Q3 2022 Howard Hughes Corp Earnings Call
Good day and welcome to the Howard Hughes Corporation third quarter earnings call.
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I would now like to turn the conference over to Eric Colson.
V P of Investor Relations. Please go ahead.
Good morning, and welcome to the Howard Hughes corporations third quarter 2022 earnings call with me today are David O'reilly, Chief Executive Officer, Jay Krause, President Carlos will lay a chief financial Officer, David Stripes head of operations and Peter Riley General General Counsel before we begin I would like to direct you to our website Howard Hughes Dot com.
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 companys expectations are forward looking statements within the meaning of the federal securities laws.
Yes.
Although the company believes that the expectations reflect reflected in such forward looking statements are based upon reasonable assumptions. We can give no assurance that these expectations will be achieved please.
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.
Thank you Eric Good morning, everyone and thank you for joining on our third quarter earnings call to start off today's call I'm going to provide a brief overview of our third quarter segment performance highlights the results of our Masterplan communities in seaport.
Dave strife will cover the performance of our operating assets and then Jay Cross will provide an update on our development projects in ward village.
Finally, Carlos away it will provide a review of our financial results before we open up the lines for Q&A.
Looking at the results for the quarter each of our operating segments performed really well relative to the same period in 2021. Despite these ongoing economic headwinds MPC EBT rose, 39% and operating asset NOI remained elevated despite the impact of divested assets.
At the Seaport revenue increased 57% and generated a net operating profit before equity losses related to the startup costs at the tin building.
At Ward village, we completed cooler and closed on a total of 404 condominium units generating net revenue of $419 million with a strong gross profit of 30%.
In addition, we launched pre sales of coli, our 10th condo tower at the end of September which was met with exceptional demand having already pre sold more than 40% of the units.
Overall, our strong results both this quarter and year to date are a testament to the resiliency of our business model and our one of a kind portfolio, which continues to withstand economic volatility like we are experiencing today.
Before I dive deeper into some of these results I first want to congratulate got to meet belonging who leads our ESG efforts and the entire Howard Hughes team on the progress made to further our sustainable and inclusive communities.
Graysby, whose assessments or a benchmark of sustainability performance and best practices for real estate companies worldwide ranked Howard US number one in the U S diversified listed peer group.
We were also recognized as a sector leader in the Americas diversified category.
I'm ecstatic that our efforts and commitment to environmental and social best practices, which are integrated throughout our communities all across the country are being recognized.
Now looking to our M P CS.
We had another strong quarter, despite considerable headwinds in the housing market and our core markets of Houston and Las Vegas, New log supply remained at historically low levels, prompting homebuilders to continued purchasing land and replenish inventories to keep up with future demand.
Although new home sales in our M. P. CS were down significantly relative to the unprecedented levels seen during 2020. One we continue to see solid demand for new homes at premium prices.
This was reflected in our quarterly results with continued appreciation in land prices and strong growth and build their price participation revenue.
Overall, our M. P. CS recorded earnings before taxes of $75 million up 39% increase compared to last year.
Looking at the details and Houston, both bridge Linda in the Woodland Hills posted strong results, which contributed to a 61% year over year EBT improvement in this market.
Enbridge Linde, we saw steady residential land sales, which were complemented by 25% increase in price per acre to $520000 together with a 17 acre commercial land sale and a near doubling of builder price participation revenue bridge lines E. B T grew to $15 $9 million a 72%.
Increase versus last year.
And the woodland Hills, EBT grew 31% fueled by a 6% improvement in residential acres sold and a 17% price per acre increased to $412000.
Shifting west to Summerlin, we sold 123 acre residential super pad in one custom lot for combined implied price of $1.3 million per acre.
Staggering, 75% increase from the third quarter of 2021.
Some of them also saw 59% increase in build their price participation revenue as new home values remained strong.
At the summit, we only closed one cluster them lot during the quarter, which compares to eight lots in the prior year.
With this premier gated community nearly sold out we reached an agreement with our joint venture partner discovery land to <unk>.
Launched phase two of the summit last July .
As part of this expansion, we contributed 54 acres of land, which will be used to develop 28 additional custom home sites.
Our land contribution which was marked up to fair value resulted in a 13 5 million dollar gain in M. P. C equity earnings signifying the strong inherent value of future land sales in this ultra luxury community.
Finally in Phoenix West Valley, we just celebrated the official groundbreaking just last week, we unveiled the new name for Douglas Ranch Terabytes.
We continue to work diligently in Florida, the new communities first village, formerly known as Trillium to install the infrastructure needed to contract the first thousand lots to homebuilders.
During the third quarter J D. M partners exercised its final option of terror balance repurchasing approximately 3% incremental ownership interest for $15 million.
This takes jdm's total ownership interest in the non Florida portion of tear of Atlas to approximately 12% or $65 million.
J D M and H H C continue to have a 50 50 joint venture in Florida, which comprises approximately the first 3000 acres of terabytes.
