Q4 2022 Howard Hughes Corp Earnings Call
Good morning, and welcome to the Howard Hughes Corporation fourth quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
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Please note this event is being recorded.
I would now let's turn the conference airports here, Eric Holcomb Senior Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to the Howard Hughes corporations fourth quarter 2022 earnings call with me today are David O'reilly Chief Executive Officer.
Hey, Krause, President Carlos <unk>, Chief Financial Officer, Dave Stripes head of operations and Peter Riley General Counsel before we begin I would like to direct you to our website Howard Hughes Dot Com, where you can download both our fourth 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.
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 fourth 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 her.
Our CEO David O'reilly.
Thank you Eric and good morning, everyone welcome to our fourth quarter earnings call.
On our call today I'm going to begin with a recap of our outstanding year and cover the segment highlights for our master planned communities in the seaport.
Dave stripe will cover the performance of our operating assets followed by remarks from Jay Cross, who will provide updates on our development projects in ward village.
Finally, Carlos the lab will provide a review of our financial results before we open the lines up for Q&A.
I am pleased to report that our fourth quarter results were solid and capped off another exceptional year for each H C. <unk>.
Considering 2022 what are your headline by rising inflation and falling new home sales are results were nothing short of outstanding and demonstrated the resiliency of our unique portfolio of assets, which continued to prove its ability to withstand periods of economic uncertainty.
Highlights of the year, including strong MPC EBT of $283 million.
Aided by record residential price per acre and builder price participation revenue.
Our operating assets delivered record NOI of $239 million, a 6% increase over 2020 one.
At Ward village, we continued to experience an exceptional pace of condo sales contracting to sell a record number of units in delivering $677 million in net revenue with strong gross margins.
And at the Seaport foot traffic rose nearly 50% year over year significantly increasing revenue and reducing NOI losses before the impact of the equity losses from the Tin building.
With these operating results generating significant cash flow as well as our strong balance sheet. We were able to continue the deployment of considerable capital into projects that we believe will unlock substantial value over the long term.
And 2022 we delivered six new projects, including a residential condominium.
388000 square feet of office and retail space.
830 multifamily units.
The completed operating assets are projected stabilized NOI of $25 million and implied yield on cost of 7%.
Further we commenced construction on our eighth condo project as well as 233000 square feet of office and our first single family for rent projects.
We currently estimate these operating assets will deliver combined NOI of $12 million with a six 7% yield on cost at stabilization.
Digging into our MPC segment.
In the fourth quarter, we continued to deliver strong results generating $77 million of E. P. T with solid land sales and a 51% increase in residential price breaker.
We also benefited from record build their price participation revenue of $20 million as home prices in our communities remains strong.
Similarly, the results of the quarter contributed to full year M. P. C E D T up $283 million.
Which reflected an 11% reduction compared to our record results in 2021.
When excluding equity in earnings from the summit, which declined $61 million year over year.
A result of its tremendous success in current lack of inventory.
P C EBT increased $27 million compared to 2021.
This growth was ultimately driven by strong land sales, a 32% increase in price per acre sold and record full year build their price participation revenue of $72 million.
In our Houston region, Ridgeland delivered another outstanding quarter with more than 60 residential acres sold at an average price of $555000 per acre.
We also closed on the sale of two commercial sites totaling nearly 85 acres, which generated more than $21 million of revenue.
With continued strong builder price participation.
Originally reported nearly $43 million of E B T in a quarter.
This performance capped off a fantastic year for Brooklyn headlined by an increase in acres sold and record average price per acre of $544000 and the highest build their price participation revenue and the Mpc's history.
In the woodlands, we commenced residential lot sales at ARIA aisle, which encompasses 25 waterfront lots on lake woodlands.
These custom lot closings, which generated $22 million of revenue in the fourth quarter included more than seven acre sold for a record $3 million per acre.
And the woodland Hills, we experienced a 50% reduction in residential acres sold partially offset by a 12% increase in price per acre.
For the year, we sold 62 residential acres at a record average price per acre of $382000.
It also benefited from our first commercial land sale and strong builder price participation revenue.
Out west in Summerlin, we closed on the sale of two Super pad sites totaling 24 acres during the quarter.
Although this represented a significant year over year reduction when compared to the massive 216 acres Super pad sale that closed in the prior year.
We achieved a new record price per acre of nearly $1.3 million in further growth and build their price participation revenue.
As previously mentioned, we experienced a significant $61 million reduction in equity earnings from the summit during the year.
It's extremely successful joint venture with discovery land has limited lots remaining in inventory pending the upcoming development of phase two.
Which will include another 54 acres of land for 28 custom home sites and commence sales later this year.
Finally in the Phoenix West Valley, we celebrated our official groundbreaking of terror ballast in late October with more than 200 key stakeholders in attendance.
We continue to work diligently in Florida the communities first village.
<unk> grading and in selling the infrastructure needed for more than 1000 residential lives.
