in the face of elevated interest rates and sort of all the macro concerns.

Good morning Alex yeah it is a question it's a great question and one that we've spent a lot of time discussing when we go through in excruciating detail our communities with the teams and track as you know home sales within our communities maniacally and we see those home sales as a leading indicator for what the home builders will need in land purchases on a go forward basis. To date our home sales have been incredibly resilient and I think that is due to the quality of assets that we have our MPCs have the best schools amenities quality of life they're attractive for residents and home builders the home builders are building homes and they sell at a premium relative to those areas around them and as a result our land remains incredibly attractive and you know our communities I've been saying for years we're not immune but we're insulated and there's always a flight to quality in in markets when there is you know perhaps a little bit of a reduction in price in homes and now's my chance to get into Bridgeline now's my chance to get into Summerlin and we see residents continue to come in and buy homes. The home prices that we're seeing the transactions at vary across the spectrum in Bridgeline our homes are in the 300s to the 500s in Summerlin they're in the 400s to the you know 10 million dollar range so we're seeing it with your first time home buyer your move up home buyer and your luxury it has been pretty consistent across the board it has been even somewhat surprising to those of us in the room given the national headlines I wake up I read the headlines I think oh my god today's the day the music stops and gosh darn it if the report doesn't come in on Monday morning that says we sold another 20 homes in each of our communities which is an incredible pace so we're thrilled with the results we see continued strength of the balance of the year the record price per acre I think speaks to the quality of our communities the desirability of our land and at the end of the day that land we have is the precious raw material that the home builders need to stay in business and remain profitable and if you have the opportunity to buy land as a home builder in a cuspi market where you don't not sure if you can generate a great margin or buy land in Summerlin that for 25 years has demonstrated success in our performance I still believe that those home builders will buy land in our communities

okay and then the second question is for Bill Bill when we met with you a few months ago you spoke about you know the potential for you know creating your own insurance entity hiring an individual and creating homegrown it sounds like now you're thinking more on acquiring an outside entity so one is your thoughts on homegrown versus acquiring and then two as you ramp up the the Howard Hughes and that and that investment you know cash flows it almost sounds like from the outside like we should think about this to be two to three years before those cash flows really start to ferment but just curious if we should be thinking longer or you think that the accretion could be sooner

sure so you know our thinking on building versus buying is if we can find the right asset and we're I would say increasingly confident we can there are a number of potential transactions of a size and a I think quality that would be a great start for us and you know again it's going to come down to terms and price and work but I think we've got a number of potential things that we're looking at so that gives us some confidence there's a deal to be done and there's a big advantage to you know starting from truly scratch you know the issues in terms of licensing building an organization technology it's not this way it's not a running start whereas we actually buy an existing well-run insurance operation then you're you're often you know off the ground and running you know sort of immediately you know our expectation based on things that we're looking at is this would be a material transaction to Howard Hughes assuming we do one of the transactions we're looking at meaning it would very quickly represent an important part of the business if you know and a successfully run insurance operation in the way that we've identified is a business that can consistently over time earn I would say returns on equity that are you know meaningfully higher than and even the best run as kind of real estate operation so we do expect insurance and the relative intermediate term to become you know very material to the company to the point that people will probably stop thinking about Howard Hughes is a real estate company with a little insurance operation I think they'll think of it in the way that we you know so our business plan as a perhaps an insurance holding company or a diversified holding company with a major insurance operation but that's that's the business plan but again it's all subject to our ability to find the right company the right price you know and that we won't know until we get a transaction done but I would say we are cautiously optimistic that there are a number of potential candidates and we're working hard to do a transaction

okay and then if I could just add when we think about the earnings potential we should think about a significant part coming from the insurance business or that the stock portfolio is going to be more the generation of the earnings contribution sure

