The Howard Hughes Corporation (HHC) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to The Howard Hughes Corporation’s First Quarter 2021 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to David Striph, Executive Vice President, Head of Operations and Investor Relations. Please go ahead.
David Striph: Good morning, and welcome to The Howard Hughes Corporation’s first quarter 2021 earnings call. With me today are David O’Reilly, Chief Executive Officer; Jay Cross, President; Correne Loeffler, Chief Financial Officer; and Peter Riley, General Counsel.
David O’Reilly: Thank you, Dave, and thank you all for joining us today. Welcome to our first quarter 2021 earnings call. Before we dive into the results of the quarter, I want to make a couple of quick announcements. If you have not done so already, I would encourage you to read our letter to shareholders that was released a couple of weeks ago. The letter which is included in our 2020 Annual Report can be found on the Investor Relations section of our website. It provides a good overview of our business and highlights the many accomplishments we’ve been able to achieve over the past year. Second, I’d like to welcome Correne Loeffler who’s joining us today on her first HHC earnings call. Correne joined us as Chief Financial Officer in April and brings a wealth of knowledge and financial expertise to the company. She comes to us from Whiting Petroleum having served as Chief Financial Officer. There’s no doubt Correne will play a vital role in driving the company forward as we look to continue the acceleration of the development across our portfolio. I’m going to open the call today with remarks on the performance of our various business segments before handing it over to Jay Cross, who will provide updates on the Seaport and our Strategic Development pipeline. Correne will then speak to our financial results before concluding and opening up the call for Q&A.
Jay Cross: Thank you, David, and good morning, everyone. As David mentioned, we are seeing strong signs of demand within our communities evidenced by the pace of new home sales, condo sales and lease up of our latest multi-family developments. From a development perspective, our strategies only to build, to meet underlying demand, to never over saturate our markets. The quarter’s results demonstrate the strong desire to live in our MPCs and the projects we have underway will allow us to capture this inflow of demand.
Correne Loeffler: Thank you, Jay. I’m happy to be joining all of you today on my first HHC earnings call. I look forward to meeting most of you over the next several months through upcoming conferences, road shows and meetings. I’m going to start with a review of our MPC and strategic development performance then we’ll turn to our financial results and balance sheet. With the start of the year, our MPCs across the country continue to experience tremendous growth. We achieve year-over-year growth in new home sales, price per acre of residential land sale and MPC EBT compared to the first quarter of 2020. New home sales accelerated quickly during the first quarter with 929 new homes sold in our community. 35% more compared to the first quarter of 2020 and 34% higher than the fourth quarter of 2020. This is an incredible pace that persists since the latter half of 2020 and we see this trend continuing. Land sales, however, were down 5% in the first quarter with 54-acre sold versus 57-acre sold in the first quarter of last year. This is attributed to fewer lots sold in Bridgeland and no super pad sold in Summerlin, which as we’ve always said are very lumpy quarter-to-quarter and should be evaluated on an annual basis. The fact that land sales were only down 5% without closing on a single super pad highlights the strength of the quarter for our MPC. MPC EBT, which is a metric of profitability, we look at where the segment increased 44% compared to the same period last year. This uptick in earnings was mostly the result of higher custom lot sales and increase units closing at the summit. Our 555-acre members only community in Summerlin. During the quarter, the summit closed on 19 units versus six units closed during first quarter of 2020, a substantial increase that helped drive quarterly MPC EBT to $63 million. As David mentioned in his opening remarks, the results of the quarter were so strong that we have decided to update our MPC EBT guidance to a range of $210 million to $230 million for 2021. Summerlin had a breakout quarter with new home sales higher by 41% in the first quarter of 2021 versus the same period in 2020. In addition, price per acre in Summerlin residential land grew 13% or $199,000 to $1.7 million per acre for the first quarter of 2021 as compared to the first quarter of 2020. This also compares very favorably with the $762,000 per acre achieved last quarter. This increase was attributed to selling only custom loss as opposed to a typical quarter, where the majority of our sales are generated through the sale of super pads. Summerlin has been a huge beneficiary of the recent migratory patterns of home buyers leaving high cost, high tax states like California. We see no indication of this trend flowing anytime soon. Further, we believe the growth demonstrated within Summerlin, the sustainable as a broader Las Vegas economy improved. Bridgeland continues to demonstrate excellent results in the first quarter. New home sales grew 33%, when compared to the same quarter last year. And price per acres of residential land increased from $439,000 in the first quarter of 2020 to $459,000 to 5% increase. The influx of home buyers to Bridgeland have been impressive and we have reason to believe this momentum will continue. Similar to what we have seen in Summerlin, the surrounding Houston economy has improved since the lows of last year in oil prices and the overall energy markets have improved. We’ve used this as a strong catalyst for continued growth in home sales. While land sales were below the first quarter of 2020, the momentum in new home sales confirms demand is