Looking at new home sales as expected, we experienced a sharp decline in the quarter with a total of 284 homes sold representing a 48% reduction when compared to the prior year.
This reduction was largely attributable to summerlin, which saw a 57% decline in new home sales.
And Houston lower home sales were also recorded in the woodland Hills.
Enbridge learned however home sales remained favorable with volumes in line with the third quarter of 'twenty or 'twenty one.
Overall, the pace of new home sales within our communities continue to trail behind the unprecedented levels, which were experienced in 2020 and 2020 one.
Clearly this is a result of high mortgage rate.
Record inflation, and recessionary fears, which are impacting new home affordability.
Additionally, homebuilders continue to encounter supply chain disruptions as well as slow municipal approvals, which are impacting the pace in which they're able to deliver new homes.
Despite the reduction in sales, we continue to see solid demand for homes at higher price points. As these buyers who were offered often moving from higher cost states tend to have strong purchasing power and allows them to better withstand rising mortgage rates and inflationary constraints.
This is contributed to further increases in median home sales prices in all of our communities.
As well as the strong levels of builder price participation revenue realized this year.
As an example in the third quarter at the median home price in bridge Lynn was $595000 or an increase of 19% year over year.
Similarly, the median home price in Summerlin was nearly $750000, a 13% increase compared to the prior year.
Conversely, we're seeing headwinds and lower priced homes, where buyers are more likely to be impacted by mortgage rates and recessionary fears throughout our M. P. C's, we offer a wide variety of new homes at various price points, providing prospective homebuyers multiple options to meet their budgets.
However, with record low inventories and all of our core markets. We are actively working with our homebuilders to ensure we have the right balance.
As a result, we're developing new lot programs, which are designed to target additional homes at affordable price points for the purpose of increasing the pace of sales in the near future.
With this in mind, we may encounter some periods of reduced land sales in the short term as we continue our discipline of only selling land to meet the underlying demand.
The long term intrinsic value of our M. P. CS remain extremely strong.
And we believe people will continue to be attracted to our highly desirable communities, which offer an unmatched quality of life abundant amenities short commutes and improved work life balance.
Shifting over to the Seaport, we continued to advance our vision to revitalize this historic neighborhood, most notably with the highly anticipated opening of the Tin building by John George We are extremely pleased to make this one time marketplace a reality together with our joint venture partner World renowned chef.
John George.
With more than 20 different food and beverage experiences from around the world, There's something for everyone at the Tin building.
In early August we launched a soft opening for the Tin building, which was met with large crowds and much acclaim from media in late September we celebrated our official grand opening and ramped up operating hours.
With strong foot traffic and sales since the Grand opening I'm pleased to report that we're making steady progress in our efforts to onboard and train additional employees.
As a result, we're adding more service days and we anticipate that the tin building operate at full capacity by the end of the year.
At Pier 17, we had another strong quarter with significant increase in foot traffic driven by private events and an extremely successful summer concert series.
This quarter's lineup, which included 38 concerts 30 of which were sold out netted over 110000 guests to the rooftop.
All of this helped drive increased concession revenues as well as higher customer volumes into our restaurants and retail businesses.
As a result, we saw a 48% increase in our restaurant sales per square foot versus the prior year quarter, helping to drive a strong year over year NOI improvement.
Overall seaport revenue increased to $32 million in the quarter, reflecting a 57% increase over the same period last year.
This improvement resulted in the seaport generating net operating income of $1 $6 million before the company's share of equity losses, which totaled $11 million during the quarter, primarily due to the startup of the tin building.
Overall, we see significant progress at the seaport with.
The Tin building now open we expect to see continued growth in volumes in the months ahead as more and more people come to experience New York city's hottest dining and entertainment destination.
All of this should continue to benefit the seaports financial results going forward and helped to bring this segment closer to stabilization.
With that I'll turn the call over to Dave strife, our head of operations to review the operating asset segment results.
Thank you David.
In the third quarter, our operating asset segment delivered $61 million of net operating income, which was a $2 million or 3% decline from the same period last year.
This was primarily due to the sale of noncore assets, including the three woodlands based hotels and the Riverwalk outlet New Orleans.
These assets generated $3 million in the prior year's quarter. Excluding these divested assets NOI was up $1 million or 2% year over year.
The largest increase in our portfolio was seen in our multifamily assets, which produced quarterly NOI of $12 million, representing a 27% increase versus the prior year.
This improvement was primarily the result of strong lease up at our newest communities as well as strong performance at our stabilized properties.
At the end of the quarter. These assets were all leased in the mid to high 90% range. Despite market pressures many multifamily properties across the U S are experiencing today due to rising rents and affordability.
We believe this is a testament to the demographics of our M. P. CS as well as the attractiveness of our upscale highly of monetized multifamily properties.
With these robust leasing percentages and exceptional demand for rentals in our M. P. C's, we continue to see strong multifamily rent growth.
In the third quarter are in place effective rents increased nearly 13% on average when compared to the same period last year and we can manage some of the highest rents in our markets.