To facilitate this development the floor Hill joint venture closed on $165 million credit facility that will fund horizontal development investments in this village.
We currently expect lot sales will commence in the second half of this year.
Looking at new home sales across all regions as expected we experienced a further reduction in the quarter with a total of 251 homes sold.
But a year homebuilders in our MPC, you sold 1574 homes, representing a 43% reduction compared to the record sales in 2021.
The reduction was largely attributable to summerlin, we saw 51% decline.
In Houston Lower home sales were also recorded Enbridge land in the woodlands hills, but a much lower magnitude of 21% and 38% respectively.
To encourage increased sales in the new year, many of our homebuilder partners are increasing incentives and offering reduced interest rates to attract homebuyers.
This is having a positive effect on sales traffic throughout our communities and has resulted in increased home sales and reduced cancellation rates on existing inventory.
While it remains very early we're cautiously optimistic given the increased pace of sales in our empty seats and markets. Thus far in 2023.
With respect to future land sales, Carlos who will discuss our 2023 guidance in a minute.
But we do expect to see a reduction in acres sold in the short term as we continue our discipline of only selling land to meet the underlying demand.
Long term many of our homebuilders are eager to purchase additional land to meet demand in the years ahead with what inventories in Houston, Las Vegas, and Phoenix remaining at near Historic lows.
However for right now many builders are in a wait and see mode, which we expect will subside as we progress throughout this year.
As a result, we anticipate land sales this year will decline to more normalized levels seen prior to the pandemic.
Shifting to the seaport, we posted a strong year with a nearly 50% increase in foot traffic compared to the prior year.
At Pier 17, this increase was particularly apparent during our summer concert series, which included 60 shows more than any previous year with over 188000 tickets sold in more than 90% of ticket inventory.
The success of this year's concert series was so incredible that the rooftop was recently named the number one top outdoor music venue in New York City by Red Bull and the number three top worldwide club by Pollster.
The success, we experienced at the Seaport. This year was not limited to the rooftop during the year all of our managed restaurants saw increased demand as locals and tourists returned to the seaport.
We also had an increase in private events, most notably Etfs in the summer and we leased the remaining available space in the Fulton market building to Alexander Wang under a 15 year agreement.
The highlight of the year was without a doubt the grand opening of the Tin building. This 54000 square foot one of a kind marketplace curated in partnership with John George has been met with significant accolades from visitors in the media.
Although we encountered some labor related challenges ramping up which ultimately contributed to reduced hours of operations and significant equity losses in the fourth quarter.
We achieved seven day per week operations in December .
We fully expect the increased operating hours and full scale operations will help to improve performance for their spend youre going forward.
Overall, the seaport generated full year revenue of $88 million or 61% increase compared to 2021.
Excluding equity losses generated at the Tin building since its opening seaport, NOI losses improved $8 million or 44% year over year.
This improvement highlights the appeal of this iconic neighborhood, which is firmly establishing itself as a premier dining and entertainment destination in New York City.
I'll now hand, the call back over to Dave stripe.
Thank you David in.
In the fourth quarter, our operating assets continued their solid performance exceeding our expectations and delivering $55 million of NOI, including the contribution from unconsolidated ventures.
For the full year, we generated a record NOI of $239 million, which represented a 6% increase relative to 2021.
Excluding our divested hospitality and retail assets NOI increased 9% year over year.
Yeah.
Most significant increase was seen in our multifamily portfolio, which generated fourth quarter NOI of $11 million in full year NOI of $46 million.
For the year. This represented a strong 39% increase primarily driven by the rapid lease up of new properties in the woodlands in downtown Columbia.
Our results were also favorably impacted by strong 12% blended in place rent growth across the portfolio.
Our assets committed some of the highest rents in their markets and at year end, our stabilized properties were 95% leased which is a testament to the quality of our product and our highly and monetize locations.
With strong demand in our markets. We continue to develop best in class assets, including Starling at bridge loan, which was placed into service late in the third quarter and he's already 35% leased as of year end.
Similarly in the fourth quarter, we completed and began leasing units at Marlow in downtown Columbia, which was recently named by wallet hub as the best place to rent in America.
With additional multifamily projects under construction and bridge Linda in Summerlin.
We expect meaningful incremental NOI growth in the coming years as these new projects are completed and move towards stabilization.
In office, we produced fourth quarter NOI of $28 million in full year NOI of $111 million.
For the quarter this reflected a 7% year over year reduction.
Primarily as a result of some tenant vacancies, which occurred earlier in 2022 and the woodlands in downtown Columbia.
These reductions were partially offset by strong lease up and the exploration of rent abatements at 6100 Merriweather in 90, 950 Woodlock Forest.
During 2022 we executed approximately 510000 square feet of new or expanded office leases, including 253000 square feet in the woodlands.
155000 square feet in downtown Columbia, and 102000 square feet and some of them.
