Q2 2023 The Howard Hughes Corporation Earnings Call
Good day and welcome our Torrance Corporation second quarter 2023 earnings call.
All participants will be in listen only mode.
Need assistance.
Leasing golf conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions.
Please note that this event is being recorded.
I'd like to turn the call over to Mr. Eric Holcomb head of Investor Relations. Please go <unk> good morning, and welcome to the Howard Hughes Corporation second quarter 2023 earnings call with me today are David O'reilly, Chief Executive Officer, Jay Krause, President Carlos will lay a chief financial officer, and Dave stripes head of operations.
Before we begin I would like to direct you to our website Howard Hughes Dot Com, where you can download both our second quarter earnings press release, and our supplemental package and the earnings release and supplemental package include reconciliations of non-GAAP financial measures will be discussed today in relation to their most directly comparable GAAP financial measures.
Certain statements made today that are not in the present tense or that discuss the company's expectations are forward looking statements within the meaning of the federal securities laws.
Although the company believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions. We can give no assurance that these expectations will be achieved please see the forward looking statement disclaimer in our second quarter earnings press release, and the risk factors in our SEC filings for factors that could cause material differences between forward.
Statements and actual results.
We are not under any duty to update forward looking statements unless required by law.
With that I will turn the call over to our CEO David O'reilly.
Thank you Eric Good morning, everyone and welcome to our second quarter earnings call on our call today I'll begin with a recap of the quarter and cover the segment highlights for our master planned communities and for the Seaport, Dave strike will cover our operating assets followed by Jay Cros, who will update our development projects in Ward village finally, Carlos <unk>, who will review our financial results.
I had an update on our full year guidance.
For the second quarter I am pleased to report that our company performed incredibly well and experienced improved underlying demand across our world class portfolio of assets.
Looking quickly around the segments, we delivered solid MPC EBT, which was highlighted by continued strong land sales at attractive prices in our Houston Mtc's.
We also saw a sharp increase in new homes sold a leading indicator of future land sales, providing increased confidence robust land sales activity in the coming quarters.
Our operating assets delivered exceptional financial results when continued outperformance in office leasing and record quarterly results in multifamily.
At Ward village buyer interest for our Premier condos remained strong.
In the quarter, we contracted to sell 43 units, representing 27% of all available inventory, which now stands at only 116 units.
Finally at the seaport the startup of our summer concert series on the rooftop which has been a tremendous success. Thus far in the year yielded significant sequential increases in foot traffic across the district and improved financial results.
Overall these favorable dynamics in each of our segments have provided a solid footing at the halfway point of the year paving the way for a robust second half outlook and increased full year guidance expectation for our MPC and operating assets.
In our MPC segment, we experienced a 23% year over year decline in DVT, primarily due to the timing of Super pad land sales in summerlin. Despite this reduction we saw a significant increase in new homes sold in each of our Mpc's.
Strong builder price participation and continued strength in price per acre.
We also continued to experience strong homebuilder demand for new residential land contracting on parcels at near record prices across our mpc's much of which has not yet closed.
All of this leads us to believe that the second half of 2023 will deliver excellent land sales.
Big picture the resurgence in new home sales that began in the first quarter continued with a total of 605 homes sold in our Mpc's.
This represented a 39% increase compared to the prior year and was primarily related to bridge loans, which nearly doubled its new home sales is currently on pace to sell a record number of homes in 2023.
In our other Mpc's, our new home sales in the woodland hills increased by more than 50% and summerlin increased nearly 20% year over year.
With these strong sales results Summerland in Brooklyn Bowl moved up in the mid year RTL code top selling MPC rankings, capturing the number five and number six spots respectively.
Ultimately this significant growth in new home sales combined with strong underlying fundamentals points to a strong second half of 2023.
While increased mortgage rates have negatively impacted demand nationally.
Mpc's have remained resilient as evidenced by the strong uptick in our underlying home sales this year.
While overall home affordability has undoubtedly been impacted by higher rates, what we've seen in our communities is that many homebuyers looking to purchase a home have simply adjusted the size of their purchase.
With that the average size of the homes sold has declined.
But the price per square foot is actually increased modestly.
To keep the value of our land intact.
Just as importantly, the increased rate environment has meaningfully reduced resale inventory is homeowners with below market mortgage rates are reluctant to sell their homes.
This is force homebuyers to gravitate to the new home market, which now represents approximately 35% of all homes sold were significant increase from the historical norms of 10% to 15%.
Ultimately this is translated into a significant boost for homebuilders and he is driving demand for our labs.