still robust and we expect strong results through the balance of the year. Woodlands Hills, new home sales more than doubled from 41 homes in the first quarter of 2020 to 84 homes this quarter. Similarly, the Woodland Hills sold 16 acres of land during the quarter, representing a 92% increase when compared to the same period last year. In addition, we continue to see steady increase in the price per acre of our residential land sold to home builders. Price per acre of residential land increased from $303,000 in the first quarter of 2020 to $307,000 this quarter. Although these numbers are from a lower starting basis, given this is our least mature community, the results are encouraging signs of future expansion ahead. As we’ve only just scratched the surface in terms of residential land sales. And our strategic development segment, the demand for our homes at Ward Village remains robust. We contracted 46 units during the quarter of which 30 units were from Victoria Place. The sales pace at this power has been incredible with 85% of the unit pre-sold and we are only just starting construction. During the quarter, we closed on a $368 million construction loan for this project at LIBOR plus 500 basis points with an initial maturity date of September 2024 and two one year extension options. This 85% pre-sold tower has hard deposits from buyers that can be used to fund construction. Our other two towers under construction at Waiea and Koula are making strong progress and are 86% and 79% pre-sold with estimated completion expected at the end of 2021 and 2022 respectively. During the quarter, we closed on five units between Waiea and Anaha generating $35 million in sales. Subsequent to the quarter end, we close on the last remaining units at Anaha, which has now completely sold making the Ward Village’s third sold out tower, only three units remain at Waiea. It is important to note that $20 million was charged during the quarter related to an additional anticipated costs to repair construction defects previously identified at Waiea. This is comparison to the $98 million charge in the first quarter of 2020 for the estimated repair costs related to this matter. As we previously stated on last year’s earnings call, we believe the general contractor is ultimately responsible for the defects and we expect to recover all the repair costs from the responsible parties. Taking a look at GAAP earnings for the first three months ended March 31, 2021, we reported a net loss of $67 million or $0.20 per diluted share compared to a net loss of $125 million or $2.88 per diluted share during the first quarter of 2020. Year-over-year improvement with a – to a stronger result in our MPC and strategic development segments, in addition to no impairment charges during the quarter compared to a $49 million impairment charge against the outlet collection at Riverwalk during the same period last year. This was partially offset by a loss on the early extinguishment of debt due to the repurchase of the company’s $1 billion Senior Notes due 2025 and the repayment of the loans for 1201 Lake Robbins and The Woodlands Warehouse in February following our $1.3 billion bond offering. We also reported lower NOI from our operating assets, largely related to the expiration of a short-term lease at the Woodlands Towers that ended in June of 2020. As well as lower operating performance from our COVID impacted assets within retail and hospitality. Excluding our loss on the early extinguishment of debt and non-recurring items, HHC would have reported a net loss of $31 million or $0.56 per diluted share during the first quarter of 2021. The bond offering, I mentioned, it’s just an example of Howard Hughes opportunistically approaching the high yield market at the right time. This successful issuance allowed the company to reduce its annual interest expense by $11 million with the refinancing of its 2025 notes and extended out its maturity by an additional two years. Further, the issuance was offered across two separate tranches, which allows us to manage our future refinancing needs. The offering includes a $650 million eight-year issuance due 2029 at rate of 4.125% and a $650 million 10-year issuance to 2031 at a rate of 4.375%. This bond offering increased our unencumbered book value of assets by over $300 million, further reduced our cost of debt and extended our maturity profile. Our nearest debt maturity is not due until the October of 2021, which is our $28 million loan on the Outlet Collection at Riverwalk. Following the end of the quarter, we closed on several construction loans in order to ensure that we are well positioned for the strategic development activity Jay discussed earlier. This included construction loans on our multi-family projects in Bridgeland and Downtown Columbia. In April, we secured a $43 million construction loan for Starling at Bridgeland, which bears an interest at LIBOR plus 275 basis points and matures in May of 2026 with an option of a one-year extension. We also closed on an $83 million construction loan for Marlow, which bears an interest of LIBOR plus 295 basis points and matures in April of 2025 with an option of a one-year extension. In Summerland, we also closed on a $59 million loan, which the places the existing construction loan for Tanager, this loan was closed in April and bears interest at 3.13% and matures in May of 2031. Finally, we closed out the quarter with over $1 billion of liquidity, which included $976 million of cash on hand and $185 million of availability under our lines of credit. Our net equity requirements for projects under construction totaled $504 million at the end of the first quarter. When you account for the construction loans we closed in April, this equity commitment drops further to $379 million. Given the strength of our liquidity position, we have more than enough capital to meet all our current funding requirements and are well position to capitalize on additional opportunities that lie ahead. I would now like to turn the call back over to David for some closing remarks.