During the quarter, we completed and began leasing units at our latest multifamily development Sterling at Roseland.
Which is experiencing strong initial demand.
With additional multifamily projects under construction and bridge loan Summerlin in downtown Columbia, we continuing to see meaningful opportunities to drive incremental NOI growth as these new projects are completed in the coming quarters.
Office NOI of $29 million increased 3% versus the prior year. This improvement was primarily the result of the roll off of free rent and new leasing activity and a class a office buildings in the woodlands in downtown Columbia.
In these markets as well as summer line, we continue to see heightened demand from companies, who are looking for a business friendly environment with a talented pool of employees and high quality of life.
Our Premier office assets, which offer high quality amenity and a walkable urban setting with convenient access to shopping dining and entertainment continue to attract new tenants.
As evidenced during the third quarter, we executed nearly 94000 square feet in new office leases in the woodlands, including 60000 square feet at 90, 950 would like for US, bringing this building to 59% leased.
In Summerlin, we've had similar success with our newest class a office tower 1700 pavilion.
Seeing unprecedented pre leasing ahead of its completion later this year Jay will talk more about that in a moment.
And retail NOI of $13 million reflected a $2 million decrease compared to the prior year. This reduction was primarily due to a onetime rent payments at ward village during 2021, which were associated with recovery from the Covid pandemic.
The remainder of our retail portfolio performed well with improved occupancy in all of our markets.
Finally, the Las Vegas ballpark generated $4 million of NOI, representing a reduction of $1 $6 million compared to the prior year period.
The decline was primarily due to poor weather during the quarter fewer games played in the current year as well as outsized fan attendance in 2020 one after COVID-19 restrictions were lifted.
With that I will now turn it over to our President Jay Bras.
Thank you, Dave and good morning during.
During the third quarter, we continued to make great progress with our development pipeline of multifamily office and medical office buildings in Houston, Las Vegas, and that won't be up.
At Ward village, we completed construction at COO, our sixth condo tower, and we launched our latest condo development coli.
Starting with Houston, we completed three projects during the quarter, the largest of which was sterling that bridge that a 358 unit multifamily development.
Briggs and central we welcomed our first residents in mid September and experienced solid initial lease up the complex already 16% leased as of quarter end.
In the woodlands, we delivered the 20000 square foot Memorial Hermann built to suit Medical office building ahead of schedule.
Lastly, we completed construction of the Kirby ice.
Which is located in the heart of the woodlands this venue, which both the longest bar in Texas opened in late September with much celebration.
Elsewhere in Houston, we continued to make good progress with Creekside Park Medical Plaza in the woodlands, which we expect will be completed in the fourth quarter.
There are 263 year single family build to rent projects wingspan also continues to advance with initial construction well underway, we expect to start welcoming residents in early 2024.
Just last week, we announced our plans to develop village green bricks and central.
This 23 acre mixed use site will be anchored by an HEB grocery store and will also include our first office project in Virginia, which will also be our first mass timber development.
We will provide more information on these projects as construction begins in early 2023.
In Las Vegas, we are nearing completion of 1700 pavilion, our newest class a office tower in downtown Seattle, and there's 267000 square foot building has seen tremendous demand and was already 51% leased with another 40% in LOI or lease negotiation at the end of October .
We expect this building will be completed late in the fourth quarter.
We're also making steady progress with tanager echo our newest multifamily offering in the summer.
This 294 units LEED silver development will be unlike any other in the Las Vegas Valley.
We expect this project will welcome its first residents in the first quarter of 2023.
Switching to downtown Columbia, our newest multifamily project part, though is also nearing completion. This leap platen complex located in the Merriweather District will have 472 units with another 32000 square feet of ground floor retail space.
We started leasing in October and have already welcomed our first residents.
The lakefront district, we commenced construction on our 86000 square foot medical office building during the third quarter as well as development is already 21% pre leased and will serve as the next health and wellness destination for the S&P State, we expect to complete construction in early 2024.
Looking quickly at the Seaport as David mentioned, we completed the Tin building celebrated its grand opening in late September .
In the Uplands design development and initial foundation construction continued at 250 water straight however, during the summer or third party lawsuit was filed challenging the city of New York's approval project and a temporary restraining order was granted pending a hearing in early December .
Till that time, we had paused construction efforts, but have been allowed to continue with site remediation work.
We believe this case has no merit and we will continue to vigorously contest. The claims we will keep you apprised as more information becomes available.
Turning to ward village in Hawaii, we generated $418 $6 million in condo sales revenue during the quarter, including the closing of 398 units for $413 million at cooler, which was completed in mid September .
As of quarter end. This tower was 97% sold with 19 units remaining and subsequent to quarter end. We closed on another 146 condos that grew a lot representing an additional 202 million in net revenue.
These closings will be reflected in our fourth quarter earnings in.
In the third quarter. We also closed on 60 units at E generating another $5 6 million in revenue. This tower ended the quarter, 95% sold with 37 units remaining there.