Put more simply the increase in interest rates has impacted both demand and supply.
Keeping an equilibrium in land pricing and driving favorable demand for new land.
As a result, we expect a material increase in land sales during the second half of the year.
This will drive 2023, MPC EBT higher.
It gives us confidence to meaningfully increase our full year guidance expectations.
Carlos will provide some more detail on those new expectations in a few minutes.
Quickly shifting over to the seaport revenues declined 19% year over year, primarily due to nonrecurring COVID-19 recoveries and special events in 2022.
This contributed to a $2 million reduction in NOI before equity investments.
Compared to the first quarter, our results improved materially as we experienced a significant 89% increase in foot traffic.
This growth was led in part by our summer concert series on the rooftop which is off to its best start to date.
We've sold over 170000 tickets representing over 85% of available taking inventory.
Overall revenue increased 92% compared to the first quarter, which contributed to a $3 million sequential improvement in total seaport NOI.
At the Tin building customer demand and foot traffic increase we continued to implement operational improvements as we refine the marketplaces overall operating model, which resulted in elevated operating costs during the quarter.
The full service dining has performed strong, but the retail fast casual dining and e-commerce have lagged expectations.
We remain intently focused on driving this one of a kind venue towards stabilization and we're confident that we're on the right path to deliver meaningful financial improvements in the coming quarters.
However.
Now appears unlikely that we would be able to stabilize the tin building in 2023 and do not expect it to be profitable this calendar year.
I would now like to hand, the call over to Dave strike to review the performance of our operating assets.
Thank you David and good morning in the second quarter. The strong momentum that has been building in our operating asset segment continued with the delivery of $68 million and net operating income a 3% increase from the same quarter last year on a same store basis, NOI increased 4% year over year with meaningful growth in our office and <unk>.
Family portfolios.
We also experienced strong leasing activity across our stabilized portfolio with year over year and sequential improvement in lease percentages in each of our three core property types.
The most significant improvement was seen in our office portfolio, which generated second quarter NOI of $34 million.
This reflected a $4 million or 13% year over year improvement was primarily the result of a onetime lease termination fee strong lease up activity and rent abatements explorations in the woodlands.
These increases were partially offset by some lease explorations at some of our older assets in downtown Columbia.
Similar to recent quarters, our Premier class a office assets continued to outperform the market as companies continue to prioritize highly of monetized workspaces in desirable locations in.
In the quarter, we executed new or expanded office leases totaling nearly 200000 square feet, including 167000 square feet just in the woodlands.
We also renewed over 180000 square feet of office space during the quarter.
This strong leasing performance brought our stabilized office portfolio to 89% leased at quarter end substantially higher than market when compared to the surrounding metro regions of Houston, Las Vegas, and Baltimore, Washington.
Multifamily portfolio delivered record quarterly NOI of $13 million, representing a 10% year over year improvement.
This growth was primarily driven by 6% average in place rent growth and favorable contributions from Sterling Bridge, Lynn and Marlo, our newest multifamily development.
Both of these properties, which were fully completed less than one quarter ago are exceeding expectations with sterling already 80% leased and Marlo a 47% leased.
They're all are stabilized multifamily properties finished the quarter at 98% leased with downtown Columbia at 99% Houston at 97% in Summerlin at 96%.
In retail second quarter, NOI was just under $13 million, reflecting an 11% reduction compared to the prior year. This decline was primarily related to onetime COVID-19 related recoveries at ward village in the prior year as well as the closure of two words village retail centers to make way for the park in Atlanta.
Dominium projects. Despite this.
A reduction a retail portfolio performed well it was 96% leased at quarter end, representing a 3% year over year improvement.
With that I will now turn the call over to our President Jay Cross.
Thanks, Dave and good morning, everyone I'll start this morning, with an update on ward village in Hawaii, where we continued to see strong demand for our premium content during the quarter in the quarter, we contracted to sell 43 condos, leaving us with only 116 units remaining to sell at our current projects.
First looking at Ali and cooler recent price reductions implemented to close the remaining inventory, which represent approximately 3% of the total units in these buildings have been very successful while our sales initiatives have resulted in slightly reduced revenue and gross margins on units sold overall gross margins achieved on the two.
Projects have been minimally impacted for the quarter, we contracted to 22 units and sold 15 units and as of June 30, <unk> was 99% sold and cooler with 98% sold.