David O’Reilly: Thank you, Correne. The results delivered during the quarter speak to the demand we are seeing with our communities across the country. Significant increases new home sales and condo sales point to the desire residents have to live in our highly amenitized award-winning master planned communities. The performance of our retail and hospitality assets in the form of higher collections and increased occupancy proves the road to recovery is rapidly improving. We have opportunities in place to capture the growing demand we are seeing across the portfolio and our strong liquidity position will allow us to further accelerate this momentum as we continue to unlock value for our shareholders. We look forward to updating you on our progress throughout the remainder of the year as we continue to deliver unmatched results and successfully grow our communities. We’ll now turn to the Q&A section of the call. We’ll answer the first few questions that have been generated by Say Technology and will be read by Dave Striph. Dave, can you read the first question?
A - David Striph: Sure. We have a question that just came in actually, while your rent collections have improved, the remain a bit behind industry averages. Could you please talk about that?
David O’Reilly: Thanks, Dave, and appreciate the question. Look, I think the question really drives down to the heart of what we’re seeing across our portfolio in different communities. And on its face does not relay the real strength that we’ve seen across the portfolio. Within our smaller retail holdings in Houston and Columbia, we’ve seen collection rates at 84% and 88% respectively. In Las Vegas, which is one of our largest retail holdings, our collections this past quarter was at 94%, incredibly strong, and it would help drive the sequential rise in our Downtown Summerlin NOI of 44%. But where we haven’t seen the same level of strength and where it’s created a weighted average in the portfolio of only 78% has been in those retail holdings we have that are largely dependent on travel and tourism, namely Ward Village in Hawaii, and the Outlet Collection at Riverwalk in New Orleans, which is right on the cruise board. And obviously cruise ships are not going yet. And the collections there Ward Village were 64% this quarter and in New Orleans were 58%, which is a lot of room to run and as travel and tourism comes back, we believe those collection rates will come back up in line consistent with what we saw in Downtown Summerlin at 94%, which candidly hasn’t missed a beat over the past several quarters. Operator, that’s the last of the say questions, if you could open up the line for live questions, please.
Operator: Yes, sir. We will now begin the audio question-and-answer session. The first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb: Good morning, and welcome to board Correne, good to have you and Brett on getting a handle on a pretty tough business. First question is, just going out to Ward Village, the curtain wall, I mean, you guys have been speaking about this for several years. I think in total, it’s up to a $120 million or so. What gives you guys the confidence that the GC has liquidity to actually pay you guys back for this cost?
David O’Reilly: It’s a good question, Alex, but first let me start by just saying there’s – I don’t think we have a tough business. I think we have some tough analysts, but our business is not that tough. I think that we’re able to create a lot of value and do so in pretty simplistic ways. But to your question, look, we see plenty of sources of liquidity that gives us good certainty that there will be the ability to repay these damages and whether that’s the surety bonds, the insurance pro – POP that’s in place, the GCs insurance policy or the GC itself, we feel very good that there’s enough liquidity out there to make sure that they can stand behind the construction defects and live up to what they said they would do when they built this building the first time.
Alexander Goldfarb: Okay. So collectively, if I understand you correctly, their liability insurance, their bank accounts, like everything about them, your side, your lawyers feel confident that they – that the $120 million plus will be paid back to you in full or as close to full as possible.
David O’Reilly: Yes. Throughout the range of different ways that we could recoup those costs. We do remain confident that we will recoup those costs.
Alexander Goldfarb: Okay. But just based on the fact that this is litigation, it’s our – yes, we should just expect that the thing will continue on for a few more years. Is that a fair way to think about it?
David O’Reilly: Unfortunately, Alex, one of the side effects of the pandemic has been the massive backlog in the court system. And in Hawaii, more so than most places given how long the Island was shut down. And those cases that have the most critical nature have been moved up and are getting done. And this case, unfortunately, is not falling under that critical area. So I do expect that this could take a couple of years to resolve.