We expect to benefit from this leasing momentum later in 2023 and into 'twenty 'twenty, four and beyond as office build outs get completed and free rent periods burn off.
Overall this strong leasing performance is a testament to our world class and amenity Rich office assets, which continued to see elevated demand as employers continue to bring their employees back into the office.
With a strong focus on a flight to quality in today's market. We expect to see continued strong leasing momentum in the year ahead.
In retail NOI was $13 million in the fourth quarter, which reflected a 6% reduction compared to the prior year, primarily related to increased operating expenses and reduced retail square footage in Hawaii as a result of the decommissioning of Po, who kind of center to prepare for the development of the park.
Ward village condominiums.
For the full year retail NOI was $52 million or a modest reduction of 2% compared to 2021.
This reduction was primarily due to one time rent payments at ward village during the prior year, which were associated with the recovery from the COVID-19 pandemic.
Overall remainder of our retail portfolio performed well with improved occupancy and leasing percentages in all of our markets.
Finally, our share of NOI from unconsolidated ventures increased 18% in the fourth quarter and 75% for the full year.
This improvement is almost entirely from the absence of net operating losses at the 110, North Wacker office building, which was sold during the first quarter of 2022.
I will now turn the call over to our President Jay Cross.
Thanks, Dave and good morning, everyone in the fourth quarter, we continued to advance our development pipeline with the completion of three office and multifamily projects, including 1700 Pavilion at 266000 square foot office tower in downtown Summerlin, which is already 50% leased Marlow.
472 unit multifamily development in downtown Columbia, which includes 33000 square feet of ground floor retail space and Creek site, Mark Medical Plaza 33000 square foot Medical office building here in the woodlands all of these projects, which were completed on time and on budget are designated as green buildings.
And are projected to provide more than $18 million of incremental NOI upon stabilization.
We also continued to make good progress on our other projects under construction, including tenant Echo 294 unit multifamily complex in downtown Summerlin expected to be completed in the second quarter of this year wingspan are 263 unit single family for rent development Enbridge Linde.
The new South Lake Medical office building in downtown Columbia, which started construction during the third quarter.
In the fourth quarter, we commenced construction on the southern South office 147000 square foot three storey office building, which we expect will be completed later this year or early 'twenty. Four we continued to see strong demand for office product in the Las Vegas Valley, and we believe this new development will be nicely complement our class a portfolio.
In downtown Summerlin overall.
Overall 2022 was an excellent year from a development standpoint, with the completion of six projects encompassing 388000 square feet of office and retail space and 830 multifamily units combined with our four projects underway. All of these projects are expected to contribute incremental annual NOI.
Of nearly $43 million to the company upon stabilization.
Looking quickly at the Seaport, we continued site work at 250 water Street during the fourth quarter, but we paused construction efforts due to a third party lawsuit, which challenge the landmarks Preservation Commission approval of the project.
In January the court ruled in favor of the petitioners and avoided the landmarks approval requiring us to cease all construction work, we strongly disagree with the court decision and subsequently filed an appeal a request for a stay of the corridor that was granted which allowed foundation work to continue and pending a full hearing scheduled for this week.
We will keep you apprised as more information becomes available.
Shifting over to Ward village, we had another tremendous year closing on a 607 condo units, which generated $677 million of net revenue. The majority of these sales are related to the completion of cooler or six condo tower, where we closed 549 units for 620 million.
In that revenue.
151 of these units were closed in the fourth quarter contributing $207 million of net revenue.
At year end cooler was 97% sold.
Also in the fourth quarter, we sold the last remaining condo unit well, yeah, yeah and seven units.
We generated combined net revenue of $11 million.
At the end of the year Ali was 96% sold.
On the construction front, we're making great headway inventory in place as well as the park Ward village, which commence construction late in 2022.
Joy in place is 100% pre sold and we are on track to deliver the tower in early 2024.
The Park Ward village ended the year, 92% pre sold and we expect to complete this tower in 2025.
Finally, with respect to pre sales, we continued to experience a rapid pace of sales at our two new condo buildings launched during 2022.
Lana the community's ninth project consisting of 696 units are fully dedicated workforce housing, where we are 97% pre salt was only 20 units remaining at year end.
Early January we started construction on your lineup and also cloud with some $264 million construction loan for the project.
Coli Ward village is 10th Condo project, consisting of 329 units launched pre sales in late September . This billing ended the year remarkably 73% pre sold.
Overall in 2022, we had a record year contracting to sell 1055 condo units with a sales value of more than $1 $1 billion.
Our projects under construction and in pre sales accounted for 961 of these units, which are secured by nonrefundable deposits. This represents significant revenue, which drove a meaningful contribution to <unk> bottom line upon their completion and provide incremental funding to advance new development projects in the future.
Now I'd like to hand, the call over to our CFO , Carlos <unk>, who will review our financial results.
Thank you Jay and good morning, everyone.
In the first quarter, we continued our strong performance, which contributed to favorable full year results, which exceeded our guidance expectations.