And our towers and development construction inventory place continues to progress nicely. This tower, which is already 100% pre sold is expected to be completed next year at the park Ward village and <unk>, which are underway and expected to be completed in 2025, we contracted a total of 10 units, bringing these towers to 93% and.
<unk>, 99% pre sold respectively.
And finally at coli, we contracted 11 condos, making this tower, 83% pre salt we expect to commence construction on this project later in the year.
Incredibly these four towers combined were 92% pre sold before construction I'd even the gun. This is a strong testament to the strength of our award sales and marketing team.
Upon completion these towers will represent more than $2 $5 billion in future revenue, which will be recognized between 2024 and 2026.
From the mainland in Nevada, we completed the finishing touches on Tanja Echo our new 294 unit luxury multifamily development in downtown Summerlin. This project was substantially completed in early July and we recently welcomed our first residents.
We also continued construction efforts at the summer in the South office and 147000 square foot three storey office complex pre leasing efforts recently began and we expect to complete the building early next year.
Enbridge line, we're making exceptional progress with the development of wingspan our single family for rent development. This project is slated to welcome. Its first residents later this year and finally in downtown Columbia construction of South Lake Medical is moving along nicely is 86000 square foot Medical office building is seeing strong demand.
It is currently 21% leased with the balance of the building either in letter of intent or active negotiation, we expect to complete the project in early 2024.
Overall these four strategic development projects are expected to generate stabilized NOI of more than $18 million for our operating assets with the combined yield on cost of approximately 7%.
While these new developments will be meaningful contributors to our recurring NOI and value creation for our shareholders. The market has shifted meaningfully over the past few quarters increase construction costs and operating expenses have outpaced growth in rental rates meaningfully impacted anticipated returns on new developments.
Bind with higher interest rates and a more challenging lending environment, it's possible that announcements of new developments could slow down in the near term.
Not to say, we're pencils down in fact, where the exact opposite our development teams in each region are actively engaged in pre development. So that once the market returns to a more normalized environment, we will be ready to go.
And with that I would like to now turn the call over to our CFO Carlos <unk>.
Thank you Jay and good morning.
I'd like to start off today with our recent announcement regarding our holding company reorganization.
This new structure is expected to promote the growth of our business provide the company with additional financial flexibility to fund future opportunities and segregate, our real estate and non real estate assets and related liabilities in separate subsidiaries.
Effective this Friday August 11th Howard Hughes Holdings incorporated will become the new parent company and our stock will trade under the ticker symbol H H H on the New York Stock Exchange beginning next Monday August 14th.
Each outstanding share of HFC common stock will automatically convert into one share of HHH common stock.
However, our strategic plan, our board and management team and our focus on long term value creation remain the same.
Turning to our full year guidance because of our robust year to that result, as well as our favorable outlook for the second half of the year, we have increased our expectations for MPC EBT and operating assets NOI.
Yeah.
And mpc's anticipated increases in residential land sales, particularly in the fourth quarter are expected to drive significant improvement in EBIT for the full year.
As a result, we now expect EBIT to be flat to down 10% year on year.
This compares favorably to our prior guidance of down 25% to 35% and represents an increase at the midpoint of approximately $70 million.
And operating assets exceptional financial and leasing performance across our entire portfolio has resulted in increased NOI expectations for 2020 three.
Excluding the prior year contribution from divested retail assets operating assets NOI is now expected to be in a range of up 1% to 4% year over year.
This is an improvement from our prior guidance of down 2% to up 2%.
And ward village as Jay mentioned, south initiatives to close out the remaining condo inventory at Lee and cooler have been very successful.
As a result of the reduced pricing. We now expect 2023 condo sales range between 40 million and 45 million with gross margins of 10% to 13%.
This where those margins have only impacted 3% of all units in the towers.
In Oro margins were distant projects remain aligned with our historical 25% to 30%.
And finally, our cash G&A guidance remains unchanged at 80 million to $85 million.
Yeah.
With respect to divestitures subsequent to quarter end, we sold our two self storage facilities in the woodlands for a combined price of approximately $30 million.
This resulted in a sizable gain on sale totaling $16 million, which will be included in our third quarter results.
Shifting to the balance sheet, we ended the quarter with $389 million of cash.
Together with anticipated cash inflows from MPC land sales in the second half of the year.
As well as the proceeds from the sale of our two self storage facilities in the third quarter, we are well positioned to deploy capital into our development pipeline.
At the end of the second quarter, the remaining equity contribution needed to fund our current projects was $223 million.
From a debt perspective, we have $4.9 billion outstanding at the end of the quarter with only $273 million with maturities through 2024, and approximately 86% due in 2026 or later.