Alexander Goldfarb: Okay. Okay. And then second, obviously, the land sales strength is good. The home sales, the condos out in Hawaii, you mentioned super pads none this time. But it sounds like maybe in the increased guidance that could be in there. But really to the point, given the accelerated reopening really down the Sunbelt markets, you guys spoke about hospitality, there’s the $8 million from the aviators. So before we analysts, as you say, we give you guys a hard time, get too carried away. What are some of the real incremental changes and you mentioned the land sales picks up from last quarter. What are some of the incremental NOI items that have dramatically improved from fourth quarter call to now, and maybe a way to quantify that we can appreciate how much benefit your portfolio has had with the way the reopening the Sunbelt economy have gone.
David O’Reilly: Well, look, I think that at the end of the day, Alex, we always look forward and we look through to those metrics that we think drive increases in net asset value on a per share basis. And to your point, those metrics are how many condos were selling at what price, how many acres of land were selling at what price per acre, MPC EBT, and the net operating income from our operating assets. And we saw a very, very modest sequential increase in our hospitality portfolio, but we do see a lot of momentum over the next several quarters as we’re seeing the pre bookings of some group business return. We saw a great sequential growth across the entire operating portfolio of 10%. That was really driven by retail with a 20% increase quarter-over-quarter, 55% increase in Ward Village and a 44% increase in Downtown Summerlin. All areas that drive higher net asset value on a per share basis across our portfolio.
Alexander Goldfarb: So really, it sounds like David, in some, the land sales are obviously up this year, but the way from a modeling and thinking about your business, the hospitality, the aviators and all these and the remaining retail, that’s just sort of grow this year, but we really should think about next year these items being back to sort of full force. And this year is still going be a slow return to normal. Is that a fair way to think about it for those items?
David O’Reilly: I think there’s going to be a combination. So I think your point is accurate, Alex. But I’ll add to that and say that we should see a meaningful return of the NOI of those assets that have suffered the most as a result of the pandemic throughout 2021. And we’re going to add to that the new developments that have come online are leasing up and stabilizing as we speak as well as more projects that we’re going to announce every quarter. And while we already announced 2 million square feet quarter that Jay spoke about, we don’t have anything this quarter, we’ve got a lot in the pipeline for the remainder of the year that we’re very excited about, where we’re going to take advantage of the increased demand that we’re seeing in our master planned communities as a result of this pandemic, and as a result of the reopening of those local economies to build great new amenities at outsized risk adjusted returns.
Alexander Goldfarb: Okay. Awesome. Thank you, David.
David O’Reilly: Thanks, Alex.
Operator: The next question comes from Jon Petersen with Jefferies. Please go ahead.
Jon Petersen: Great. Thanks. How about we can dig in a little bit on the retail rent collections, you guys were in kind of the high-70%s this quarter. I think if you look at most of the other shopping center REITs, I think that they were anywhere from kind of the low-to-mid 90% on rent collection. I imagine that Hawaii is what’s dragging that number down. So I’m wondering if you can parse out maybe your different MPCs and what retail rent collection looks like, and then any indication of what collection was like in April and expectations over the next couple of months.
David O’Reilly: Sure. So big picture, our three largest drivers of retail are Las Vegas, Ward Village and New Orleans. Las Vegas led the way with a 94% collection rate, incredible performance. Those assets like Hawaii and New Orleans that are impacted the most by travel and tourism had lower collection rates and Hawaii was at 64% and New Orleans, which is largely driven by the cruise ship industry as it’s an outlet center immediately on the cruise port was behind the portfolio at 58%. Those collections have steadily increased over the past quarter and I expect they will continue to do so over the next several months and several quarters as reopening takes hold and as we start to see a return to whatever the new normal is.
Jon Petersen: I guess maybe an order of recovery fair to say that Hawaii probably expect to recover quicker than New Orleans cruise ships probably are slower to come back.
David O’Reilly: I – my only hesitation in agreeing with you, Jon is the dependence on international tourism on a Wahoo, which may come back at a pace at the same or slower than cruise ships. I – it’s really tough to predict.
Jon Petersen: Okay. And then I guess if we think over the next year or so, do you expect to collect the rent eventually there was uncollected over the last year, or should we just kind of write it off?