so you know again going up to the Berkshire model I would say the investment part of the insurance operation has been more materially more important to the profitability of the insurer than the insurance company itself you know but and I think you know when you run us a if you will a pedal to the metal if you will in Berkshire's insurance operation comes from the fact that he's investing in assets that can earn you know equity type returns and the insurance company itself is a focused on profitability you know the typical insurance operation is pretty aggressive in making as much money as possible from insurance and using leverage to get an adequate return on assets you know we we think this approach is both lower risk and kind of higher return so I think the way you should look at the insurance operation over time is you know how are we going to you know if we had a billion dollars of equity invested in insurance let's say and we can compound that equity at 20 percent or more over time it will become very very material to the overall intrinsic value of Howard Hughes I think that's the way to look at as opposed to earnings I think you're going to want to focus you on you know the growth in the you know the equity value of this insurance company over time and you know the Howard Hughes has tried over time to come up with sort of a per share kind of cash flow or earnings metric to try to fit in with you know other you know the conventional real estate companies that have an FFO or other metric I think that's frankly a mistake and you know and I don't know that the market's actually really given us credit for that so we're going to come back we're working with the team on giving you some kind of KPIs that you can think about and looking at our business like if you think about you know Howard Hughes you know today right you've got obviously you know the most straightforward part of the business is you know net operating income we generate from a you know a portfolio of real estate assets we have a condo business that you can think of in a fairly straightforward way right we've got you know a certain amount of profits we're going to generate from each of these various towers kind of over time and then we have land holdings both commercial and residential and you know what the intrinsic value of Howard Hughes depends on kind of growing you know the cash flows from the real estate operation they and they relate to what price we're monetizing land and what the value of our remaining holdings are you know those are kind of the key sort of metrics that we're going to look at but we think people over time particularly as the insurance operation becomes a bigger part of the business will be focused on kind of overall the growth of intrinsic value of the company over years as opposed to you know a quarterly metric of a cash that I think is very challenging to do for business you know as you know that has everything from land sales to development stabilized assets

having covered Howard Hughes for a long time I appreciate that so thank you Bill thank you David sure

thank you one moment for our next question our next question comes from the line of Ray Zong from JP Morgan

hi good morning thanks for taking my question my first question is on the leverage side Bill as you look at the leverage as of today for Howard Hughes and you know the target that you're trying to go after how should we think about a pro forma of our pro forma on leverage and given that you know what are the deal size that you think we should be expecting would it be a 100 stake or something in something or a smaller stake but a larger company how should we think about that

sure so you know we think that Howard Hughes's real estate operation is kind of appropriately financed and we don't intend to kind of you know lever it up any kind of material way you know we like the business the way it's being managed today we have today excess cash of certainly the 900 million and maybe another hundred or a couple hundred million dollars of excess cash in the overall company called a billion dollars that's sort of in the realm of the amount capital that we would intend to use if we were to invest in insurance operation if that business the check size was larger we would raise capital or you know partner with other Pershing Square affiliates in doing a transaction but the goal would be for the company we acquire to be controlled by Howard Hughes and yeah that's an important element Ryan wants to add something good

and to clarify just your question we don't need to own 100% as Bill mentioned we would like to own more than 50% of it for control but when we talk about raising capital one of the values that we believe Pershing Square is providing the Howard Hughes in our arrangement is we have the ability and it demonstrated over time at Pershing Square to be able to raise capital externally and we have a large and deep network of partners who have partnered with us very successfully in the past and so we bring we have the opportunity if we the cash on the balance sheet we could partner in a way that would be very accretive to our huge shareholders while at the same time still allowing us to be able to control the entity in terms of the daily operation

yeah just to further you know to Ryan's point you know if we were to buy a business insurance operation for a billion and a half dollars a billion check written by Howard Hughes and let's say 500 million by a co-investment sort of vehicle it's an attractive co-investment for someone where Howard Hughes is sort of the likely ultimate buyer when the company sort of gets to a scale where it can buy out sort of the minority partners so there's a interesting potential partnership opportunity but you know we're not talking about buying a five billion dollar asset and owning 20% of it I really focused on is something order of magnitude in the billion two billion ish you know kind of you know whatever it could be a billion to theoretically three billion something along those lines where Howard Hughes is sort of the control