Slight headwinds in the housing market pre sales activity at the Park Ward village and you Lana have remained strong we contracted 42 units at these towers during the quarter as of September 30th The Park was 91% pre sold and you Wanna was 96% pre salt.
We broke ground on the park and we expect to start construction on Yolanda late in the fourth quarter.
With significant demand quality housing in Honolulu, we launched pre sales at our 10th condo tower coli in late September we have already pre sold more than 40% of the units because as tower and we expect to see strong pre sales momentum.
That's through the fourth quarter.
All of the pre sales at these towers as well as Victoria place, which has been fully sold out for some time represent significant revenue in 'twenty four 'twenty five and 2026 that is secured by nonrefundable cash deposits. These projects are expected to provide meaningful contributions to the company, which we use to fund future.
Your developments in our pipeline and with that I will hand, the call over to our CFO Carlos <unk>.
Thank you Jay.
Our results in the third quarter demonstrated the strength of our business model as we continue to benefit from strong demand throughout our communities despite headwinds from the real estate market.
In summary, during the third quarter.
We reported net income of $108 $1 million or $2.19 per diluted share compared to net income of $4 1 million or seven cents per diluted share during the prior year period.
Alright, let me see is generating strong EBITDA of 75 million and increased 39% year on year, despite reduced superfast sales in summerlin.
This improvement was primarily driven by lines up in Brooklyn favorable build their price participation revenue strong appreciation in the average price per residential acre salt and the equity contribution from the summit.
Our operating Athens delivered $61 million of NOI with improvements in multifamily and office.
Well, that's represented about 3% year on year reduction when excluding the impact of our debt.
As with all of the asset and the outlet collection I'd, rather walk operating assets NOI increased one point to a million or 2%.
At Ward village, we call some 404 condo units, resulting in $123.3 million on the profit at a 30% margin.
He has a strong base of 3000 projects in development.
At the Seaport, we recorded a $9 $5 million NOI loss, primarily as a result, the startup costs that had been building.
However, we have been tremendous increase in foot traffic and sales for men as restaurant concert and private event as evidenced by a 10% increase.
And revenue compared to the prior year period.
Overall, we're very pleased with the performance of our <unk>.
Segment, the third quarter and year to date.
Together with a favorable outlook for the fourth quarter you have increased.
All your guidance for the empathy and operating segments.
Hum.
Difficult challenges in the housing market, we now expect full year EBIT declined only 10 and 17% year on year.
Which compares favorably to our prior guidance of a 25% to 30% reduction.
Notwithstanding the races right M.
Empathy with he can be inherently more uncertain that the market conditions and the timing of closings or large landfills transaction.
An operating asset with strong brand growth and lease up in multifamily new office leases and favorable retail result.
We now expect full year, NOI will increase 3% to 5% compared to 2021.
This is an improvement relative to our prior guidance.
What's contemplated at Youre up to 2% year on year NOI reduction.
With respect to share buyback during the third quarter, where sports is nearly 369000 shares from stock for 25 $44 million.
Those shares were repurchased at an average price of $69, which is well below intrinsic value.
At the end of the quarter, we still have $50 million buyback capacity.
Looking at our balance sheet at the end of the quarter, we had $355 million of cash on hand.
The timing on the closing that's Kola of which nearly 150 units were completed in early October will generate more than $150 million of additional cash flow in the fourth quarter, providing us with plenty of capital to advance our development pipeline.
At the end of the third quarter, the remaining equity contribution needed to fund our development projects was $372 million before anticipated new financings or wingspan in Brooklyn, and the Columbia Medical Office building, which we expect will close later this year or early in 2023.
From a debt perspective, we have $4 billion outstanding at the end of the quarter with limited near term maturities and approximately 82% due in 2026 or later.
On the financing side, we closed on a $392 million construction loan for the development of the Park Ward village in Hawaii.
During this rising rate environment. It is important to note that 86% of our debt is either fixed or swapped to a fixed rate, which significantly mitigates our interest rate risk.
With that I would like to turn the call back over to David.
Thank you Carlos and with that let's begin the Q&A portion of the call. We'll start by answering the first few questions that were generated by state technology voted on by our shareholders, they're gonna be read by Eric Eric We read the first question.
Sure David.
The first question is can you give an update on the debt and covenant compliance Carlos will take that one.
Yeah.
Sure. Thank you Eric.
In the third quarter, we did not meet the debt service coverage ratio of four one Hughes landing do Hughes landing and for water was killed square.
So let me first say that none of them have a material impact on our liquidity or our ability to operate the assets because the consequence of not meeting the ratio gets to trigger a cash trap, which means that the cash generated by the assets have to stay at the asset and cannot be stopped at corporate but we can use.
Them to run the assets.
The first do in the first two buildings. The issue is related to tenant move outs that we're actively working to release, while in the case of four waterway and as a result of an early renewal with free rent. So that issue will cure as that free rent burns out.
Okay. Thanks Carlos.
The second question is with rates rising in T bills now at 4% what are the parameters for moving forward with a new development project.
Does the seven or 8% return on cost model still work.