David O’Reilly: Look, we’re pushing to collect every dollar that is due to us that has not been paid. And a lot of those rents have been not collected, but deferred and will be paid back over the next several quarters, next several years. That’s assuming that those tenants make it. And it’s very tough for me to predict, which tenants will make it and won’t. We think that they have great businesses. We wouldn’t have signed leases with them if we didn’t. It’s just a matter of whether or not they can survive until we get to the other side and they’re back into a more profitable time able to pay their rent and the deferred rent that they still owed us.
Jon Petersen: Okay. Got it. And then good to see the Aviators play their first game in a long time. Can you remind us what the NOI upside there is for a full return of the Minor League Baseball season?
David O’Reilly: Yes. So in their first season, in existence in 2019, we did about $8.5 million of NOI. Our guidance this year assumed that they broke even. And while we opened and so far we’ve been able to host all of our games we’ve done so at limited capacity at about 50%. We’re hopeful that over the next several months and the next several home stands, we’re able to increase that capacity and get closer to a 75% or even full capacity with the amount of safety precautions that are in place.
Jon Petersen: Okay, great. And there’s one last question. On the Seaport 250 Water Street, you guys are approved to kind of move forward there. Can you maybe talk about the development yields you guys are underwriting towards and when you expect to be stabilized on that building?
David O’Reilly: Well, look we are – while we may have received the approval from the Landmarks Commission, we have just started the official Euler process. And that’s a process that will probably take us through to the end of this year. So for me to comment on a potential development yield, potential profitabilities, sales per foot on potential condos or rent per foot on space, that’s being leased before we even have full approval, I think would be premature. As we’ve done with all of our projects, we’ve made sure that we’re allocating capital to generate the highest risk adjusted returns. And you shouldn’t expect us to do any different on this project at 250 Water Street.
Jon Petersen: Okay. Sounds good. I’ll save that question for a future quarter. All right. Thanks guys.
David O’Reilly: You’re well, you may – everyone may ask it every quarter from now until then, but it’s all right.
Jon Petersen: Sounds good.
David O’Reilly: Thanks, Jon.
Operator: The next question comes from with Hamed Khorsand with BWS Financial. Please go ahead.
Hamed Khorsand: Hi, good morning. First question I had was what the safeguards for the sold contracts of Victoria Place, where the buyer does not walk away in three years?
David O’Reilly: Sure. So we have – we take a hard deposit of 20% of the purchase price and that deposit can be used towards construction. So we feel very good. And if you go back historically speaking over the past 30 years, we’ve seen very little volatility and the underlying set of values of condos. In fact, during the global financial crisis, prices of condominiums on a Wahoo dropped only by about 10%. So relative to a 20% deposit that feels really good. The other nuance here that’s really important to note is that while it’s a 20% deposit and 20% of the value is coming in terms of a cash deposit often and has always been the case in our towers to date knock on wood, the buyer’s equity is actually greater than 20%. Because all along the sales process, as we’ve seen this great momentum Victoria Place is a perfect example of selling 85% and just starting construction this past March. We’ve been increasing prices every step of the way. Those valuable stacks and those highly desirable units that we’ve seen the greatest sales velocity we’re moving prices up. So while it’s a 20% cash equity deposit, that book equity, that that paper equity is actually higher for those buyers and that actually further helps them and gives them the confidence to move forward towards closing.
Hamed Khorsand: Okay. My other question was, what is currently missing from the Seaport that Tin Building opening is such a big deal in your comments today?
David O’Reilly: Look, I think that the Seaport has a handful of things that we’re working very hard to make sure that we’re doing to stabilize that asset. That’s including finishing the Tin Building, that includes finishing the leasing of the fourth floor the Pier space, and backfilling some of those retailers that unfortunately did not survive the pandemic in the Historic District. All of those things are critically important to our long-term success and were optimistic about the opportunity to do that. And our optimism is increased by the success we experienced last summer with the Summer Greens this past winter with the Winter Greens and just this past month reopening the Summer Greens again and hopefully having a concert series in 2021. So there’s a lot of work to do, but the momentum is behind us. The reopening of the city has shown that there is incredible demand for great FMB, for great experiential opportunities on the Water in Lower Manhattan and we’re thrilled to be in the middle of that strikes them to meet that demand.
Hamed Khorsand: Okay. All right. Thank you.
David O’Reilly: Thank you.
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: Once again, we appreciate everyone joining us today. Thank you so much for following the company and for investing with us. And we look forward to speaking with you in upcoming conference calls, conferences, and future non-deal road shows. Thanks so much.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
