Earnings Transcript for HHC - Q3 Fiscal Year 2021

Operator: Good morning, and welcome to the Howard Hughes Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to John Saxon, Investor Relations. Please go ahead.

John Saxon: Good morning, and welcome to the Howard Hughes Corporation’s third quarter 2021 earnings call. With me today are David O’Reilly, Chief Executive Officer; Jay Cross, President; Correne Loeffler, Chief Financial Officer; Dave Striph, Head of Operations; and Peter Riley, General Counsel. Before we begin, I would like to direct you to our website, www.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 Law. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statement disclaimer in our third quarter earnings press release and the risk factors in our SEC filings for factors that could cause material differences between forward-looking statements and actual results. We are not under any duty to update forward-looking statements unless required by law. I will now turn the call over to our CEO, David O’Reilly.

David O’Reilly: Thank you, John and thank you all for joining us today. Welcome to our third quarter 2021 earnings call. To start the call, I’d like to provide a brief recap of our quarterly performance and cover the highlights of both our MPC segment and Seaport. Our Head of Operations, Dave Striph, will cover the results of our operating asset segment. Followed by our President, Jay Cross who will provide details on our development activity and speak to the results in Ward Village. And finally, our CFO, Correne Loeffler, will conclude the call with a review of our financial results before we open the lines for Q&A. Before we dive into the results of the quarter, I would first like to highlight the release of Howard Hughes 2020 Annual ESG Report, which was published just a few days ago, and can be found on the sustainability portion of our website. This report displays the impactful ESG results we have produced so far and reflects our commitment to environmental and social best practices, which are integrated throughout our communities across the country. Now, on to the highlights of the quarter, we closed out the third quarter of 2021 with strong results across all segments as Howard Hughes continues to capitalize on the high levels of demand that exists throughout our various mixed-use communities. We put our performance in perspective, most of HHCs year-to-date results in 2021 have surpassed the year-to-day pre-COVID activity of 2019. MPC EBT is up 29% operating asset NOI is higher by 1% even with lingering impacts from the pandemic. And Ward Village condo sales were just shy of 2019 levels, despite having limited available inventory and this was all accomplished by reducing our G&A cost by 30%. During the third quarter, we saw healthy land sales driven by super pad sales in Summerlin. Our operating asset NOI grew for the fourth consecutive quarter. Condo sales in Ward Village accelerated despite a shrinking supply of available units under construction and the Seaport saw steady improvements from the return of the concert series at Pier 17 and the growing popularity of our unique restaurants. We expect these results to grow stronger, especially with the recent addition of Douglas Ranch our latest MPC spanning 37,000 acres in Phoenix West Valley. In October, we announced our $600 million all cash acquisition of this fully entitled shovel ready MPC, which further adds to our depth of opportunities. By strategically redeploying the net proceeds from our non-core asset dispositions, we now have the ability to transform this canvas into a leading community focus on sustainability and technology. A community that is entitled for 100,000 homes, 300,000 residents, and 55 million square feet of commercial development. Following this transaction, we are still left with a healthy cash position to continue executing on our existing development pipeline to meet the growing demand within our MPCs. While we have already have approximately 2 million square feet of development underway, we’re pleased to announce new commercial projects in the medical office and single-family for rent sectors, which Jay will touch on in a moment. But we’re not stopping there. We long believe that Howard Hughes trades at a steep discount relative to its net asset value. As such, we’re pleased to announce our recent board approved share buyback program, amounting to $250 million. We believe there’s great value that has yet to be reflected in our stock price and due this buyback initiative as an excellent use of capital that when coupled with our developments projects will help deliver meaningful value. All of these recent announcements put a significant amount of capital to work to unlock tremendous value for our dedicated shareholders. Now let’s turn to the performance of our master planned communities. Our MPCs had another great quarter despite encountering headwinds including supply constraints to Delta variant and weather delays particularly in Houston. Housing supply still remains low throughout Houston and Las Vegas while demand continues to persist at elevated levels, which leaves us well positioned to deliver residential land at appreciating prices. Homebuilders are currently sitting on record low inventory, and they will need to replenish their depleted land holdings in order to meet this outsized demand. During the third quarter, our MPCs recorded earnings before taxes of $54.1 million, a 48% increase compared to last year largely driven by the robust super pad sales activity in Summerlin, as well as the strong performance of our Summit joint venture. In addition to these impressive results, we continue to see a steady pace of new home sales, proving the strength of our communities remains clearly intact. So far in 2021, there have been 2,163 new homes sold in our MPCs a 6% increase over last year, indicating further demand lies ahead. Overall, we’re seeing a lot of positive momentum when it comes to land sales. And looking ahead, we expect our fourth quarter to be the strongest quarter yet. As such, we are raising our full year 2021 MPC EBT guidance by $60 million at the midpoint to a range of $275 million to $285 million primarily due to stronger than expected super pad sales in Summerlin. This is our second time raising MPC guidance in 2021, as this segment continues to exceed our expectations. Speaking of Summerlin, this MPC drove a substantial portion of the positive results for the quarter selling 47 acres mostly made up of super pad. This MPC generated $45.6 million in EBT, a staggering 130% increase compared to the prior year period. Additionally, year-to-date new home sales have eclipsed over 1,200 units and are 20% higher over the same period in 2020, which, if you recall, was one of the strongest years in Summerlin’s history. Another significant driver to Summerlin’s results has been our joint venture at the Summit, our exclusive 550 acre community in Summerlin. The total earnings from our share of equity during the quarter totaled $8.3 million driving the year-to-date earnings to $54.6 million versus only $4.4 million during the first nine months of 2020. The activity at the Summit over the last year has been tremendous. And these positive results have been primarily attributed to an influx of California buyers purchasing these custom lots and built product. Turning over to Houston, our Bridgeland MPC experienced a decline in land sales as supply constraints continues to have an impact. As we highlighted last quarter a majority of the home builders have extended their lead times for home deliveries due to ongoing supply disruptions that have resulted in higher material costs and delayed delivery times. We’ve started to see some of these bottlenecks upside and expect a more normalized environment heading into next year. This quarter’s land sales were also impacted by inclement weather as significant rainfall in the Houston area delayed horizontal development, resulting in slower lot deliveries to homebuilders. Despite these factors, demand in the area remains incredibly strong. We view the significant imbalance between under supply and robust demand as a strong catalyst for elevated activity as we move into 2022. Lastly, in the Woodland Hills despite lower quarterly land sales due to the similar impacts experienced in Bridgeland, the residential price per acre grew 18% over the prior year period to $353,000. While new home sales were up 15%, which points to future growth ahead as we accelerate activity across this MPC. Moving over to the Seaport, we saw heightened activity throughout the quarter as events and concerts at Pier 17 help drawing spectators. During the quarter NOI improved 43% compared to the same period in 2020 indicating the return to normal season. In July, we launched our 11-week summer concert series on the Pier 17 rooftop. Of the 30 concerts hosted, 20 was fully sold-out. The turnout for these concerts proved to be very strong with approximately 74,000 guests in attendance, representing 90% of our available ticket inventory. We were glad to welcome back the series after canceling last year’s lineup due to the pandemic and we look forward to building on this momentum for next year. In addition to concerts, we hosted several other major events, including the SBs in July and the world tour for the Fujis, who debut at Pier 17 for their first show together in 15 years. If these type of special events that continue to set the Seaport apart from other destinations in Manhattan. All of these events help drive substantial traffic to our restaurants, we saw an uptick in activity as more and more locals and tourists experience our variety of cuisines from acclaimed New York City chefs. As a result, our restaurants saw their average monthly sales increased 65% versus last quarter. While labor constraints have marginally improved, we continue to see improvements in this space quarter-after-quarter. Many of our restaurants are now closely approaching their stabilization targets, as higher volume has contributed meaningfully to the growth of our bottom line. Overall, we see the Seaport heading in the right direction and the upcoming completion of the Tin building, followed by its grand opening in the first half of 2022 will help bring the Seaport closer to stabilization. With that, I’m going to stop and hand the call over to Dave Striph. Dave.