Well, it's very much a project by project decision I mean like everyone else, we're being squeezed by higher cap rates and increased construction costs, but we still benefit more than most by the strength of our masterplan communities, which allows us to outperform in terms of revenue and also avoid overbuilding. So if we believe the projects economics are feasible in our favor.
But in the long term and they can add value to our portfolio will continue to develop where possible always based on current market factors and appropriate risk adjusted economics.
Worth noting that each of these projects are all important on their own are also important in terms of how they combined to impact the rest of the community and drive greater value.
Enviable land bank, so that drives a lot of our decisions.
Thanks Jay.
Third question is on your Investor Relations page you have a set of key metrics.
One of those is historical return on equity and its reported to be 25% could you provide some guidance on how this number could be verified and example of numbers for an actual project be great as well Carlos Thanks, Erik I plan first and then we'll move on to the example, he said if it is very helpful. So this is the cash on cash return essentially.
Their cashless or debt service divided by the equity in our project and it is something that we update on a quarterly basis. So the number being quiet right now 25% is what we had as of June 30, and again it will be updated every quarter and this is a result of the gastro gastric turns were all assets developed by us over time.
I'm, including those that have been sold.
Now to get to the example, I using one they've actually one of our multifamily projects in the woodlands, one as such has a 42% cash on cash return which is.
Weighted by taking.
The stabilized NOI of $17 2 million, which you can find that the supplemental.
Less the debt service of $3 3 million, which is not directly found but we do publish the principal amount and the rate and the property level debt section of the supplemental and that net $3 9 million of cash seven stabilized NOI minus $3 three of that service $3 9 million of free cash which is the right.
By the equity in the project of $9 3 million and that's how we get to a 42% return for one lakes edge.
Great. Thanks Carlos.
Our next question is how should we think about the value of your 1 million square foot of retail in Hawaii. After fully stabilize Dave do you want to take that one sure well given that I lived there for seven years I feel like I have a pretty good feel for it you know the location in my mind is irreplaceable across the street from our 100 acre Beach Park did the base of our vertical MPC.
He just halfway between downtown Honolulu, and Waikiki, we currently have a mix of older legacy assets in the new retail assets.
As we continue to develop the community we demolished the older product and replace it with newer better retail at the base of our condo buildings. When we do this we increased rental rates of around $20 triple net on average to somewhere around $75 Triple net.
And as more people move into the neighborhood. We expect this retail performance just continues to increase.
Thanks, Dave.
We'll take one more question does the company maintained its position as a price maker and not a price taker regarding land sales.
Due to new economic conditions change, who has the power in these negotiations, but I think this past quarter's results I can clearly demonstrate that we're still a price maker.
We had a tough economic environment this past quarter, but we continued to experience increasing price per acre sold in all of our M. P. CS.
Clearly as we said in our prepared remarks, we're going to only sell land to keep up with underlying home sales.
And if we don't like the price that homebuilders are willing to pay we won't sell we have the precious limited resource, especially in an area like we're sitting in today in summerlin outside of Las Vegas, which is very much land constrained and we're going to wait because we have that precious resource that will continue to appreciate if we don't like the price in any given quarter or any given year.
With that said, we haven't seen deterioration we've seen increases and we're excited about what we'll see for the rest of this year.
Alright, Thanks, Steve.
Alright, Sir with that we'll open the lines for Q&A can we have the first the first question. Please.
Thank you My first question comes from Anthony <unk> with Jpmorgan. Please go ahead.
Thank you.
My first question just on builder price participations, and like I think $52 million year to date and just wanted to try to get ahead of 2023 and as we think about where that could go like.
Does that kind of fade away because you know, perhaps you know whatever the base pricing was for the stuff that might get sold next year is different or I guess, how should we think about just the risk around you know that that number looking ahead, because it just seems to be running pretty high.
It's a great question, Tony and I appreciate you asking it look at it.
It's a number that is in this year and last year very high outsized relative to our expectations.
And I'm going to do my best to answer this question without giving you any sort of guidance on 'twenty three because we're not in a position to do that in this call, but I do think that our expectations would be that that would return to more normalized levels.
This is clearly elevated over the past several quarters and if were.
Really good at selling land at the absolute right price that should be zero.
Luckily for US people continue to invest in upgrades in their homes pay per view premiums and we've seen price appreciation in the underlying home sales in each of our Mpc's, which has driven a very favorable builder price participation over the past several quarters and years.
Okay understand thanks for that and then just a question on the condo pre sales here at 40% and a month in a tough market.
Can you just talk about maybe where the demand is coming from and just you know comfort that yeah, you know kind of get the rest of that done.
Yeah, absolutely. So the demand we've seen is largely consistent it's you know have to 55% of buyers local to the island.
It's still about 30% Asian buyers, primarily out of Japan, and we saw an increase compared to our past couple of towers modest increase through our job our Tokyo sales Gallery, and we're still seeing strong demand from mainland U S. Buyers. It's a very consistent mix of what we've talked about and published in the past across our towers.