owner gotcha understood thank you and the second question is on you know us as Bill and your team has you know gotten into the -to-day in the organization you know what are the things that you guys have changed so far obviously you know on on the gna side we see that maybe just give us some thoughts on things that you have changed and what else are you looking at to change at this point should we expect this is more or less the stable status and also you mentioned the mix of it moving forward strategically you want you know bigger part of the business mix to be towards insurance so does that change the remainder real estate portfolio do you look for you know changing the mix between operating assets npc and condo like how should we think about those as well looking out

sure so I would say we've changed nothing with respect to Howard Hughes's real estate operation I do think it would be helpful you know the gna initiative was something that you know David had sort of underway in planning prior to our transaction and there there was a very thoughtful I would say strategic logic for the changes that were made organizationally I think would be useful for David maybe you describe where those gna savings came from why we made those changes we don't and then we don't have any plans to change the way Howard Hughes we really like obviously we've been involved with this business for 14 years we've had a board presence I was chair for whatever 13 or something those years so we're very happy with where the real estate business is and the way it's currently being managed I think the only difference today versus before would be you know maybe if some of the world's greatest npc assets showed up you know across the street oh I mean across the street like I don't know some other market like another you know phoenix type transaction were to show up I would say we're less likely to do that today we feel like we have enough exposure to sort of the npc business but there's a ton of work to do in the existing assets and the idea is just to continue to develop the Howard Hughes communities these sort of small cities and make them the most desirable places to live in America and I think they're you know the fact that the the home sales performance lot sales performance kind of speaks in a more as a maybe increasingly challenged residential market kind of speaks to the power of those communities but no real change to that business and the team's doing a great job of running it but David maybe you should comment on some of the changes you've made organizationally and and why how they generated gna benefits

absolutely bell it's a good question ray I appreciate it what we really did is we took a step back long before the Pershing Square announcement was made in terms of how we operate this business and given the changing market environment where development returns are tighter costs are up rents have not kept up with it we thought about a rationalization of the overall organization and a focus of that development platform into more rifle shot opportunities where we can generate the highest and best risk adjusted returns rather than taking a more scatter plot approach as a result we centralized a lot of our development expertise here in the corporate office taking a lot of the the developers out of the regions knowing that there would be fewer projects to do on a go-forward basis and at the end of the day when you think about this way there was a point in time where we had you know multi-family developers office developers retail developers in multiple regions and it became largely redundant because the velocity of development as you noted in our results has slowed so we've been able to centralize and bring that talent into one place where we can use that talent across regions partner with our regional presidents to execute and I think operate in a much more efficient way delivering greater free cash flow to the bottom line I don't want it to be lost on our investors and our analysts that in Carlos's prepared remarks we left our gna guidance unchanged despite the the transaction with Pershing and the inclusion of their fixed fee in that gna guidance I think our ability to do that and maintain gna neutrality and get the ability to leverage the incredible amount of expertise that's at Pershing Square it shouldn't be lost on our investors I think it's an incredible benefit

yeah the other thing I would say you know it's a bit you know investing real estate development and running a profitable insurance company have sort of the same thing in common you want to do business when the returns are attractive and you want to step away when they're not and the problem of having kind of you know soup to nut development teams each of these various locations is if you're a developer you just want to do stuff and that's when people get into trouble and kind of real estate development and you know and it's also not great to have headquarters always turning down transactions you propose because they don't offer attract enough returns and so you know you can actually have an absolutely best in class team you can take the best and brightest of all the various regions and and centralize them in one location you can take the skills like you know we have an incredible team marketing team that has the ability to do a lot of the work and so we have a lot of people that are on the condo program for example in Hawaii led by Bonnie and you know when Howard Hughes decided to build a condo in the woodlands we had you know all of that expertise and development expertise that we could apply to what is going to be an enormously successful what is already enormously successful development in the woodland so there's a gna savings and it actually is it makes it it's a much more attractive place to work in the sense that in our various developments there's probably always going to be something interesting to do in a certain property type so we get a gna savings we get a best in class team we leverage all the learnings from the various communities and and there's less pressure you know to do business ryan you want to add something