Dave Striph: Thank you, David. Our operating assets had a standout quarter as our portfolio delivered strong sequential and year-over-year NOI growth. For the third quarter, we reported $60.6 million of NOI. A new layer in the activity from our three hotels that were sold in September, this segment generated $62.9 million. This marks the fourth consecutive increasing quarterly NOI is our portfolio of income producing assets continues to expand. As the economy continues to reopen, and activity within our regions improves. We’ve seen a corresponding increase in our retail NOI. These assets generated $16.1 million of NOI during the third quarter, the highest level since the first quarter of 2019. This is in large part due to a stronger tenant base coming out of the pandemic, in addition to consistent increases in collections. For the third quarter, we collected 83% of our retail rents with Summerlin leading the charge for the highest collections in our portfolio. As we’ve highlighted previously, our retail at Ward Village has been materially impacted over the last several quarters due to sharp declines in tourism as a result of the pandemic. However, as travel restrictions to Ko'ula have been recently eased, we have seen a corresponding improvement in our retail performance. In fact, Ward was the largest contributor to the sequential increase in retail NOI partly as a result of a one-time payment of deferred rent of approximately $1.4 million. We expect our retail portfolio to continue on this path of growth as collections work back to pre-pandemic levels, coupled with a continuous lease up of our remaining space to credit worthy tenants. At the Las Vegas ballpark, we were able to host the remainder of the aviator season at 100% capacity. This resulted in $5.4 million of NOI, a 74% increase over last quarter, where the beginning of the season was limited to 50% capacity to comply with COVID-19 protocols. This is a star comparison to the same period in 2020, where the ballpark loss nearly $1 million as the season was canceled entirely due to the pandemic. So needless to say, we were glad to welcome back fans into our stadium and look forward to another strong season next year. Our multi-family assets produced $9.2 million of NOI during the third quarter, a 24% sequential increase almost exclusively attributable to strong leasing momentum and our most recent developments. In 2020, we completed construction on three multi-family projects between the Woodlands in Columbia. And during the third quarter, these new developments made up two-thirds of the increase in sequential NOI growth. In addition to this robust leasing velocity, we’ve been able to push rents higher in the currently commanding some of the highest rents compared to our surrounding metro areas. In addition to our existing product, we have three more multi-family developments underway in Downtown Columbia, Bridgeland in Summerlin to meet this ongoing demand, which will drive our NOI even higher. Our office assets have experienced steady increases in NOI over the past few quarters, despite a sluggish recovery in the return to office environment. For the third quarter, we generated $27.8 million in NOI, a 6% increase sequentially and a 17% increase compared to the same period last year. The bulk of this increase was driven by the roll-off of free rent at select assets including 6,100, Merriweather our latest office building in Downtown Columbia. Overall, we are seeing a noticeable increase in leasing activity and expect our pipeline of opportunities to accelerate into 2022 as tenants look for additional space and folks continue to return to an office setting. And now with that, I’ll turn the call over to our President, Jay Cross.