Fluctuated a couple of percent here or there in terms of our optimism for <unk>.
Contracting and selling the remaining 60% of the building we feel great.
You look theres only so many.
As you can contract and it takes a while for those deposits to go hard and we had a very short window. This quarter, we feel very good that that's a number that will continue to climb throughout the rest of this year.
Okay got it and then just last one if I could on.
250 water Street I understand how it's tied up in AR and the lawsuit, but does that mean in December we get an answer or can that just drag out a lot longer and I know you've got some debt that that's on that just trying to understand what you do with that.
But I I I really can't comment on the timing of the temporary restraining order our ability to get lifted or what will happen in the court system.
We strongly believe that this is a suite without merit and we're going to fight vigorously and as we have an update on the timing we will absolutely be sure to communicate it the loan that we have on the asset we feel is completely supported by the value. That's there, especially given that since that loan was put in place. We've had the approval of the transfer the air rights, which has done nothing but.
The increase the value. So we feel strong that we're gonna be able to refinance that debt whether or not we have the.
Temporary restraining order lifted which again like we said we believe is without merit.
Okay got it thank you.
Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning, good morning down there.
I gave it a yeah I appreciate that you don't want to talk about 2023 guidance and you know me well enough to know probably where I'm going but my question is this you guys took up your land sale, Yeah land sales are not going to be down as much as you expected. This year, we all know whats the mix quarter to.
What are you know if some super pads or high end land closes that obviously.
Impacts I appreciate your comments that the high end yeah. The bulkier home sale prices continue to go up the low end, which I'm going to guess, it's more woodland Hills, you know it was more affected but in general it sounds like not that your immune from the 7% mortgage world.
At your communities are far less impacted so maybe you can just give some perspective because it sounds like you know the operations of the business are going well at the NOI.
The landfill pricing is holding up better so I'm, just trying to see where the weaknesses are and as we think about next year should we can you know are we thinking about you know major declines in land sales because you don't like pricing or what you're hearing now from the builders is they're willing to pay the prices per acre.
They really want to be in your communities and they don't really have a lot of inventory so they sort of need to be there because that's where the buyers are I'm just trying to get a sense of how your communities are performing relative to the market and maybe youre increasing share because your communities offer more than the average.
And do you see out there.
Yeah, Alex it's a great question and it's one that I'll try and answer as best I can look I think that our homebuilder partners.
And homebuyers want to be in our MPC.
We have an unmatched quality of life incredible amenities short commutes improve work life balance.
Just a lower cost of living that's driven so many homebuyer decisions and therefore homebuilder demand for our land.
Clearly home sales are slowing we have higher interest rates, we have inflationary pressures fear of a recession, it's having an impact I believe we've been outperforming and I believe will continue to outperform based on the quality of our communities.
We're in a much different spot in this potential housing downturn than the last.
Going into the last housing downturn, we had meaningfully overbuilt new homes ahead of household formation.
And that trend is completely different today and if you look at some of the data that comes out of Freddie and Fannie and National Research. We estimate that were short almost four five to $4 8 million homes today.
Coupled that with record low vacant developed lot inventories in the hands of our homebuilders.
I would argue 20 months as equilibrium and in Phoenix, We're at 14 in Houston were at about 13.
And here in Summerlin were seven to eight months of supply which is record lows.
So I think the strength that we saw this quarter and our confidence in being able to take up guidance for the remainder of this year is the result of the outperformance we've seen in our communities the record low land inventories homebuilders have.
And the continued demand for homes.
And unlike the past cycle Alex Ware.
A home buyer coming into the market knew had their choice of way too many resell on the market.
We see fewer and fewer resale inventory is those people that are sitting in their home locked into a 3% mortgage arent in a rush to trade out to a seven.
So new buyers coming into this market are really left with new new homes as their choice.
Okay. So David let me ask you this.
You break out your portfolio you said the low end is being impacted what percent of your portfolio of land sales or however, you want to mention that well break it out is it 80% of your landfills target the upper end that aren't really being impacted by some 50% just trying to get sort of a breakout as far as how much of your land goes to towards the homes that.
Arent seeing an impact by 7% mortgages versus the lower end homes starter homes that are seeing an impact yeah. So are our landfill strategy is to meet the underlying home sales and to fill the deepest pocket of demand. So in any given quarter. Our land sales could be directed to more higher end homes or it could be directed to more starter homes and.
Our land sales will adjust to meet that demand quarter over quarter and to that end I think based on the results that we've seen that we mentioned in the prepared remarks for the next several quarters, we will see more lots sold to those that are still driving the home purchasing and less to the more starter homes.
It's incumbent on Us Alex and we do this and we've talked about this I'm sure that we pushed to make sure that we have all price points available on the ground to the best we can in all of our communities. It maximizes absorption and maximizes vibrancy of the community that maximizes the diversity of the new families that we welcome into our communities. So our job is to make sure that we.
We have lots on the ground to meet all of those price points at all times.
Okay.
Next question is.