In summary.
Our MPC has produced $77 million. So maybe at the end of the fourth quarter. Despite continued market headwinds, resulting in full year EBIT of $283 million.
This result for 2022 was only 11% lower than our record results in 2021 and was at the upper end of our most recent guidance, which anticipated a 10% to 17% year over year reduction.
Our operating assets delivered $55 million of NOI during the fourth quarter with record full year NOI of $239 million.
Barrick to 2020. One this represented a 6% increase which compares favorably to our most recent guidance, which contemplated a 3% to 5% increase.
When excluding divested assets operating asset NOI increased 9% year over year.
At Ward village, we generated $62 million of con the profit in the quarter, which contributed to full year, calling the profit of $196 million and overall gross margins of 29%.
This also exceeded our guidance expectations, which projected gross margins ranging from $26 five to 27, 5%.
The seaboard, we recorded year over year NOI improvement of 11% in the fourth quarter and 44% in 2022, when excluding losses from unconsolidated adventures of the Tin building.
As expected these new assets Grand opening in late September resulted in sizable equity losses from the fourth quarter, but we anticipate significant improvement going forward as this asset operates at full capacity and starts to move towards stabilization.
Lastly, we reported full year G&A of $82 million, which came in at the lower end of our $80 million to $90 million guidance range.
This represents more than a 30% reduction compared to our pre transformation G&A run rate of approximately $120 million in 2019.
Overall, we are very pleased with our performance in 2022.
Looking forward, we remain very positive about the long term outlook for our businesses, but we do anticipate some near term challenges in 2023.
We sold them ongoing market headwinds.
In our MPC segment, we expect the current soft housing market and reduced new home sales will impact homebuilder demand for new residential acreage.
As a result, we expect MPC EBT will decline, 25% to 35% compared to 2022.
Although this is a sizable reduction from the outsized levels of earnings experienced in recent years. This EBIT levels remain favorable and are comparable to more normal MPC earnings generated during 2017 and 2018.
In operating assets and we anticipate the momentum throughout our multifamily portfolio to drive NOI growth going forward.
And office, however, we expect a modest year over year NOI reduction primarily due to a loss of some office tenants during 2022.
Although we had tremendous success leasing more than 500000 square feet of vacant office space across our portfolio. During 2022 office build out times and rent abatement periods included in many of those new leases will limit NOI growth until later in 2023 and into 'twenty 'twenty four.
Overall, excluding the contribution from divested assets in 2022, we project operating asset NOI will be down 2% to up 2% year over year.
After another successful year of condo closings on ward village during 2022.
We expect reduced condo sales and profit in the near term as our next hour Victoria place is not expected to be delivered until early 2024.
In 2023 condo sales will be driven by closings of remaining units I E and Colo, which are 96% and 97% salt respectively.
As a result condo sales in 2023 are expected to range between 45 and $55 million with a gross margin between 25 and 28%.
Condo sales are expected to materially increase in 'twenty to 'twenty four with Victoria place closings is expected to generate approximately $775 million in revenue.
Yeah.
And finally in 2023, we expect cash G&A to range between 80, and $85 million, which excludes anticipated noncash stock compensation of approximately $5 million.
Looking at asset dispositions during the fourth quarter, we sold two retail properties, including Lake woodlands crossing for $23 million and Craig cited village Green for $28 million.
Total net proceeds were $39 million with Lakewood, Thus crossing now subject to a 99 year ground lease with H H C.
Together with the sale of the outlet collection at Riverwalk as well as our interest and want then north Wacker earlier in the year total net proceeds from asset sales in 2022 were $216 million.
Turning to our balance sheet, we ended the year with $627 million of cash, which leaves us well positioned to deploy capital into our development pipeline.
At the end of the fourth quarter and the remaining equity contribution needed to fund our current projects was $266 million.
From a debt perspective, we had $4 $7 billion outstanding at the end of the year with only $228 million of maturities in the next two years and approximately 87% due in 2026 or later.
During the fourth quarter, we close to nearly $1 billion in financings, including $575 million of permanent debt $219 million of construction loans for our latest developments and a $200 million abscess loan for horizontal development in Brooklyn.
This tremendous financing achievement not only extended our weighted average debt maturity to six years, but it also resulted in 100% of our debt being fixed capped or swapped to a fixed rate, which significantly mitigates our risk in this rising rate environment.
Thank you Carlos before we open up the lines for Q&A I, just want to reiterate the exceptional performance of our assets in 2022.
We have an exceptional portfolio of assets with a robust pipeline of new development ahead of us, which well positions the company for net asset value growth in the years ahead.
As the attractiveness of our communities continues to become more and more apparent. It is no accident that in 2022. The woodlands is once again ranked the best place to live in America.
Summerlin was ranked in the top 10, selling mpc's in the country.
The accolades for our communities and our company's strong results continue to speak to the success of <unk>.