Jay Cross: Thanks, Dave and good morning, everyone. To build on the momentum we are seeing within our operating asset portfolio, we are pleased to announce some new product types in addition to our traditional mix. Recently, we have expanded into the medical office space to continue to provide residents with the highest quality convenient medical care. We have noticed a growing need for this type of asset as the volume of residents in our communities continues to grow. With that we are pleased to announce the launch of two medical facilities spanning 106,000 square feet throughout Downtown Columbia and the Woodlands. In Downtown Columbia, we will launch our first medical office building on the shoreline of Lake Kittamaqundi. This new development will sit adjacent to our successful [Indiscernible] in the form quarters building, helping to establish Downtown Columbia as a prominent health and wellness destination.

.: Lastly in Bridgeland, we will be constructing our first single-family for rent community, which will commence in the first half of 2022. These 263 homes will span a combined 328,000 square feet and offer a unique hybrid between single-family homes for sale and multi-family for rent, adding yet another new product to our operating asset portfolio. Given this as an extension of multi-family, we plan to leverage the expertise of the property managers who oversee our existing portfolio in Houston to assist in managing this build around community. In total, these three projects represent over 430,000 square feet and $114 million of development as we continue to put our capital to work and enhance of our stream of recurring income. We have already had a number of developments under construction in Summerlin, Colombia and Bridgeland. So the announcement of these additional developments demonstrates the immense demand we are seeing throughout all our regions. Moving to the Seaport construction of the Tin building is now in the final stages and will be substantially complete by the end of the year. The launch of the Tin building has been highly anticipated, and our team has been working in close partnership with Jean-Georges team to prepare for the grand opening of this 53,000 square foot Food Hall in the first half of 2022. Lastly, we continue to make great strides through New York City’s process to obtain the necessary approvals for the development of a 26 story mixed used building at 250 Water Street. In October, the City Planning Commission granted us approval for this project. Another hurdle passed through this rigorous land use process. We are nearing the end of the review, which we expect to conclude before the end of the year at the New York City Council. The prospective development would replace the 1 acre parking lot with market rate and affordable residences commercial and community space, further enhancing the character and vibrancy of this neighborhood. We look forward to updating you on our continued progress as we continue to close in on the final stages of this process. At Ward Village, the pace of condo sales continues to exceed all expectations. Despite having less inventory under construction. The number of condos contracted during the quarter has only grown across our three recent towers, ‘A’ali’i, Kō’ula, and Victoria Place we are 90% pre sold as of the end of the quarter with Kō’ula and Victoria Place still under construction. This robust philosophy has led to the pre-sales launch of our eighth tower the park. Pre-sales activity at the park began in July and as of the end of October, we have already contracted 64% of the total units. The sales activity across these four towers, just in the third quarter translates to 316 contracted units secured by hard deposits. During a period of time when travel to the Island of Oʻahu was discouraged surrounding Delta variant concerns. The pace of the sale is truly remarkable. We’ve been able to establish a mark on this community where residents want to live in our historical sales pace has reflected increasingly faster sell-outs with the launch of each new tower. Subsequent to the end of the quarter, we completed construction ‘A’ali’i, and began welcoming residents to their new homes in October. As of November 2, we closed on 495 units, totaling $332 million in net revenue, revenue that will be recognized on our fourth quarter income statement and will contribute meaningfully to our bottom line. With that, I’d like to now hand the call over to our CFO, Correne Loeffler who will review our third quarter financial performance.