Holly 98% of our debt remains fixed cap or swapped to a fixed rate.
Okay.
As Dave mentioned, the debt markets for new developments are challenging and in <unk>.
Some cases are delaying the start of certain development projects as we wait for loans to close before breaking ground.
Despite these issues, we are having success closing new loans, including $28 million construction loan for the development of the South Summerlin office.
This loan bears interest at Sulphur, plus 235% and has an initial four year maturity.
Additionally, we are currently documenting a new multifamily construction loan for a project in our pipeline as well as some refinancings on existing properties, which we expect will close later this year.
With that I would like to turn the call over back to David for closing remarks. Thank you Carlos.
Before we open up the call for Q&A, just a couple of closing thoughts.
The new home market is back and we significantly increased our full year MPC EBT guidance to a level that is closely aligned within 2020 twos near record results.
The exceptional financial results and leasing performance of our operating assets are testament to the quality of our world class portfolio of mixed used assets, which continued to outperform in their markets.
This has resulted in increased 2023, NOI guidance and our strong lease up particularly in office will help to drive this segment closer to stabilization in the years ahead.
And finally, we have several construction projects nearing completion as well as a robust development pipeline that will inevitably grow our stream of cash flow in the years ahead.
<unk>, the perpetual cycle of value creation that differentiates Howard Hughes.
Overall, we see very positive future and were excited for the growth and value creation opportunities that lie ahead.
With that let's start the Q&A portion of the call. Operator can you. Please open the line for our first question.
Yes.
I will begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
And the speaker phone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
This time, we'll pause momentarily to assemble the roster.
First question from Alexander Goldfarb Piper Sandler. Please go ahead.
Hey, good morning, good morning down there.
Just a few questions David.
The first is out in Hawaii, you guys discounted a few con.
Condo units I think sort of clean up the remaining inventory. If you could just provide a bit more color on that usually you know those kind of sell like hotcakes and.
Except for the original yeah why are some of those Uber priced units that sort of languished I think all your other product out there has sold fairly quickly. So maybe you could give just a bit more insight into the rationale to discount and then you know the impact to economics and also you guys raised price along the way.
So just curious you know when you look at the whole sell out you know given where you originally pro format versus where you ended up net of the of the cleanup units what the math looks like.
No problem, Alex It's a great question and your memory served you very well in that for the overwhelming majority of the towers. We've delivered we've delivered them almost entirely sold out when we closed and completed construction.
For all of <unk>, and cooler, which were incredibly successful for US we had some standing inventory at the beginning of this year and we really wanted to move it by the end of the year as we're getting to launch our next tower.
And the inventory that we had represented less than 3% of the units and those entire buildings and once they are completed and up there and kind of standing inventory. We have continuing expenses in terms of HOA and real estate taxes. So from an MPV perspective and from a competition perspective, when we launch a new tower.
We thought it would be best to sell that standing inventory quickly to do so we put it together and modest pricing discount relative to where they were previously and those previous pricings. As you noted had been increased multiple times, along the way and we thought it was prudent to move them in and get it done.
From an overall economic standpoint, it really doesn't move the needle you know when you sell 97% of your units at 25% to 30% margins in the last 3% had half of that Youre still generating 25% to 30% margins for the entire building and you're not sitting on any standing inventory. So for US we thought it was the prudent.
And one that we've moved on quickly.
So that we could get those buildings completely closed out and turned over to unit owners and residents that are continuing to dine shop and experience all the benefits of ward village has to offer.
Okay. Next question is that the seaport appreciate your comments that taking a little longer I don't think that really surprises.
But my.
The question is more on ESPN, you guys have a big studio there obviously E. S. P. N. It's been in the news for Downsizings I'm not I think their lease comes up soon I think maybe I'm wrong, but maybe you could just give some comments and color around that and then if you did have to backfill them, where you think you know rents would be.
Today versus what you're getting from them.
And so the least with ESPN goes through December of 2025, and we've been in ongoing discussions with them on.
Potential extension shorter term in nature as they figure out their long term plans, which I don't think they have a full grasp on sitting here today.
That said, we think studio space and completely built out studio space is highly valuable and we don't worry about back filling that space given the incredible views its location and the energy and dynamic environment that we're seeing every day down at Pier 17.
Our mark to market of rents perspective, it's kind of early for me to opine on that considering we wouldn't be thinking about it. So the earliest of December 2025, but given that it is fully built out studio space and its location, we're not open to taking a discount.
Okay, and then just finally on the re org.