yeah and i would just add i think one of the most important things that we're focused on now and where you will ultimately see over time the value creation from the addition of the Pershing Square team to Howard Hughes is in capital allocation broadly and as both David mentioned in his comments on real estate and taking a rifle approach to get to the highest return projects and as Bill mentioned we are opening the aperture aperture in the ways in which we can deploy capital so we've put a lot of capital on the balance sheet three months ago that can be deployed and if you think about it now going forward we have an opportunity to take the highest return real estate projects and be able to focus on those take the excess cash that may have otherwise been deployed towards somewhat attractive but still lower returning real estate projects and put those towards other things every time you write an insurance policy that isn't capital allocation decision the way you invest the cash from the float that's a capital allocation decision we have historically had an r-pershing square investment strategy arguably among the highest returns that you could find amongst most capital allocation strategies and insurance gives us a pathway to continue that in addition though we have the ability to ultimately over time look to acquire other businesses which will both provide a diversification of the cash flows beyond insurance and real estate but at the same time give us another arrow in our quiver to be able to take advantage of high return opportunities and if you look at as Bill had mentioned Berkshire as an example we think one of the reasons why Berkshire has been so attractive is that there were a number of ways in which they could deploy a lot of capital into the highest return opportunity at that moment and that's really the value that we're trying to add to Howard Hughes as we transition it to a diversified holding company

yeah when we're sort of the other benefit we have is we own 47 of the company we are under no pressure to deliver an outcome next quarter this year and we can as a result be super thoughtful about how we think about deploying capital and that carries over to the entire Howard Hughes sort of organization you know if you if as a pure play real estate community developer all the cash that we generated over time we really had no place to put it other than in our various communities or in you know buying a new sort of mpc now we have you know the whole world if you will is our is our oyster the reason why we're focusing on insurance first is a well-run insurance operation is a great platform for a successful investment strategy and you know you know our favorite version of Howard Hughes is we build this very very valuable company and the shares outstanding you know don't change or if anything they shrink over time and the ability to do that is much greater in insurance than if we were running around doing you know acquisitions one deal at a time but over time the goal is you know as the real estate operation generates more and more cash we'll have more cash for the holding company the insurance operation itself we expect to generate a lot of cash that will be reinvested in equities at least beyond the piece that we need to put aside for the insurance business you know the claims potential claims in the future and that's how we we build some a company that's very valuable on a per share basis

thank you so much for from all three of you this is a very thoughtful thank you so much sure

thank you one moment for our next question our next question comes from the line of John Kim from BMO Capital Markets

thank you Bill in your commentary earlier I think you mentioned that you were looking at a number of potential transactions and I just wanted to clarify that ultimately you'll just be acquiring one insurance company and not a series of acquisitions and then secondly for the companies that you're considering to acquire do they already operate the way that you prefer in terms of being conservative and a levered or do you anticipate changing how they're run and if that's the case how difficult is that to implement

sure so what we're focused on now is buying one business run by an excellent management team that's you know done a very good job in the you know writing business over time all of the companies we're looking at are operated as conventional insurance companies I would say in terms of the amount of premium they write relative to capital and the way they invest their assets our plan would be to you know change that you know over time but you know the you know Berkshire is pretty much it's it's almost unique you know there are a couple of examples of insurers that have taken kind of a somewhat similar approach I think it's the it's the exemplar sort of example but you know the you know it helps enormously there are very few insurance companies that are part of diversified holding companies basically and so that's why the targets we're looking at are operated conventionally I would say okay

that's helpful maybe turning to David you talked about the record price per acre that you achieved this quarter in page 23 of your supplement you have an estimated price per acre and that didn't change sequentially for Somerland or Bridgeland is that policy not to change that figure since it's an estimate or you to anticipate that number going up

well John I think conservatism is always the best policy and as incredible as our results have been this quarter in the past several quarters for me to try to extrapolate that to the moon over the next 30 years I think would be a little bit cavalier so we take a conservative approach we don't use one quarter's results to impact the future per sale acres on a daily basis we look on a trailing 12 trailing 24 months and if we feel that it's appropriate to apply that price per acre across the remaining we