Correne Loeffler: Thank you, Jay. The results of the third quarter clearly demonstrates the strength of our business as we continue to benefit from the strong demand throughout our communities across the country. In summary, our MPCs produced $54.1 million of earnings before tax or EBT during the third quarter. A 22% decrease compared to the last quarter 48% increase compared to the prior year period. It’s important to note that while EBT decreased from the last quarter it was largely attributed to non-recurring costs, such as the early extinguishment of debt upon the retirement of our Woodlands and Bridgeland credit facilities. In addition, the top line only declined slightly due to the lack of commercial land sales in Summerlin compared to the last quarter. Our operating assets recorded a $62.9 million of NOI when including the contribution from three Woodland space hotels, which represented a 9% increase compared to the last quarter and a 65% increase compared to the prior year period. As Dave touched on earlier, that strong performance was due to a continued improvement across our retail portfolio, a strong minor league season, our ballpark robust lease of activity at our multi-family assets, and the roll-off of free rent at select office assets. At Ward Village, we contracted 316 condo units, which were made up of 61 units from our three towers under construction and 255 units at the park, which launched pre-sales during the quarter. Combined sales at ‘A’ali’i, Kō’ula, and Victoria Place were up 36% compared to the prior quarter and increased 154% compared to the prior year period. Finally at the Seaport, we’ve recorded a $3.6 million loss in NOI resulting an 19% improvement over the last quarter and a 43% improvement compared to the prior year period. Taking a look at GAAP earnings for the third quarter, we reported net income of $4.1 million or $0.07 per diluted share, compared to net income of $139.7 million or $2.51 per diluted share in the prior year period. The decrease in net income from the prior year was attributed to a one-time non-cash gain of $267.5 million for the third quarter of 2020,which was related to the deconsolidation of our once in North Wacker office tower in Chicago. If we remove this one-time gain, our quarterly earnings are substantially higher than our prior year period due to strong activity displayed throughout the entire business. With only one quarter remains to finish out the full year we remain on track to meet or exceed all previously disclosed guidance targets for 2021. As David mentioned earlier, our MPC segment has done particularly well, which has led us to raise our EBT target for the second time this year. Our previous guidance range for 2021 was $210 million to $230 million. We are now raising our guidance by $60 million at the midpoint thus revising our range to $275 million to $285 million, as we were expecting a strong into the year. Given the recovery we are experiencing in our operating assets. We are raising our full year NOI guidance by $5 million to a range of $200 billion to $210 billion. We are raising this segments guidance despite the fact that we will not receive any hospitality related NOI during the fourth quarter. As we just sold our Woodlands hotels in September for $252 million. The sum of these assets generated $120 million of net proceeds and brings our total net proceeds from non-core asset sales to $376 million since the announcement of our strategic transformation plan in late 2019. We are also revising our full year condo profit guidance at Ward Village by $7.5 million at the midpoint. Our previous guidance range for 2021 was $100 million to $125 million. With elevated condo sales following the completion of ‘A’ali’i in October, we are expecting condo profits to range between $115 million to $125 million. Please note that this target excludes the $20 million our repair costs incurred at [Waya] during the first quarter, which we fully expect to be reimbursed for. Lastly, we remain on track to meet our previously disclosed G&A guidance of $80 million to $85 million for 2021. Now let’s take a look at our balance sheet for the quarter. We ended up their quarter with a $1 billion of cash on hand, leaving us plenty of runways to execute on the recent capital initiatives we discussed earlier. Additionally, we closed on several financings at attractive rates, while at the same time extending our maturity profile. A couple of our recent financings include two construction loans for our latest projects in Downtown Summerlin, a $75 million loan for our 1,700 Pavilion office developments and a $59.5 million loan for our Tanager Echo multi-family developments. In addition, we refinance the Woodlands and Bridgeland credit facility into a new $275 million loans secured by Bridgeland most receivables in land to support future horizontal developments. Lastly, subsequent to the quarter end, we closed on a $250 million loan for 1201 Lake Robbins resulting in net proceeds of $248 million, which helps to elevate our overall cash positions. Additional activity following the close of the quarter includes the repayment of all lease construction loan upon the completion of the project. As Jay mentioned earlier, we welcome residents in October and paid-off the $230 million outstanding on this loan using proceeds from the closing on the tower. We continue to push out our near-term maturities and remain focused on executing new financing to support our latest development projects, as well as securing long-term funding for our stabilized assets. Please refer to our third quarter 10-Q and supplemental package for additional details on this activity. Now I’d like to turn the call back over to David for some closing remarks.

David O’Reilly: Thank you, Correne. We are going to open up the lines for Q&A. But before we do, I just want to hit on a few key points. First, we remain committed to driving our net asset value higher on a per share basis, and our laser focused on closing the gap between our stock price and the true inherent value of Howard Hughes. And the actions taken over the last quarter to deploy capital into projects that we believe will achieve outsized risk adjusted returns reflects that strategy. We acquired a new fully entitled shovel ready MPC. We announced the launch of three new development projects, and we announced the $250 million share buyback, all of these initiatives will unlock tremendous value for our shareholders in the near medium and long-term. Second, our balance sheet remains strong, even after allocating capital to the various projects I just mentioned. Our discipline capital allocation approach has allowed us to conserve capital and leaves us with sufficient excess liquidity to evaluate additional opportunities to further expedite growth. In addition to cash flow generated by future land sales, condo sales, and recurring NOI, combined with the proceeds from our remaining non-core asset sales will only drive our cash position higher. Third, our financial results through 2021 represents the strength of our business, as we are now exceeding pre-COVID levels. And the guidance targets we’ve established for the full year points to an even stronger fourth quarter ahead. With that, we’d now like to begin the Q&A section of the call. We will answer the first few questions that have been generated by Say technology and will be read by John Saxon. John, can you please read the first question?