Starting to see the atrium C. Ticker go away, we got used to it.
But can you just give a bit more color I mean, you guys have been public for well over a decade.
Just sort of curious what drove this and certainly David you've done a lot to simplify the company from what it was so was this a rating agencies with this the debt markets like what sort of drove this because usually like debt documents are pretty specific on the.
The cash flows that are tied to it or if it's a corporate entity. It's from the hole. So just a bit more color and then is there any additional costs to G&A that we should be modeling as a result of this re org.
I'll take that in reverse order because it's much easier Ah theres no incremental G&A everything that you know about Howard Hughes' yesterday, we will be the same as with Howard Hughes Tomorrow next week and next month. The Board management strategy. Nothing is changing this is really just a structural change in the company that allows us.
To segregate real estate assets from non real estate assets and keep the result of non real estate assets away from the covenants of our debt and it's something that I've been thinking about personally since we bought about 18 months ago. When we made the investment in John George and the 25% passive investment in.
And his restaurant business and the results of that are impacting our bond covenants in some of our debt covenants and its just cleaner if we could figure out a way to put it separate and aside and this structure allows us to do that and potentially think about other non real estate assets like the baseball team and thinking and whether or not that one.
Fifth in you know H H H away from the traditional real estate assets of <unk>. So it's really it's form over substance I wouldn't read into this please don't take the comment about thinking about major acquisitions or things away from what would traditionally do we have simplified the company and we take great.
Fried and simplification that we've done and the focus that we have and that has not changed one bit.
Thank you.
Thank you. Our next question Anthony about one O J P. Morgan. Please go ahead.
I guess follow up on Alex's last question there on the Holdco structure.
Is there anything imminent that prompted that.
To do this now I know you guys have been in the press a bit with regards to potential studios in the Las Vegas market and just didn't know if that's tied to that at all.
Oh, no no I think that the the press that's been out there on the work that we've done on trying to create studios in the Las Vegas market is very consistent with what we do it's build real estate to meet the demand increase the population and jobs within our community and we think film production is an incredible way to do that and some.
All of them.
Our role in that would be owner of the real estate landlord, we are not getting into the production business.
This is this really had nothing to do with that Anthony and its really just you know kind of as I answered it with Alex.
Just a structuring new ones, where we can keep non real estate assets away from real estate assets I don't anticipate us, bringing in any more non real estate assets and the production business.
Okay got it and then a second question.
With regards to the builder price participation is is that coming from.
The the Super pad site, largely that was done a little while ago in summerlin or is it from other areas in this.
It is just.
They're like sort of a backlog of a builder price participation income that that you're seeing that's helping drive the guidance here.
I would say, it's so to answer your first question the build of price participation is largely coming from summerlin, but there is some build their price participation in the woodlands.
Richland Woodland hills, but the majority of that comes from Summerlin and that as you noted comes from Super pads that were sold in some instances 12 to 18 months ago.
Our increased guidance is not necessarily the result of our expectation for future build their price participation because we tend not to model continued increases in home prices that would drive that in today's rate environment that increase in guidance is largely driven by incremental land sales more acres at <unk>.
Higher price per acre than we expected a quarter ago, and thats driven by the incredible velocity of home sales that we've experienced throughout the first six months of this year that has candidly defied our expectations.
And I think it's pointed to how incredible the environment that we've created within these masterplan communities are that we're continuing to see elevated new home sales and a more difficult market for buyers.
Okay.
If I can sneak one last one in just in office you mentioned the term termination fee. There just can you tell us what the dollars were in square footage and just trying to understand how much that helped on the guide yes.
Yeah, I get that the termination fee was less than $3 million. It wasn't huge it was for a tenant to sign the lease a 10 year lease that never moved in it was about 27000 square feet great space in us landing and we are already negotiating a lease for the backfill.
Okay, great. Thank you.
Thank you next question from John Kim BMO capital markets. Please go ahead.
Thank you.
The extent of the Triple H ticker.
I had a question on the condo sales and in particular, the window remediation costs of CAD.
During the quarter I know you are looking to realize or sorry recover some of these costs.
But is this a one time expense this quarter or is this just something that can be recurring.
No. This is this is it so we had a meaningful expense.
Two years ago.
When we initially under took these repairs and these repairs were led by the homeowners of Hawaii.
We're funding and we are jointly pursuing recovery of those funds.
This last bit of it was the Overages that came in as the result of over a year of remediation and repairs and inflationary environment that drove costs higher than our original expectation those repairs have been closed out and I'm knocking on wood I do not expect any more I definitely know.