And with the continued development in our pipeline, we know the best is yet to come.
Now, let's start the Q&A portion of the call.
We'll begin by answering a few questions that have been generated by state technology, which will be read by Eric Holcomb.
Eric first question.
Thanks, David the first question today is will you be considering a dividend at some point in the future Carlos do you want to take them.
Thank you, Eric and good morning, everyone.
Well one of the biggest benefits of Hh CSR self funding business model, where we can harvest free cash flow to fund our development pipeline without the need to raise capital.
Or like towards the end of 2020 one in early 2020 to buyback our stock when we see it as a significant discount to intrinsic value increasing our NAV.
At some point if free cash flow has exceeded the development needs and stock buybacks didn't makes sense, we could consider a dividend, but we do not have any plans to implement the dividend as of now.
Thanks Carlos.
Second question is can you. Please give an overview of the water issue in Arizona. According to water authorities in Buckeye, Arizona State University Buckeye is one of them one of the top three cities that will have the largest water water cuts by 2026, David do you want to take this question I'm sure. It's a great question and one we've been answering for awhile.
Issues of water management are inherent in desert environments.
We relied strongly on our external experts as well as our experience in summerlin, where over the past 10 years. The population has doubled but the per capita usage has decreased so much that the overall usage today of water in Las Vegas is less than what it was 10 years ago.
Shifting to Terra balanced development and Florio, our first village, which is about 3000 acres. In 7000 homes is moving ahead as planned Florio has already secured a 100 year certificate of assured water supply from the state of Arizona and that full development will take about 10 years to 12 years to complete.
The balance of terror balances divided into nine phases in the first five phases. We have been awarded an analysis of assured water supply, which is the last step really before receiving a 100 year certificate that Florida has.
Look we're going to continue to support the introduction of modern technology and innovation by collaborating with local state and community leaders to make sure that we're executing this in the right way.
We are long term investors, we're going to own and live in these communities. Our employees live in these communities are kids are going to go to school in these communities. We are absolutely committed to making sure that we protect the precious resources that we need to see the success of all these community. So it has our full attention and we are incredibly confident that work.
Third question is today is can you give an update on that compliance are there any properties still in technical default or about to be closed.
Thank you Eric.
At year end, we had.
Three properties that did not meet the debt service coverage ratios.
Our <unk> landing do Hughes landing and for water with square.
None of them have a material impact on our liquidity or our ability to operate the assets because the noncompliance with regards to cash crop, which simply means that we can still use all the cash flows for the operation of the asset they simply cannot be soaked up the corporate and they don't really have any other any other restrictions.
Further we expect that for waterway squares instances of noncompliance will be cured by the second quarter of this year, because they'd have to do with them with an extension that had free rent that burns off it will get back into compliance while the influences and one in three Hughes landing I related to tenant vacates that we have.
Active projects prospects for war.
Alright, Thanks Kosta <unk>.
I have another one for you Carlos number four does operating in a higher interest rate environment changed that says decisions on specific projects. An example would be for an office or apartment building that was planned a year ago that might not make sense anymore sure. Thanks, Eric well when it comes to the development projects.
Higher interest rates get capitalized to the basis of the asset and they're not really one of the main components of cost for a project.
They do have an impact us and our weighted average cost of capital, which in turn has an impact on our capital allocation decisions.
Internally, we meet every two weeks, we have a capital allocation committee that meets every two weeks. It's a very rigorous process that we take very very seriously and we evaluate all of the projects regardless of where there wasn't initially brought up approved our thought off and we allocate capital appropriately do them projects that achieve the highest.
Risk adjusted returns.
Okay.
Alright, Thanks Carlos.
Last question from say today is please give details on the asset sales in the woodlands, how does the company decide what to sell and what to keep generally doesn't the company prefer to have a monopoly on commercial properties and its mpc's David Yeah, absolutely. It's a great question and I think I'd answer it by going back to.
To the transformation plan in late 2019 that we announced when we shifted the company and we said that we were going to focus on those areas of assets, where we had a competitive advantage in nature of the question references a monopoly on commercial property as well, it's not a monopoly, but we do have outsized control and we do have outside.
<unk> ownership of the office space multifamily space within our communities.
Those assets, we intend to keep at the transformation plan. We said that we were committed to keeping the downtown City center retail that impacts the way a community fields and operates but those one off strip centers that we developed throughout the communities, we didn't see as having a competitive advantage and therefore deemed a noncore.
Creek site village Green in Lake Woodland crossings are perfect example of those noncore outside of the City Center retail strip centers, where we were able to develop these assets and incredible yields and sell them generating a $26 million gain that's a tremendous profit creation opportunity for our shareholders and one that we should execute.
Every day, they can continue to add key free cash flow to the bottom line that can accelerate other developments.
Okay.
Alright, Thanks, David.
Gary will move to the live Q&A now.
We will now begin the question and answer session.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question is from Anthony pay alone with J P. Morgan. Please go ahead.