A - John Saxon: Sure, David, our first question asked what potential material effects are expected if the Woodlands township voting causes it to incorporate into a city?

David O’Reilly: Thanks, John, and appreciate the question that came in from our shareholder here. The biggest impact the potential impacts of incorporation in the Woodlands were really safety and cost. And according to multiple law enforcement experts and financial experts that if the city were to incorporate, we would have compromised the security and low tax rate that has helped make the Woodlands a number one place to live. And that vote for incorporation was held this past Tuesday on the second and I’m thrilled to announce that almost 70% of the residents voted against the corporation. And they saw that we don’t need to fix what wasn’t broke. And kind of stood side-by-side with us as fellow residents and as the developer to maintain the Woodlands as according to niche.com the number one place to live.

John Saxon: Thanks, David. Our next question as management wants to be more focused on MPCs to accelerate developments there, what activity could have been done in the past and what can be done in the future in order to reach the endpoint faster?

Jay Cross: Thanks, John for this one. We only just reached our 11th anniversary as a company and I think as we look back, I would say the results produced over that last decade have indicated a constant focus on executing quickly to meet as much market demand as possible. If one looks at our operating asset portfolio, we’ve increased NOI from $46 million in 2011 to $240 million of annualized NOI today, by monetizing our raw land, we develop commercial assets, we now own and operate several million square feet of diversified real estate in office retail and multi-family. And so we’re constantly focused on accelerating these development pipelines through the introduction of new product types, such as medical office and single-family to rent as we mentioned on today’s call and we’ll continue to look to see how we can expand our portfolio within our MPCs.

John Saxon: Thanks, Jay. For the next question, how do you think about the $2 billion and non-segments debt? And does it make sense to pay down to further protect yourselves from the eventual recession?

CorreneLoeffler: Well, I appreciate the question. Just to be clear, the non-segment debt is made up of our three tranches of unsecured senior notes that we actually went out and issued last September as well, earlier this year. We did that by taking advantage of the capital markets opportunities to jump in there and really be able to secure this long-term debt at some attractive rates that allows us to take out shorter term maturities or at higher rates. So at net-net, it actually was an improvement to our overall balance sheet so we feel very comfortable with where we are today and our debt maturities and the overall levels of debt.

John Saxon: Thank you, Correne. Now we have a couple questions related to Douglas Ranch. The first one, do you still anticipate JDM and Eldorado coming back into Douglas Ranch. How will personnel costs be split if HHC employees are doing most of the work? Anything to help understand the relationship with JDM and Eldorado when it comes to cost and earnings is appreciated?

Dave Striph: Sure, it’s a good question. And as we announced next quarter, we’ll get into more details as this is a transaction that close after the end of the quarter. But big picture JDM not Eldorado, but JDM only has the option to require 50% and they put in $34 million for their deposit to require that 50% stake. While I very much expect to JDM will come back in as our partner with you either scenario is favorable for AJC. When it comes to personnel costs, yes, HHC is the managing member and will be boots on the ground team executing there and will be paid to cover that overhead so it should not be a cost center for us in any way. And assuming that JDM does come back in our partnership will be a 50/50 split, so we’ll receive 50% of the earnings 50% of the cost and the same holds true for Trillium, the first village of Douglas Ranch.

John Saxon: Thanks, David. And then continuing on the Douglas Ranch. Can you discuss the challenges that water scarcity presents in Phoenix? And what if anything the company has done to secure water for this MPC?

Dave Striph: It’s a great question and we thoroughly investigated Douglas Ranch access to water leading up to this acquisition and announcement. It was one of the main points in our diligence over the past six months, there is an aquifer directly under Douglas Ranch that we can tap into and we have water rights for Trillium, along with a meaningful portion of Douglas Ranch already in hand. And our master planned in Douglas Ranch is going to integrate the best in water conservation and sustainability. It’ll be woven throughout the design and into the community from the very early stages as this is just a blank canvas under which we can put in the best processes that they want. And we have experienced developing large scale master planned communities in desert environments like Summerlin. And those state-of-the-art technologies will be replicated at Douglas Ranch. Summerlin was Nevada’s first community to implement water smart conservation guidelines. And it was the earliest adopter of desert landscaping. We’ve gone beyond the imposed restrictions for new construction, improving low water use techniques that save millions of gallons of water each year. On top of that Heath Mountain who will be the President in Phoenix and run Douglas Ranch has led the development of Bridgeland and they’ve won multiple awards for integrating local ecology and low impact sustainable design. And we’re going to continue to work with industry experts to make sure that we are at the leading edge of sustainability and conserving all of our natural resources.

John Saxon: Thanks, David. This is going to be our last question that was pre-submitted through Say, How’s the outlook for 2021 through 2022?