More from one area and hopefully no more for many of the other towers as we.
Haven't seen any recurrence of these type of problems.
Okay.
At Seaport.
What surprised you.
At 10 building this year I know, it's up to this point it's been.
Mostly on the expense side, but was wondering if on.
On the revenue side, that's disappointed as well.
I'd say that on the revenue side consistent with our prepared remarks, we've seen remarkable success in the sit down restaurants in the full service restaurants, Brasseaux Reid How's the red Pearl that have met and exceeded our expectations, I'd say, where our expectations have not.
Fully been met has been really associated with the quick service signing the retail and the E. Commerce that has been slow to be adopted.
We are working real time, with our partners and with John George and his team to implement changes to bring those back to our expectations. It takes time and sometimes those changes create some short term costs that we saw flow through the P&L right now and as those changes get fully implemented we expect.
Spec those operating expenses to come back down into the line and hopefully realize the revenue that we expected going in now with all that said the foot traffic has never been higher at the Pierre the bodies coming through the Tin building have been nothing short of exceptional in terms of the number of people in the overall excitement around the building.
Given that given the excitement of the concert series given how many people are coming to the seaport everyday we know theres, an incredibly successful outcome here and it's just about Martin him modifying and maximizing the product mix and offering to drive the revenue and get to profitability.
On the concert curious I know, it's not a huge dollar amount, but last year second and third quarter. It was.
Profitable on a N Y NOI basis. This quarter was slightly negative we expect that to turn around in the third quarter of this year, Yeah. I mean last year in the second quarter. We had eight first which was a four day buyout by the board APE Yacht club that was incredibly profitable for us that didn't happen again this year.
Maybe that's a result of the slowdown in the NFC market I don't know.
We've had some a lot of other events and a lot of other buyouts, but we haven't been able to recreate the amount of money that we made in those four days I expected in the third quarter, we will see similar results to this quarter and perhaps slightly higher as the number of events picked up.
<unk> compared to <unk>.
Okay, and just one final question on tariff Alice.
It's get an update on whether or not.
Expect any settlements this year.
Yeah, we do we do think that we'll see probably 500 ish lots by the end of this year, it's slightly down from our initial projections, but that's really the delay of a quarter or two which has really been driven by supply chain delays in delivering the infrastructure. The buyer appetite is strong we have.
A lot of the same builders that we talk to in summerlin everyday that want to buy lots from us into our Dallas and those negotiations are ongoing.
Soon as we can get the infrastructure in place to deliver those lots, we expect to announce those contracts.
Great. Thank you.
Thanks, John .
Your next question will be from Peter Abramowitz of Jefferies. Please go ahead.
Yes. Thank you.
I was wondering could you just dive in a little bit more on kind of the breakout between your expectations for pricing and volume associated with the guidance raised in Mpc's.
It seems like the pricing has been pretty strong so just kind of wondering.
How you would quantify the pick up in volume that you're expecting in the second half.
I wouldn't say that our expectations in terms of pricing per acre would be largely consistent with what we've experienced in the first half of the year.
And the Delta in the increase in midpoint of guidance of about $70 million is going to be driven by increased the number of acres at a similar price to what we've experienced.
Got it that's helpful. Thank you.
And then could you just touch on you called out in the earnings release to reduction in sponsorship revenues.
That's a ballpark in Vegas.
On what what drove that.
Yeah, I think that when we first opened the ballpark in move out 2019, we were the only professional sports team in Las Vegas, and now we have the Golden Knights the Aces the Raiders and soon to be the Oakland A's and.
I think that increased competition is creating some temporary headwinds I do see that business coming back strong and we've seen some increased activity there over the past 60 days.
So I think we can close that gap pretty quickly we are still leading minor league baseball in attendance in.
Ticket pricing and we couldnt be more happy with the performance of the aviators and what they've done not just within the stadium, but what they've done to the overall community what they do to the downtown Summerlin shopping dining and experience for.
For the 70, plus nice if they're there. So we think they're performing very well they continue to drive great outcomes across the entire community to summerlin and as a result, I think that we'll be able to pick up that gap and hopefully see that revenue come back on the sponsorship side.
Got it and then one last one.
Any large expirations coming up in either office or retail.
And could you give an update on where you stand with those unexpected move outs or where do you stand in a renewal process, but I think the exploration chart that we have in the supplemental shows pretty modest explorations across.
Both office and retail I would say the one area of focus for us and it's honestly an area of opportunity more than anything else is downtown summerlin.