Great. Thank you maybe I'll start where you just left off on the disposition and general capital allocation side any thoughts or plans for for asset sales in 2023, and then also just thoughts around share buybacks or other capital uses for this year.
Good morning, Toni Thanks for the question David.
We don't have anything planned, but we're always evaluating potential asset sales of those kind of noncore strip retail or really we don't have anything left outside of our MPC is now that we've completed all of those non core dispositions. So we'll maybe see a one off sale of some of those smaller retail centers, it's all going to depend on where the pricing.
Is and where we see the market environment and what the use of that capital could be.
We still feel very strong that our development pipeline can generate outsized risk adjusted returns and we see the vast majority of our capital allocation strategy going there.
We're always going to be on the lookout for those times, where the share price drops below intrinsic value and if those opportunities arise capital could get allocated there, but it's tough to say that this formula formulaic or programmatic in terms of how we allocate capital we have to be nimble and adjust based on the what are some <unk>.
Okay, and then I guess, one follow up on the on the capital side, just the thought process around starting an office building.
In Las Vegas on spec just you have another one that's in lease up and just how you thought about using that capital there and just the demand for space.
This is Jay cross I'll take that one.
<unk> hundred <unk> is continuing to leave us very well and 701 and two summerlin are perhaps the best office buildings in the Vegas market, they're mid rise buildings, which is not a typical vegas product and so we felt that we were missing a segment of the market by not having a three story simpler.
Office product and that's what we're building on spec and what we call a village 15, which is south of the downtown if we didn't start something we wouldn't have any product available for another two or three years in the class a sector and we felt it was important that given Las Vegas.
Intrinsic strengths that we have product that keeps us in the marketplace. So it's only just coming out of the ground, but we're very optimistic that we're going to do well with this building.
Okay. Thanks for that and then just in terms of the Mpc's, Yeah, I know mix plays a big role in terms of pricing and what you do quarter to quarter, but as we think about your guidance for <unk> for 2023.
What type of.
Just more macro backdrop does that assume like I'm trying to just put it into context of a just a U S housing market that started off on a pretty pretty muted foot here this year.
It's been an unusual couple of quarters in the U S housing market Tony.
And I would tell you that as Carlos mentioned in his prepared remarks, we really felt like the past several years have been we've seen outsized results. We've seen incredible results the past two years, especially coming out of the pandemic and when we thought about guidance this year and where we saw with underlying home sales we wanted to maintain our discipline.
Only selling land to keep up with underlying sales.
And we're really cautiously optimistic that we'll be able to achieve those results. This year.
<unk> to see a modest uptick early in 2023, I don't know that we've seen enough data yet to call it a trend but.
But I think we were pretty pleased with the results so far and hopeful that they'll continue.
Okay and then just last question on the MPC isn't with regards to tear of hours for Oreo what do you have assumed.
For this year from I guess it before you.
Well, we're assuming that we're going to contract close to 1000 lots during the year 2023, but we won't be able to close those lobs until we finished all of the infrastructure associated with them. So we see very modest contribution in that guidance in 2023 from Florida.
Okay, great. Thank you.
The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey.
Good morning.
First just going back to Anthony's question on on the home sales and going back to trend I think you guys said that the MPC.
EBIT would be down 25% to 35%, which take this year that sort of implies a $2 20, a run rate I think historically you guys are at one eight to 202 would still be above the historic. My question is is this a case where because of the value per acre is going up.
Selling sort of fewer acres, but at higher price points and that's why intuitively, we would think that land sales would go down more but it's because the value per acre has gone up that you could sell fewer acres, but still earn more I'm just trying to rationalize the market today.
So if you.
Yeah, It's a great point, Alex and one that I, probably should have stressed earlier that compared to 18 or 19, we can generate the same or greater MPC EBT with fewer acres because our price per acre continues to accelerate higher as the demand for our master planned communities continues to grow.
And I think that is part of why we feel good that we'll be able to achieve these results.
During the prepared remarks that in summerlin.
This past quarter, we were close to $1 $3 million per acre, which is an all time high and it was a moment in time.
It's great that we have left and we think we're going to sell it at a great price per acre, but I don't know that we'll be able to consistently achieve those results for the next year.
Okay and then the second question is just going back to the Arizona water issue, obviously, it's been in the press.
You spoke about 100 year certificate that you're trying to go for I think you also mentioned something about you have the water rights or buildable outlook for the next 10 years than in the media. There's also.
Stories about how agriculture is actually the bigger user part or not necessarily housing. So just putting it all together because they are the headlines it seems scary, but obviously you guys, presumably they've done a tremendous amount of due diligence politically geologically et cetera, how.
How should we really think about what's going on here and are the headlines that we see in the media are those new or this is always the case whenever you try to develop in a you know a water.
Desert type environment and therefore, these headlines are really nothing new and so far everything that you're seeing and even the governors.