David O’Reilly: Well, we’re not providing guidance today for ‘21 to ‘22. But as we announced during the call, we have raised guidance across our MPCs operating assets and condos for the remainder of this year. And as a result, I think it’s clear that we very much expect to close out 2021 with a very strong fourth quarter. And I believe that this momentum will carry us into 2022. In 2022, we will begin lot sales and Douglas Ranch. We will continue to execute on our incredible development pipeline that Jay is growing every day. We’re going to complete construction Kō’ula in Ward Village, and we will have the grand opening of the Tin building at the Seaport. Sitting here today on this call, I have no reasonably the 2022 will be nothing short of another excellent year for Howard Hughes in all of our segments.

John Saxon: Thanks, David. All right, operator, we can open up the lines for those with questions on the call.

Operator: [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question is from Daniel Santos with Piper Sandler. Please go ahead.

Daniel Santos: Thank you for taking my questions. My first one is on 110 North Wacker. And apologies if you’ve covered this during your prepared remarks. But can you walk us through what the rest of this lease up at that asset looks like and when you expect the asset to stabilize?

David O’Reilly: Sure, so we are approximately 80% leased at 110 North Wacker and as you know it’s anchored by Bank of America and the vast majority of the building is on long-term leases. So, we have a weighted average lease term there over 12 years, which is we think tremendous. The majority of the remaining lease up space is in smaller chunks and some options space that are larger tenants have. So we only have the option ability to lease those for some shorter term. I think that given that the leasing pipeline has started to rebuild post-pandemic in Chicago, I’m hopeful that we can get some more leases done over the next quarter or two. But as Dan, we’re in the market with that asset. And we talked about this last quarter, we’re hopeful to get some potential bidders on that over the next several months and be able to execute on a sale, that non-core asset is quickly as we can at the right outcome for the company. And as Correne highlighted with our liquidity position, we’re not in a rush, we’re going to wait for the right price not the first price.

Daniel Santos: Got it. I appreciate that. I was wondering if you could give some more color on the large pads out at Summerlin, there seems is like a $13 million department and it would deposit it would seem like a pretty significant sales. So just any color on that would be helpful?

David O’Reilly: I think the best color I can give you Dan is back to the remarks we made regarding the increased guidance in our MPC EBT for the remainder of the year. And obviously, by taking that guidance up as much as we did at the midpoint, we feel very confident that there’s a great demand for builders for our land, both in Summerlin and Houston. And that increased guidance reflects that deposit, and as well as other transactions that we believe will come in during the fourth quarter.

Daniel Santos: Thank you. Just one last one, if I may. Over at Ward Village, would you consider accelerating the development to maybe two towers a year? Just given the strong demand or do you still feel pretty comfortable at that one tower year kind of pace?

David O’Reilly: Well, our job is to build as quickly as we can to meet market demand. And I think that, while we launched one tower already this year, we have the opportunity to launch a second that would not be competitive. And that may be more of a workforce housing tower. And then hopefully, towards the early to the middle of next year we launch our next tower. But we’re thrilled with the progress. I can’t believe that I’m sitting here only three months later, after our launch in July. The percent pre-sell that we are it’s really a testament to the team. And that has been with three price increases over this three-month period. And despite those increases, demand continues to remain strong. So we feel great sitting where we are, we’re always trying to accelerate to meet market demand. If we could launch two at the exact same moment, I think that maybe a little bit too much. But if we can get them every six to nine months instead of every 12 to 15 months, that might be a way to better tap into that demand.

Daniel Santos: Appreciate the comments. Thank you. That’s it for me.

Operator: The next question is from Peter Abramowitz with Jefferies. Please go ahead.

Peter Abramowitz: Good, good. I just want to ask at the Seaport, could you give an update just on leasing prospects for some of the retail vacancies there, as well as some of the office space that you have left?

David O’Reilly: I appreciate the question. Clearly retail in New York City coming out of the pandemic has been impacted. And we’ve been impacted like so many of those other areas in the city. We’ve been able to backfill a lot of the vacancies, the bankruptcies and those tenants that haven’t survived like 10 Corso Como with some great new concepts like the lawn club and restaurant by detrained and that’s been great. And those spaces are getting built out now. And we’re hopeful that we’ll be able to open those in the next several months. And then some of the other smaller spaces in historic district, we’ve been able to bring in some great shorter term tenants, some activations that have helped keep it alive and drive some revenue for us, which has been great as we continue to look for the right long-term users in that space. From an office leasing perspective on the Pier, we are continuing to market that space. And at this point, we’re waiting for the right tenant that’s going to appreciate that space the way that we do, and someone like Nike and ESPN that sees the value of having water views on three sides. And we do think that as the Tin building opens next spring and that construction fence comes down and we really open up the Pier to the world. We’re going to see that demand grow.

Peter Abramowitz: Okay, got it. That’s helpful. And then in your office portfolio, in your core MPCs, what’s utilization, physical utilization, looking like currently and kind of how is the return to work that’s slowly happening, how is that impacting some of the vacancies that you’re looking to lease up in your office portfolio?