In downtown Summerlin, which as you know is about a million square feet of retail we're coming up on our 10 year anniversary of developing that asset.
And as a result in 2024, but more so in 2025, we're seeing some meaningful explorations there and it's allowed us to think very strategically about which tenants we want to renew in which tenants we're going to we're going to pursue better performing retailers.
And with every time, we've had a vacancy in that property and I think we're still 98 or 93% leased right now we've been able to backfill it with better credit better quality higher traffic higher sales per foot and we don't think the explorations and $24 25 will be any different than what we've done over the past two years.
Got it thank you.
Next question will be from Alex Barron housing Research Center. Please go ahead.
Yeah. Thank you I wanted to ask on the you know given the discounts in the Congo powered units this quarter.
Is that one effect for expected gross margins for the future towers.
Absolutely not in fact, we've continued to increase pricing on those towers that are in pre sales are under construction and the only discounting. We did was cooler and <unk>, which were buildings that we've completed and turned over and had standing inventory.
Those new towers, we haven't increased prices in Victoria place that sold out I can't.
But on the other towers, we absolutely have.
So are the gross margin is still expected to be in the letter.
And that's a high 20.
25% to 30% is what we bubble he said and we don't expect those towers to be any different.
Got it.
And then can you.
Explain.
What's going on in pair of Atlas I saw this other flow rail is that a new piece of land or is that just the subdivision.
Expected of the existing Atlanta, and if so is that the plan to just.
Subdivided in because I tell them that one it seems like you guys own 50%, whereas I thought you own the higher percentage of fair value. So can you just give us more details on that.
Yeah, absolutely so nothing's changed first of all so this is very consistent with when we initially bought the property.
<unk> op Terra balanced has in our expectation will have multiple diligence as all of our master planned communities do.
And.
Florio is the first 3000 acres the first village of the 37000 acres of Turnabout.
That first village a 3000 acres does have a different ownership percentage and that's been consistent from the day that we acquired it.
And there's really nothing new there other than Thats. The first village that we're building and we're looking forward to contracting our first launch later this year.
So to do the math basically whatever 500 lots or whatever you guys sell there this year.
Here those revenues, we should just the vitamin happened that's your share.
Yes.
And for feature villages are they going to be.
Going on simultaneously.
Well they necessarily be at similar economics or will there just be kind of sequentially like after after this one is done and then the next one starts.
Oh, well look we tend to go up sequentially, but as you can see like originally is a great example, where we have four villages and on in our Hec quarterly spotlight video the gym Carmen walks through bridge Lynn we talk about the four villages that we have we're actively selling in three of the four right now and the fourth one is sold out.
So we don't wait until one is completely sold out to start the next we kind of staggered them and so as we see the timeline for one winding down and we're ramping up the next village and each one of those villages has slightly different characteristics are slightly different personality. If you will different village centers different community centers.
And it allows us to adjust home sizes pricing and styles to maximize absorption and we meet a greater number of consumers out there looking to buy a new home.
Okay very good I appreciate the explanation thanks and good luck.
Thank you next question will be from Amit of course N E.
Ws financial please go ahead.
Hi, Good morning. So first question I had was.
How are you adjusting planning and development given the interest rate environment.
Can you self fund a big portion of this and if so how much does that slow down your development plans.
Yeah, I would tell you that both Carlos and Jay mentioned this in your prepared remarks, and clearly the lending environment is very challenged right now and even more so in the construction area. We've been lucky that we've been able to secure some some good loans that were in the process of closing right now.
And when we do we'd be happy to talk about them and provide more detail on those.
I don't see us pushing forward a development deal or pipeline completely unlevered on 100% of our equity into those deals. It just won't generate the returns that we need and it puts a little and some instances too many eggs in one basket.
So we're gonna be thoughtful we're not going to start construction on projects until we have those loans closed and done as Carlos mentioned.
And as Jay said will this potentially.
Slowdown or temper, our development pipeline sure, but we are not pencils down our teams are working around the clock on pre development plans of lots of new multifamily some office some retail even some studios.
So that we're ready to go the moment, they werent able to get that construction loan the moment, we're able to see economics that provide an outside risk adjusted returns for our shareholders and we're not waiting for the market to come back to start planning, we're planning and we're going to have those those things waiting on the starting line and as soon as that gun has pulled were.
<unk>.
So, yes, I think right now while the lending environment is challenged yes are the new development starts will slow down, but I think that just means that we will see a lot of activity as the market comes back.