<unk> are all basically according to what you would've originally underwrote.
But I would tell you that the.
The governor statements in the media focus that has been on the Hacienda basin is consistent with what our understanding was going into the acquisition. There is no new information that's come up over the past several months that changes our view we had done our work we had a great idea of how much water there was and how much water there wasn't I would tell you.
Given the continuation of the drought across the country that this is an issue that continues to gain traction and momentum, but one that we've been focused on since I've been at Howard Hughes, because it's been an issue in Nevada in the Las Vegas Valley.
And we've seen what those efforts the results of what great collaboration across developer City state local authorities and our focus on conservation can drive.
And we're highly confident that we can see that same kind of outcome in Phoenix West Valley, because we've seen already great collaboration from the mayor of Buckeye from Governor Ducey from the mayor in terms of driving great outcomes that are allowing those that want to live in Phoenix West Valley, the opportunity to forward that affordable home.
That they can't find in many other cities in this country.
The next question is from John Kim with BMO capital markets. Please go ahead.
Thank you good morning.
On guidance.
I was wondering if you could provide guidance on interest expense given your debt is largely fixed or swapped for most of this year.
So I think the guidance that we provided in terms of NOI MPC EBT condo profitability in G&A is about all we're going to provide which is what we've historically done I think our interest calculation for the forward years of pretty straightforward there on a line item by line item detailed basis within.
In our supplemental and I think.
Most of our investors and analysts have an opportunity to get to a number thats very close pretty easily.
Okay, you do have a $615 million with swaps that expired September .
What's the strategy as far as what do you do upon exploration and is this the only swap you have expiring this year.
Yes, Jon this is Carlos that that is the <unk>.
Larger swap that we have expiring this year, the only swap actually and we're already looking at alternatives right now for how we're going to cover the risk for those cash flows when that swap expires.
Carlos You mentioned also you capitalize interest policy.
What are you expecting as far as capitalized interest.
Three.
Okay.
Capitalized interest in 'twenty, three will be largely dependent on how many new developments, we start beyond what's been announced today I mean, those that have been announced today have assigned individual construction loans, where we do capitalize interest into those buildings. Those are shown in the total cost of our expected.
Spend in.
Those buildings, so we announced a new development project, we tell you what the total project cost is and within that total project costs, including includes the capitalized interest that we expect to put into that asset over the development period. That's a number that can change if new projects are added and continue to grow.
Yeah.
The total capitalized interest in further development pipeline strategic development segment is pretty straightforward.
Okay moving to operating assets, David I was curious on your comments on retaining office.
Within your.
Mpc's and you have been outperforming the local markets, but reflective of market conditions.
Recent come down what what's going to be the catalyst for occupancy to pick up.
And if you can provide any color on what leasing activity was in the fourth quarter.
You know versus the full year.
Yeah. So look I would tell you that what we've seen throughout 2022, and we don't see slowing down has been a meaningful flight to quality as employers are trying to incentivize employees to get back to the office they're focused on.
Really bringing their employees back to amenity rich great locations.
<unk>.
Make it easier to get back to the office and we've seen occupancy and kind of body heat within our office portfolio in the woodlands, among the highest in our portfolio and higher than what most national reports have been and I think that's largely because we have great monetize buildings, we have very short commute for those that live and work in the woodlands.
In general for the full year, we did 253000 square feet of new office leases in the woodlands over 150000 in Colombia in over 100000 in Summerlin.
A northeast based.
Crypto company come into our buildings and it has been different than the traditional oil and gas users that we've seen in the Houston market and I think our.
Comparability in our optimism with our office portfolio is driven by the quality of buildings. We have that are in some of the best communities in America that continue to attract both residents and employers.
Our leaving those higher tax less business friendly states looking for a new home.
You don't have much explorations this year it seems pretty modest.
Do you expect occupancy to trust in 'twenty three.
I think that we're going to see a combination of hopefully a positive new leasing but there.
There are always those are those things that go bump in the middle of the night, whether those are tenant bankruptcies or downsizes or things that you don't necessarily anticipate.
For the year, we should see positive increase in occupancy throughout our office portfolio.
I don't know that that positive increase in occupancy and net absorption that we're projecting and that we're working on real time will necessarily translate to increased NOI in 'twenty three given the build out times and free rent periods associated with those new leases, but long term.
Those leases create incredible value because it's already net effective rents that are significantly higher than the yields of given the cost basis of these assets.
Okay. My final question is on seaport in the Tin building you mentioned the 10 buildings now on a seven day operating week.
But can you discuss.
When you think about the tin building seaport will be profitable.
So look clearly, it's very difficult to drive free cash flow and profitability of a building that you can't open seven days a week and it wasn't until December that we were actually able to get there.
And consistent with how we've opened other restaurants with John George and Great restaurant tours, we want to make sure for those first several months that we're open and running that we're delivering incredible service incredible quality of food and incredible experiences and as a result, we intentionally overstaffed to make sure that we get it right.