David O’Reilly: Sure. Like most markets, we’re seeing utilization rates picking up every week, every day. And sitting here in Houston, I can tell you that there are more and more cars in the parking lots here on a daily basis. And that’s great. And the leasing velocity here in Houston has continued to grow as well. And probably three quarters ago, Peter, I would have told you that we were talking to tenants that were 5,000 to 10,000 square feet. And Quarter 2 ago, we started working on some full floor deals here, which are the 20,000 to 30,000 square feet. And now the tenants that are touring are even larger in size. So we see that momentum continuing to grow here in Houston. In Vegas, it really never stopped because our two office buildings there are entirely full, in addition to the two buildings that are 100% leased to aristocrat and our new construction 1,700 has over 50% of the building under LOI already. So that pipeline has been great. And in Colombia, very similar story in that 10 through 17 continues to perform very, very well wanting to Merriweather are basically entirely full. And we’re working on a deal as we speak that hopefully will take the balance of 6,100. So we’re feeling very good on the office leasing front as that momentum continues to gain steam coming out of the pandemic. And folks get back to the office.

Peter Abramowitz: Got it. And are you able to quantify kind of what physical utilization is, is that something like 40% or is it closer to 60 or 80?

David O’Reilly: I would say it’s between 50 and 60. But it depends on the building. It depends on the market. If we have a building that has a tenant for 50%, and they’re not back to the office yet, clearly that building is not in that same range. But in general across our portfolio, I’d say it’s in the 50 to 60%.

Peter Abramowitz: Okay, got it. That’s helpful. And then final one for me. Are you able to quantify kind of the yields that you’re underwriting to on the single-family for rent and the medical office product? And then for the medical office building, is that something you view as a long-term hold or is that something you could develop and then look to take advantage of the depth of private market demand?

David O’Reilly: I’d say well, as we start construction on those projects, and they get into the supplemental of the yields and stabilization dates, and expected timing will all be thoroughly disclosed. I think it’s safe to say that with any new development that we’re doing, we’re trying to achieve those outsized, risk adjusted returns and develop at a yield well in excess of underlying cap rates. And for these projects, you should expect nothing different than what we’ve done in the past for the past 11 years. In terms of medical office, as a core hold, I think, for those buildings that are the multi-tenant users that are synergistic with having a dominant market share. That’s something that we want to continue to hold. I think the unique situations where we have a build a suit for MD Anderson for a very unique use, like a cancer treatment center versus a traditional medical office, that presents a different opportunity for us to create value.

Operator: The next question is from Vahid Khorsand with BWS Financial. Please go ahead.

Vahid Khorsand: Good morning. Thanks for taking the question. First question, David, you were talking about in Texas properties there the MPC that the homebuilders sentiment not necessarily sentiment, I guess but there’s supply issues and their build-out issues. Whereas in Summerlin, there seems to be a difference. Could you just talk a little bit about why Summerlin is seeing a different homebuilding era right now versus Woodlands and Bridgeland?

David O’Reilly: So, I would say that Woodlands and Bridgeland compared to Summerlin. As some similarities and those supply constraints that they’re seeing and whether its front doors or windows or appliances have been very consistent. There have been also some meaningful differences as well and that one in Summerlin we are selling super pads whereas in Bridgeland, Woodland Hills and Woodlands we sell lots. So therefore, the lead time for a builder is much longer when they buy a super pad and therefore they’re buying their super pads today for those home sales out into the future versus buying a lot today to sell that home tomorrow. So their appetite remains strong because they’re buying a little bit further into the future. The other big difference in the two has been just the weather and it has been so wet this summer in Houston that has slowed down our ability to deliver locks to builders by about three months. And the approval and permitting process has been backlog because there is a rush to supply lots. We’re at an all time low in terms of developed lots on the ground for builders. And we’re in a sub eight months supply across the region and in the far northwest we’re Bridgeland sits that supply is below six months. So we’re working hard and trying to get caught up. But the weather has put us behind some of the approvals have put us behind. And there is a tremendous demand from the builders, we just have to expedite our delivery to meet that demand.

Vahid Khorsand: Got it. In the same vein, I think I brought this up in when you first brought up the idea of single-family rental homes in Bridgeland. Has there been any pushback from the homebuilders or is there so much demand that just 200 something, I think it was 200 something homes doesn’t really make that much of an impact?

David O’Reilly: No, there’s been no pushback from the builders. And I think that if you look at some of the public builders, they’re actually either working directly or in venture to get into this business because they see what we see, which is the home renter is not the same person as the home buyer. And it’s not necessarily directly competitive, it’s meeting a segment of the market that is not necessarily a home buyer because of marital issue, or it’s a temporary job, or it’s someone who doesn’t have a deposit. But there’s a meaningful component of the population out there that is looking for a single-family for rent options, that is not necessarily looking at it instead of a home purchase.

Vahid Khorsand: And then my last question, it’s about Ward Village, and I think, the park, I don’t see an income type of building category like I know, and Victoria Place is ultra luxury and Ko’ula is upscale. But as you’re now seeing this extra demand that you’re seeing is coming in, and prices going higher, are you entitled or is there any limitations on maybe the next one being workforce versus ultra luxury or do you have the freedom to just go ultra luxury if that’s where the market is?