And to your earlier comments about operating asset NOI going up is that purely because you're raising prices or are you seeing natural demand continue as you've commented in the past years.
So we're seeing a lot a number of different factors impact the improvement in operating asset NOI within office, we're seeing lease up of vacant space, specifically in the woodlands and a tower we bought <unk>.
Vacate 90 950.
I would look for us, which is now 91% leased and all the remaining vacancy under LOI.
So the office has been a story of absorption and a migration of companies into our communities user chasing well educated employees that have relocated to the woodlands Summerlin and.
In multifamily it's been the lease up of new developments and the continued improvement in same store results and increased lease rates across the portfolio.
And in retail while this quarter was down year over year as a result of COVID-19 payments the previous year in ward village that continued absorption and turnover of tenants like I talked about in downtown Summerlin from weaker performing tenants to better performing tenants and signing more luxury brands are continuing to drive those NOI higher.
So it's not a one size fits all I think it's unique to each property type within our master planned communities.
The overarching theme has been that our communities have performed incredibly well coming out of the pandemic. The momentum that we saw continues more residents are moving in more companies want to be there more retailers want to be there more tenants want to be in our multifamily building use of the quality of life that we can offer and that's material.
Rising in a recurring NOI and we expect that team to continue.
So just going back to my original question why not just harvest all this cash flow.
Properties generate.
And pay down debt and just weighed out the current cycle in the debt market.
Well look we very much enjoy the competitive advantage that we have by being the dominant owner of office and multifamily in our communities and if I sold those buildings when I go to build the next one I have competition I don't like competition.
I like having that dominant market share because it drives better results of our development and better results of our owned assets.
And it is selling assets could provide a short term pop a little bit of cash I think it would materially impact in a negative way our competitive advantage of being that dominant landlord and controlling the environment within our communities something that we think is paramount to their success.
Okay alright, thank you.
Thank you.
Thank you and again if you have a question. Please press Star then one.
Thank you next we have a follow up question from Alexander Goldfarb with Piper Sandler. Please go ahead.
Yes. Thank you.
No.
Well, obviously there are a lot of people on the call that I have a lot of questions for you.
So just following up on Tony <unk> question on the studio in Vegas, maybe you could just I am sure that you haven't backed out everything, but just big picture.
You and Mark Wahlberg, So I guess two two bostonian guys.
But if you could just lay out our U is Howard Hughes just doing the land.
And Mark entity is doing the studio operation or.
Is there a joint investment in Atlanta, I'm, just trying to figure out how the economics are if you guys are just tasked with doing funding everything related to building the structure and the real estate and then his entity is is funding. The operations just wanted to figure that out and then two just going back to the seaport. Obviously, you guys have a good rapport with.
Hudson Pacific Theyre doing the peer with vornado and in on the East side.
Going back to your to the Seaport does that open the planned if if ESPN leaves and you still have vacant office space does that change the calculus. There that may be you could do sort of a mini of studio.
In seaport, so sort of a two parter, but again piggybacking off of Tony's question.
Oh, well, let's see how do I answer this we haven't formalized any agreement because we are not at the point, where we should be doing that in terms of studios in Las Vegas and in summary, we are.
Still working with the elected officials and the Senate and the assembly and the governor to try to find a tax bill that works for the development of studios.
And we're working very closely not just with Mark and his team and he has been an incredible.
Spokesperson unofficial spokesperson for summerlin and for moving from coastal cities into better quality of life communities, but we've partnered closely with Sony and Sony Pictures in terms of.
Trying to advance a build it works and now working with them on designing a studio layout on our land that works my expectation is that we would we would be the real estate developer and owner of the studios the landlord of the studios and Sony and Mark in their various production companies among others would be the tenants within those facilities.
Rent to us as the landlord.
We're a long way to go.
And this is.
Yeah highly speculative so let's not model anything just yet.
We'll provide all those details if and when it comes to fruition and we're able to talk about it in greater detail.
In terms of the seaport again.
Look it's tough to speculate in terms of what are the opportunities for studios they are beyond ESPN.
We are actively looking at finding tenants for the remaining vacancy at the seaport and as we have something to announce trust me, we will announce it soon and quickly we won't wait.
Thank you.
Thanks, Alex.
Thank you.
Concludes our question and answer session.
The conference back over to Mr. David O'reilly for closing remarks.
Thanks, everyone. Appreciate you joining our call today and look forward to seeing you at our upcoming investor events, including our Investor day at the Seaport in September as narrow next earnings call. Thank you again.
Yeah.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.