will Okay if I could just squeeze one more in on

Ritz Carlton the condo sales have sort of stalled over the last couple quarters intentionally actually

let me let me let me jump in there okay so I it's largely because of me and you know I the team sold out the first half of the project despite raising prices on a you know weekly basis because of the the the the the demand and I said look we're you know this is a unique incredible asset it's like a really an amazing I would say it's a the highest end equivalent of a of the best of New York City type projects and I see us selling at prices that seem to me really really cheap and I said look let's just sell half and let's let's deliver the product and then we'll we'll get you know the price that we deserved and then I made the mistake of stepping off the board and not being chairman anymore and David snuck out another like 20 percent of the project because you know because that's his instinct but you know the bottom line is we could sell the entire project out if we wanted to but you know our goal is to maximize the you know the profitability you know for the project so you know I guess the current approach is if someone desperately wants to buy something you know we maybe we find a way to make a deal with them but you know we think that since again it's a first of its kind in the woodlands and really truly breaking new ground here we're definitely leaving a lot of money on the table in the initial units that we've sold it's still prudent to do so so I obviously supportive of everything that management has done so far but it behooves us to leave you know a nice piece of the project as it gets as people can actually see the finished product

and are the remaining units a higher floor or higher price points generally

I say the remaining units represent a good sample set of the overall units of the building it's not as if the smaller units are left or the penthouses are left I think we've sold a great range of units from the smaller all the way up to some of the penthouses and what remains is a representative sample set of the overall building

I

mean basically every time David sells a unit I tell him he sold it at a too cheaper price and every time he hasn't sold a unit I'm telling him he's not selling quickly enough so that's the nature of our relationship

great comment thanks

it's like in trading when you tell the trader oh we should have bought it I would have bought it here and

I the fire so to speak

thank you one moment for our next question our next question comes from the line of Peter Abramowitz from Jefferies

yes thank you very much for the time and for taking the questions maybe just kind of a philosophical question if I could for Bill I guess what would you say to some of the common pushback from the market and from investors on sort of the complexity of the Howard Hughes story it's maybe been a concern over time and been a challenge that some of the feedback from the investment community is that it can be hard to underwrite or people struggle with some of the parts stories and kind of the long duration of capital required for unlocking value the lack of comps and you know certainly Berkshire is a good model to follow but is a bit of a unicorn in its success story in the public market so I guess keep kind of philosophically how do you get the market comfortable with some of those challenges that still exist in the stock and kind of what would you say to some of that pushback