David O’Reilly: So other than that, we have a limitation that 20% of the units need to be workforce. And the first portion of that was met with [Indiscernible]. And we expect our next tower that we’re working on right now to meet the remaining requirement for all workforce housing. Other than that, our ability to build is up to us. And we could do ultra luxury, upscale, moderate, wherever we see the deepest pockets of market demand. And for us, if we’re able to have a balance in the type of product we’re delivering between the first second and third row, we can hit the widest potential pocket of demand the most potential buyers that are out there in the market and accelerate the value creation as fast as we can.

Vahid Khorsand: Got it. Thank you very much.

David O’Reilly: You’re welcome.

Operator: The next question is from Alex Barron with Housing Research Center. Please go ahead.

Alex Barron: Thank you, and good morning. Great job on the quarter. I want to ask a question on the new Phoenix MPC. Since you indicated you could sell about 1,000 lots in the first year. Wondering if you could give more specifics on in what quarter do you think those first sales would happen? And is there any guidance you can offer as far as approximate price of those losses in the 75,000 or 100,000, what’s the approximate range?

David O’Reilly: So when we announced the transaction, Alex, we said that we expected to transact on it at least 1,000 lots in the first half of next year. And that’s probably about as granular as I can get at this point in time. But I feel very good that we’re going to be able to get that done in the first half. And we had talked on our announcement of the Douglas Ranch call at about that 70,000 to 75,000 range per lot. But that will depend on lot size and density et cetera depending on which neighborhood. Again, we really focus on price per acre. We think that’s kind of a great equalizer in terms of the variability in terms of lot size and density.

Alex Barron: And when you say that a 1,000 in the first half is that meant to imply that in the second half, there could be nothing or you just don’t have enough visibility. In other words, I’m trying to get a sense of is it going to be consistent sales every quarter pretty much or is it going to be more spotty, kind of like the way Summerlin works where you sell a big pot of land and then maybe nothing for a few quarters?

David O’Reilly: I think that you could expect it to be a little bit more lumpy. I think all of our landfill business is lumpy, but I would expect that we would work hard in Phoenix and Douglas Ranch to use the same methodology that we use in Summerlin, which we think creates the most value for the company. And that does create a little bit more lumpiness in the results, but it drives much better cash flow to Howard Hughes. So, I would expect that if we’re able to transact those 1,000 lots in the first half of next year, we might not sell much more for the remainder of the year. And 1,000 lots is a meaningful amount of supply for a new community just getting started. And if you think of Summerlin selling 1,400 homes last year were Bridgeland selling about 900 homes last year to be in a position where we could do 1,000 a year as our first year as a new community is exciting. But that’s a lot. So to think that we could do 1,000 lots every six months, I think is a little bit aggressive for communities first year in existence.

Alex Barron: Well, the good news is, that market is pretty land constrained. So I think you’ll find plenty of demand from builders.

David O’Reilly: We agree with you wholeheartedly, Alex.

Alex Barron: You guys got a good deal there. Second question is on the Hawaii condos. So congratulations on the first closings on time in ‘A’ali’i, can you give us a sense on Ko’ula, and on Victoria Place and on this new park Ward Village? What are the expected closing dates on those three towers?

David O’Reilly: So we expect to close Ko’ula at the end of next year. And then Victoria Place should be about a year after that.

Alex Barron: Okay.

David O’Reilly: Now, the park which we just started pre-sales on in July, we haven’t started construction yet. So until we have a construction start date, it’s tough for me to pin down a closing date or a completion date. Because again, we don’t start construction until we’re 50% pre-sold, which we’re almost there basically there. Until we have a construction loan and process which we don’t have yet for the park, and a GMP from our contractor which we don’t have yet. Every time we start a new tower, there’s a great internal race between our construction team and the sales team in terms of who can get done first 50% pre-sold or GMP contract. And our sales team has won, I think for the last four towers in a row, which is great news for us. We love that. So but we do want to make sure that we are prudent and thoughtful before we start construction, that we have our costs completely buttoned down. And we have financing in place so that we can deliver that project with the appropriate amount of equity.

Alex Barron: It makes sense. And on this park Ward Village, can you give us a sense of where are the prices -- some type of price range for that condo tower?

David O’Reilly: So the park Ward Village is directly across from the Victoria Ward Park from Ko’ula. So it is a second row tower with great sweeping views right behind Victoria Place. And I think that you should expect pricing there to be a little bit higher than Ko’ula, but perhaps not as high as Victoria Place in the front row. And the passage of time and appreciation that we’ve seen in Ward Village has allowed us to make sure every time we sell that next front row project or that next second row project, we’ve been able to achieve a meaningful premium from the last one.

Alex Barron: Okay, thanks a lot. And best of luck.

David O’Reilly: Thank you, Alex. Appreciate it.

Operator: This concludes our question and answer session. I would like to turn the conference back over to David O’Reilly for any closing remarks.

David O’Reilly: Thank you again for joining us today. Hopefully we’ll see a lot of you at our upcoming conference schedule and on the road show. And if there are any questions between now and then we’re always available to help. Thank you again, talk soon.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.