And then once we hit that point, which where I believe we're achieving now and I think the team has done an incredible job, we're going to be able to pare back that overhead that labor costs get it back into line with what we expected going in.
And hopefully minimize the losses for the next few quarters, and then hopefully get towards profitability in the back half of this year.
Clearly inflationary pressures on not just labor, but food as well.
Has hurt our ability to drive profit early on in this opening.
But right sizing the labor right sizing the recipes right sizing each and experiences within the Tin building, we think can allow us to turn the corner pretty quickly because the revenue that we're generating there the foot traffic that we're generating there has been nothing short of exceptional and.
And with that much fall that much volume going through that building every day, we're going to be able to turn that corner and push towards a much better results for our shareholders. This year.
That's great color. Thank you.
Thank you.
The next question is from <unk> <unk> with B Ws financial Please go ahead.
Hi, So first question I had was.
Could you just define your given that you're saying your self funding business what that would entail this year given the smaller financial footprint, you're expected to have with E B piece.
This year.
Hi, Thank you for the question well as we.
We also talked about our capital allocation committee. So we are always looking and matching our sources of our cash flow with our development pipeline.
What what what we might see is not a change in the model is that we will continue to match the free cash flows that'll be harvests from NOI land sales and a few condominium sales that we will have this year and take that and look at our pipeline and the match of the inflows with the outflows.
I understand that but.
Smaller amount of projects this year because your.
Youre going to have less cash flow or are you going to be into that to keep the.
Flywheel going as far as projects are concerned.
I mean, we're not going to see as much new development this year.
Then we have in past years, because we're not closing the condo this year and therefore, the free cash flow is lower our job is to match fund that net free cash flow that comes in into the uses on the other side, whether that's share buybacks and new developments.
In years that we have outsized free cash flow, we can start more projects.
We have less free cash flow, we're going to start less projects.
And but there are years, where there is free cash flow that don't doesn't not necessarily get used entirely because theres just not enough great projects that we just can't get them out of the.
Off the planning stages and into the dirt fast enough.
What we look at our unfunded cost of our existing development pipeline and the cash that we have on the books that can more than fund that and leave us an adequate cushion today.
And then as that free cash flow comes in we will able to start a handful of new projects. This year is we think we have the opportunity to do some great projects that will not just create value on the projects alone, but will be incredibly additive to the overall master planned communities that they are built in and those are the those are the unique opportunities that we will execute on this year.
Okay and my other question was.
Could you just talk about the competitive landscape with each tenant losses I think it's the first time, you've talked about tenant loss and since COVID-19, what's driving that and how are you staying competitive in Europe mpc's.
Well I would tell you that.
Our buildings and we own the majority of the buildings within our Mpc's continued to outperform the regions and I think they do that because we offer the quality of life. It's so many employees and employers are looking for that those out of state migrations that I've talked about that have come into the woodlands and Columbia in Summerlin are leased.
Up that space, we saw good leasing momentum this year I quoted earlier the number of square feet that we leased in each of our markets. Those were I think very strong results given the macro environment and the shift of more folks hybrid and more work from home.
I feel great that our communities and our assets will continue to outperform as they have for the past decade.
Okay. Thank you.
The next question is from Alex Barron with housing Research Center. Please go ahead.
Yes, Thank you gentlemen.
I was just hoping you could provide a little bit more clarity on the timing of the next couple of condo tower closings I think when you said early.
2024 is that first quarter or not necessarily and then what follows after that is there. Another one in 2024 or is it going to be until 2025.
Yeah.
So our next condo delivery is going to be Victoria place and that will be early 2024.
I'm going to hedge on <unk> and I know it makes it really difficult to model for you all.
But for US we have to close it we have to close it right and we have to deliver a great experience for our new residents coming in so whether that means the end of March or early April are more focused on doing it right then hitting at any particular quarter, especially given the number of units in that building is not as if we close them all in one day will space Mountain.
Blocks over the course of.
What would be probably at least a month.
And as a result, we may see some in <unk> and some into Q, but sitting here today I think it's a little too difficult with over a year to go to say exactly what they will be closing those units as we get closer we can provide more details there we won't see another closing in 2024, but we do anticipate in 2025.
With the tower after Victoria place, which is the Barnhart Park Ward village.
Then we have a pretty good runway with park, and then <unk> and <unk> that we should see at tower a year for the foreseeable future.
Okay. That's very helpful. Thanks, a lot.
Thanks, Alex.
This concludes our question and answer session I would like to turn the conference back over to David O'reilly for any closing remarks.
We appreciate all of you joining us today and.
Getting some great questions and Flushing out some of these details we hope to see a lot of you at the upcoming Investor conferences, we have as well as our Investor day with a few other of our peers in Hawaii, and if theres any other questions or follow up we're always available. Thank you again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Yes.
Yeah.
Yeah.
Okay.
Uh huh.
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