This is probably a yes no it sounds like the condos in Hawaii, there's no impact there like they sell regardless, they're sort of immune to mortgage rates et cetera is that a fair assessment.
I would say based on the sales that we experienced this quarter. Both closing out cooler continued absorption of all the continued pre sales of the park Ward village and <unk> as well as launching coli. So far we haven't seen a meaningful impact.
Change or dampening of demand based on any of those other factors.
Okay final question I appreciate your time, but final question, Yeah Laboratory things you mentioned around the Tin building.
Obviously labor in general at the Seaport is this delay does this push out by a few years your your planned stabilization.
It doesn't seem like the labor market is going to get better anytime in the near term. So are you guys now assuming a longer stabilization to profitability or what's your view given what's gone on so far with with labor.
Yeah.
It's tough for me to quantify what that delay is really changed in terms of the timeline to stabilization Alex it's not years it's months.
As we said we expect to be opened fully at seven days by the end of this year early January and we're chipping away at hiring every week, adding you know 15 to 25, new folks that are coming to join the team and learn from you know probably the best coloring our expert in the world in my opinion, and John George and helping out the Tin building. So we're chipping away we.
Feel good that were on our roadmap now to getting opened to seven days, we would've liked to have been open seven days in September .
But if that becomes January instead of September .
Sure. It's good to stabilization being pushed off three to four months, absolutely I don't know that my Crystal ball is accurate enough to say exactly the day that we expect it to be stabilized. So it's really hard to quantify what this could mean.
Thank you.
If you'd like to ask a question. Please press Star then one at this time our.
Our next question comes from Amit <unk>.
Great.
Dws financial please go ahead.
Good morning.
First a follow up on the ward village.
You sold a couple of more units and COO in Q3 are you seeing any feedback from these customers and from our sales associates to the sales process that you're seeing there.
Oh look I think that our job is to constantly take the feedback throughout that process to try to improve it and it's something that our sales team led by Bonnie Wiedmeyer on the ground. There in ward village does an excellent job and I think that.
That excellence has shown up in our results and our ability to continue to sell.
Okay and then.
There were some reports last a few months from new homebuilders, we're seeking out investors buy homes in bulk for rental homes are you exploring ways to expand Howard Hughes footprint and single family rental space.
Yeah, I think I think the launch of our first single family for rent community wingspan Enbridge lenses evidence of that.
Very much.
Make sure that that as we sell land to homebuilders are those homebuilders are selling homes.
We don't typically allows spec building.
And we're pretty.
Maniacal about what we allow our homebuilding partners to do long term and that's building homes, it's not flipping land or using it for another purpose. It's clearly the market. This will be for this purpose of these size lots and these price homes. So we haven't seen that phenomenon in our community.
But look we are optimistic about our single family for rent community wingspan Enbridge Lynn, we think theres tremendous demand and we can't wait to get that project completed.
Okay and last question is regarding the maturities that are coming up any plans on how to deal with that or do you want to refinance and adding more debt at higher interest rate or are you just going to divert.
Cash flow from stock buybacks that to the debt maturity anything you'd add there.
Our expectation is that the all the near term maturities and we're always thinking about two years ahead will be refinanced at similar or either slightly higher slightly lower proceeds and what currently are outstanding.
But does the current environment actually allow that though interest rates have gone up quite a bit since the maturities for our coming up so.
So far so good we feel we feel comfortable with that comment.
Okay. Thank you.
Similarly, the NOI and the rental rates that were achieving on these assets have also gone up meaningfully over the past several years, so our ability to refinance at similar proceeds has not been impeded to date.
Okay. That's helpful. Thank you.
Okay.
Okay.
Your next question comes from John Kim with BMO Capital. Please go ahead.
Hey, good morning, guys, it's Eric on for John .
Can you just just thinking about the build their price participation can you just remind us the dynamics and the drivers behind that.
Sure Yeah, absolutely so when we sell land to homebuilders, whether that's been a super pad or a lot.
The typical contract that we sign.
Based on a hard deposit at takedown schedule, a price per acre and in residual participation known as builder price participation, which is typically between 16 and 20%. So illustrative Lee if we assume that build a price participation is 20% and.
And we sold land to a homebuilder, where we thought the end home price would be $500000.
So our implied land value there based on 20% is a 100000.
If in fact that home is sold for 600000 as a result of new premium upgraded quality of finishes that the homebuyer Alexa put in their home or other areas to drive the price higher just depreciation for example, we're going to participate in 20% of that Delta. So if the 500000 dollar home is sold for 600.
We received a 20000 dollar check builder price participation.
Okay. That's helpful and then.
Just based on the large super pads sold in the fourth quarter of last year.
Given given the housing prices relatively strong in the upper end market is it is it safe to assume that there's a potential upside in the buildup price participation on those houses do come online that are sold.
Yeah.
<unk>.
Eric It is really hard for me to predict what the price of the home is going to be when they are sold there could be 369 or 12 months from now.
Sure I'd love to think that they're going to continue to go up and we will see participation, but thats not something im willing to predict.