sure so look I completely understand it and it's something we struggled with as an independent public company focused on this business and ultimately you know I think we collectively and certainly at Pershing Square came to the conclusion that we're never going to be able to get the kind of respect we deserve if you will for management's accomplishments and the quality of our assets as a pure play real estate company and I think that's driven as much by complexity as actually the market assigning a very high cost of capital to a business that's in real estate development you know land sales condominium development and and multi-geography and it's unique and doesn't pay a dividend etc so we sort of said you know what we're never going to overcome this so now what we should do instead is embrace embrace the complexity so to speak and what I mean by that is you know how are you the core real estate business is a phenomenal business and you'll understand that business you know over you know the next you'll you'll understand it even more the next three four or five years as it starts generating you know a ton of cash and then even more so overall kind of a longer period of time but we don't want to double down in that business and just keep redeploying capital and buying more MPCs because we'll you know it's a story that will never properly be told what we want to do instead while you're right there there are the examples of successful diversified holding companies are limited we do believe that we have the kind of necessary collection of skills assets and kind of a starting base to do so you know if you look at Berkshire success a big part of it came from the fact that Buffett himself owned half the shares outstanding so we could take a very long-term view well we own 47 percent of the shares outstanding um the second thing that Buffett brought to the table is he was a very talented investor proven talented investor in the stock market in investing in common stocks you know we bring that we've got a 21 year record at Persian Square of you know generating you know an excess of a 20 compounded return over that period of time and you know 27 28 compounded since we've had permanent capital over the last almost kind of eight years that's a you know that's unicorn record at least in investing in common stocks and we bring that to the table you know to this company you know the we spent a lot of time studying Berkshire over time and you know without Berkshire's insurance operation it wouldn't have been a particularly interesting business that is a key part of our strategy here we're cautiously optimistic as I mentioned that we can start in a good place with a good asset with a great team and build you know a profitable insurance operation and we're going to manage that insurance company's investment portfolio for free now I want to very carefully distinguish you've seen there are many examples of regular way insurance companies that invest their assets principally in fixed income securities and then there are a bunch of hedge funds I would say that kind of either built or acquired insurance companies for the purpose of creating permanent capital to invest in their funds and the way and the track record of those entities is poor I would say generally and the reason for that is you know one they didn't focus as much as they should have on actually having -in-class teams running the insurance operation and two they invested their assets in their funds and charged high fees it was really a fee generating AUM kind of exercise what we're doing here is the assets of Howard Hughes's insurance operation are going to be invested directly in common stocks not in Pershing Square funds not charged fees in fact there will you know there's it will be the lowest cost investment operation of any insurance company because we literally will be doing that as part of our overall arrangement with Howard Hughes so one of the interesting benefits to the management teams that we the management team that runs our insurance operation is because the benefit of Pershing Square is investment acumen without any cost associated with it that actually obviously is beneficial to the ability to run that company kind of profitably so while there's no guarantee we're going to be successful taking this approach I think we have you know the sufficient degree of ownership and understanding of the existing base business we've got you know a balance sheet that will enable us to do initial transaction the company has vastly more resources that it could afford because it has the entire Pershing Square organization working alongside Howard Hughes at a you know cost that is you know a fraction of what it costs so these are significant competitive advantages and I would say unlike Berkshire our base business is a vastly more attractive one you know Buffett had in effect a liquidating insurance company that was his base asset and you know which was basically a textile operation and he redeployed that capital fairly quickly over time into much better businesses we have the benefit of a real estate operation that we really like as long as we don't buy another NPC it starts it in which we don't intend to we can it will generate a lot of cash that we can redeploy in other businesses and I think as this becomes a more diversified company the kind of the high very high cost of capital that shareholders assigned to the company is going to come down and and you know just from a technical perspective I would say the universe of investors who want to invest in a pure play NPC company we kind of know those are the investors that have kind of come and gone over time that have owned Howard Hughes over the last 14 years the universe of investors that can invest in diversified holding company is you know a thousand X the scale or infinite relative to what are willing to invest in a diversified holding company you know the takes only a small number of Berkshire shareholders if you will a tiny percentage of a trillion dollar market cap to decide to be interested in Howard Hughes to buy the 53 percent of the float that's held by us for the stock to do very well over time so we think while there has been you know some you know sure pretty material exit from the shareholder base of kind of dedicated pure play real estate investors those investors have been replaced by investors who are betting on kind of the diversified holding company story the the you know what we intend to do here and I think you know what causes the stock price to go up over time I think if we execute on what we hope to and starting with a great insurance operation you start to deploy that capital intelligently people start to see results they realize this is no longer the old Howard Hughes we're going to attract a much broader base of investors and and I think that becomes a pretty attractive stock story

yeah I appreciate that and certainly we can post a you know 20 20 plus percent roe on an annual basis I think that's also a lot of problems so and then maybe a micro question and thank you for the color there just more kind of a micro question on the real estate side David could you just talk about just kind of leasing demand for for the office asset you just acquired in the woodlands how that's sort of shaping up