Okay, that's fair.
Maybe switching to condos on the margins they came in a bit above our expectations just kind of curious what were the drivers there and how should we be thinking about what was closed in the fourth quarter.
Yeah.
Yeah.
Look I think it's it tends to bounce around a little bit and what we've always said is that we're targeting a 30% margin on average across all of our towers.
Some of those towers, a front row, which typically have a higher margin summer second row, and third row, which are typically a slightly lower margin than the front row.
In general we expect to achieve about 30% and this past quarter, we were able to get there, especially on cooler than I think some of the price appreciation of price increases that we've had as we've gone through the sales process of these towers has helped solidify strong margins.
Okay. That's helpful.
And then last one on the same store that you guys provide in the breakout for the the office segment. It seems like occupancy that's up year over here.
But our same store NOI ticked down just a little bit I'm. Just curious is there any lease termination fees embedded in the numbers there or kind of can you just walk me through.
The results.
In the office or overall.
In the office, but no.
Yeah. So in the office, we've seen positive absorption as noted by the increase in occupancy, but with new leasing and positive absorption comes free rent.
And our same store results, we published on a cash basis and on a GAAP basis.
I can't pay my bills with GAAP rent I can only pay with cash rent, which is why that is why we publish.
Perfect. Thank you guys.
Yeah.
The next question comes from Alex Barron.
Please go ahead.
Yeah, Hi, guys. Thanks for taking my questions I wanted to focus a little bit on the U masterplan in Phoenix.
First of all can you guys.
Just talk about you know.
What was forget the fact that rates are going up or if we're thinking long term, what what was sort of the expected.
Run rate as far as how many lots would sell per year and over how many years with this project you know eventually fell out.
Yeah, No. It's a great question and a 37000 acres, it's the largest master planned community in our company and one that we projected a sellout in the 40 to 50 year time range.
Clearly when you're pushing projections out that far its very difficult to be entirely accurate, which is why I kind of gave you that range that you could drive a truck through.
Look we're anticipating that we're going to sell our first thousand lots to homebuilders. This year, we were hopeful that we would be able to get it done in 'twenty. Two I think that will actually happen in 'twenty. Three now just based on some of the labor shortages time constraints and ability to get dirt moving on the ground to get those lots into the hands of homebuilders.
We still see demand, we still have great conversations with homebuilders, we see a need in Phoenix in an under supply that needs to be met.
But again, we're in this for the long game and unless we're going to be able to sell that land at an appropriate price.
We're not in a rush to get rid of anything at a discount.
Yeah, and that's why I was I started up I guess my question, so with the sort of long term picture in mind, because obviously I think we all can agree that Phoenix is a good.
Long term attractive market that said short term.
That market I think is under a lot of stress.
I'm curious you know where do you guys see the the range of prices starting off.
For those homes that that you would anticipate selling lots to the builders in 2023 like how low.
You know what what the builders are need to price those homes, I guess for things to sort of work and get going on the right foot.
But our expectation is that we're gonna be able to sell lots at 80 to 85000 per lot, which based on lot sizing today, which is more modest than we're talking about entry level homes in that market translates to you know call it three to $325000 per acre.
Clearly in the early stages of any new MPC.
You're welcoming residents residents that are typically new homebuyers more moderately priced homes and over time, we believe based on the quality of the Master plan communities that we develop we continue to diversify and command a premium from those areas around us we've seen it time and time again and even in the woodland Hills, which is only really in its fourth year of selling we're at a meaningful.
Premium compared to the overall northeast the market around us and.
And we expect to see similar performance in <unk>.
That said again, we're not in a desperate situation, we don't need to sell that land unless there's demand there from homebuilders unless we're getting the appropriate price for a lot in price per acre and we're not going to sell that land because we very much value maintaining the quality standards desirability and the amenities that we think make our community special.
Okay.
Great and so in terms of lot size like what's the minimum lot size.
You know about builder would be able to start an entry level community.
It's the type of number that can be all over the board.
Wanna.
I mean, the range of what we're looking at right now in the first phase of Florio and lots of we're talking about are across.
10 to 12 different smaller subdivisions with varying lot sizes and varying prices of homes. So that we don't have 10 different homebuilders building all the same size home at all the same price point.
So our job is to maintain that diversity, even if that diversity is in a tighter band of new homes and entry level versus a much wider band that we see here in summer.
Yes.
Okay, but I'm, saying like what they started at like 40 foot wide lots and is there going to be any attached communities as well or is that all expected to be more like single family type launch.
Our expectation right now is that it will be all single family. It will be detached and yes. We can have lots is 40 foot foots in.
Going up from there.
Got it okay. Thanks, and best of luck guys. Thank you. Thanks, so much.
This concludes our question and answer session I would like to turn the conference back over to David for any closing remarks.
Thank you all for joining US today, we look forward to seeing you are in our investor relation event in the near future. If theres any follow up or additional questions. We're always here to help please don't be shy and thank you again for joining us.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.