yeah no it's a great question worse couldn't be more excited because this is an asset that I'm looking out the window and I can see here right on the heart of the waterway it's the first office building you come to as you exit 45 and it's a pristine class a building that is entirely empty it is the only vacancy in the waterway sub market of the woodlands as we've leased up all of the other assets that we've had almost entirely full and it's a market where we're able to achieve on a building like that high 20 net rents with a basis today of around $80 a foot and after we put in ti's will still be sub 200 we think it's an outstanding opportunity to generate risk-adjusted returns and allow us to meet the existing demand that we see in this sub market that we just currently can't accommodate because our assets in the sub market are full so we're meeting the demand of office tenants that want to be in the sub market we're doing it in an outstanding basis and I think that we have a really good opportunity here to lease this thing up quickly similar to how we did this building here 9950 that we acquired

you know if you recall right before the pandemic all right that's all for me thanks for taking the time thanks Peter

thank you one moment for our next question our next question comes from the line of josh caffin

hello good morning I just had a question about the macro hedging regarding hedging strategies how will the positions be constructed for example in the scenario of the cds trades that pershing held if hhh was to be in a situation now would the trade be executed through both of them or how would the sizing of those positions be constructed and for future acquisitions would similar approaches be used thank you

sure I think it's a very good question so one of the things that pershing square has done over time with respect to our investment portfolio is the bulk of our assets have been invested in you know common stocks of high quality durable growth companies periodically I would say episodically we've identified what I would describe as black swan type risk in the market or cases where we've got a very I would say varying view on interest rates or commodity prices or currencies and the market offers us the opportunity in the form of an option like instrument to make a large profit relative to our investment if the expected or the potential risk were to occur and we've used that to kind of hedge risk and in some cases a little more opportunistically just to make money you know the if we were to identify such a risk and we thought it appropriate for howard hughes to hedge that risk we would size a similar sized hedge in howard hughes by buying either an interest rate option or credit default swap at howard hughes like we like we do in the pershing square portfolio and we'd size it relative to what we think is appropriate in light of how much equity or how much exposure we have to that you know particular kind of risk and that would also be a strategy within the insurance company investment portfolio that we would you know operate similarly yeah

and I think the key to to think about that as bill mentioned is when we buy these typically options or option like instruments if the risk that we're worried about doesn't come to fruition and the option doesn't pay off we size into an amount where we like to think about it is effectively you don't notice it in the aggregate results because the amount of money you can lose will be small enough at the same time if the risk that we're worried about actually comes to fruition the payoff from a relatively small investment will be large enough where it will have a very material impact and those are really the only investments we make where they're very asymmetric so that when we're hedging something if it doesn't work out it will not be a material negative impact to the howard hughes business but it would be a very material positive if that risk were to come to fruition that would be the key in how we size what we call asymmetric hedges which is the way that we have historically done inside a pershing square

and just to give a very real life sort of example of this at the february 2020 board meeting for howard hughes i told the board one i didn't actually travel to dallas because i was concerned about the covid pandemic becoming much more serious over the next several weeks and i you know i said it's time to hunker down because you know things are going to get complicated what we were doing at pershing square at the time is we were buying sort of hand over fist credit default swaps our investment grade cds as a very low risk way to hedge a potential deterioration in the credit markets and or deterioration in the equity markets howard hughes was not in a position to do so didn't didn't have the expertise wasn't set up in order to be able to write that insurance didn't have arrangements in place with various financial institutions howard hughes didn't participate we made a very large amount of money on a very small amount of premium investment you know invested 27 million premium we made 2.6 billion ultimately ultimately in profit from that trade you know if we could have done 10 million for howard hughes or if we had done 5 million for howard hughes at the same time howard hughes would not have had to do a 600 million dollar equity offering a month later it's maybe a very real life example of of you know what we'd hope to achieve in the future

awesome thank you bill thank you ryan

thanks thank you at this time i would like to turn the conference back over to david o'reilly for closing remarks

once again thank you all for joining us if there are additional questions or thoughts we are always available to answer those and i'll close by reiterating what bill mentioned earlier that we'd like to invite everyone to join us on september 30th in new york city for the annual shareholder meeting it will be on 42nd street manhattan information details and your ability to register will be available as soon as our proxy is beginning on august 18th on the investor relations page of our website howardhughes.com thank you again

this concludes today's conference call thank you for participating you may now disconnect