Q2 2025 Howard Hughes Holdings Inc Earnings Call
Good day, and thank you for standing by. Welcome to the Howard Hughes holding second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question answer session to ask a question during the session. You will need to press star 1, 1 on your telephone. You will then hear an automated message. Advising your hand is raised to withdraw your question. Please press star 1 1 again, please be advised. That today's conference is being recorded. I would now like to hand the conference over to your speaker today. Joe valaine general counsel, please go ahead.
Good morning and welcome to the Howard Hughes holding second quarter. 2025 earnings call.
With me today are Bill Amin, executive chairman, David O'Reilly, chief executive officer and Carlos Olalla Chief Financial Officer.
Before we begin, I would like to direct you to our website www.hardwarestore.com.
The earnings release and supplemental package include reconciliation of non-GAAP financial measures that will be discussed today, in relation to their most directly comparable GAAP financial measures.
Certain statements made today that are not in the present tense or that discuss the company's expectations are forward-looking statements within the meaning of the federal securities laws.
Although the company believes that the expectations reflected in such while we're 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 filing for factors that could cause material differences between forward-looking statements and actual results.
We are not under any duty to update forward-looking statements, unless required by law.
I will now turn the call over to our CEO. David O'Reilly.
Thank you, Joe and good morning on our call. Today I'm going to begin with a recap of the second quarter and cover segment highlights from the master plan communities, operating assets and strategic developments.
Carla will review our updated full year guidance and balance sheet.
Following our comments on the operating results for hhc. We'll hand the call over to Bill Amin, our executive chairman, who will discuss hhh's future strategic Direction, before we open the line for Q&A.
As we discussed on our last earnings, call the second quarter marked. A significant milestone for Howard. Hughes Holdings with Persian Square investing 900 million in exchange for 9 million shares of HHH stock.
These funds will be strategically used to transform Howard Hughes from a pure play. Real Estate company to a premier Diversified holding company.
Before Bill discusses this. In a few minutes, I'm going to shift to talk about the results for HHH to the real estate development business. The Howard Used Corporation and more details.
The second quarter was another exceptional quarter for Howard Hughes as our team delivered outstanding results. Across our business highlighting, the strong demand in our portfolio of Master Plan, communities and further solidifying, our strong 2025 Outlook.
For the second quarter, we delivered adjusted operating cash flow of 91 million or a164 for diluted. Share our MPCs continue to see strong home builder, demand executing land sales at record prices for acre in both Summerland and bridges.
Operating assets also set a new record quarterly noi across office and multifamilies with solid year-over-year segment growth of 5%.
In strategic developments condo pre-sales. Remain strong at the lenu. And we launched pre-sales at Melia and Al Lima, which are undoubtedly 2 of the most anticipated luxury residential towers ever to come to Market in Honolulu.
With these strong results, we are raising our full year guidance for adjusted operating cash flow.
Driven by the current and expected strength in our MPC land sale business and operating assets noi.
Carlos will discuss guidance in a few minutes.
Record high average price. Per acre of 1.35 million a 29% increase over last year.
Land sales were led by Summerland, with 2 super pad sales, totaling 65 acres, achieving a record average price breaker of 1.6 million.
We also sold 2, custom Lots in Astra Summerland, newest luxury, Community for an impressive, average price of 7.7 million per acre.
Looking at new home sales, we can continue to see solid demand across our MPCs with a total of 487 homes sold in the second quarter.
while this was a decline from last year, the reduction was due to a reduced new home, Inventory in Summerland, and Regulatory delays in Britain,
As both of these issues are currently being resolved, we expect to see home sales for the second half of the Year remain strong.
while the national housing market has shown signs of softening during the quarter, our record price for acre, highlights the strengths and desirability of our MPCs
We're seeing steady demand for new homes across our communities. We believe this demand will drive home builders to look for more land to develop in our communities.
This will drive what we expect to be a continued record residential land sales price per acre and MPC EBT for the full year in 2025.
In our operating assets, like, we delivered, noi of 69 million representing a 5% increase compared to last year driven primarily by a record-breaking quarterly. Noi in our office in multi-family portfolios.
Looking closer at office, we reported noi of 35 million or 6% year-over-year increase
As we previously mentioned this growth was primarily the result of last year's strong lease of activity at 99950 Woodloch, Forest, 6100 mare weather and 1700 Pavilion.
Which ended the quarter. 99% 98% and 92% leads to respectively.
During the quarter, we acquired 7, Waterway a 186,000 square foot Class A office building and adjacent, structured, parking located in the Woodland Town Center for approximately 16 million dollars.
This acquisition increases our already strong market. Share of the Wilderness Town Center, submarines.
With this market, share, exceptional basis and net rents in the high 20s. This asset is expected to provide outsized risk, adjusted returns upon stabilization,
Our multifamily portfolio. Also performed well delivering record. Noi of 17 million or 19% increase year-over-year driven by strong lease up efforts at our recently completed assets and improved overall leasing at our stabilized properties, which were 97% leased at quarter end.
in our retail portfolio and our was 13 million, which reflected a 7% year-over-year reduction,
primarily due to the non-recurring collections of tenant Reserves at War Village in the prior year.
Excluding this impact in 2024, our noi would have seen a modest increase year-over-year.
In downtown Summerland, we continue to make progress on our tenant upgrades and recently, signed new leases with Biore and Paris. Spaghetti.
A quarter end. We had only 5 retail spaces available most of which are currently in. Negotiations representing only 17,000 square feet.
Turning to our strategic developments. In the second quarter condo pre-sales were solid with 17 units. Contracted representing incremental future revenue of approximately 35 million.
Nearly all of these pre-sales were at the lenu bringing this Tower to 67% pre-sold.
We expect to break ground later this year with an anticipated delivery in 2028.
Pre-sales that are a condo projects under construction which are 96% pre-sold on average, we're largely unchanged in the second quarter and we remain on track to deliver. Mulano Workforce Housing Development, that's 100% sold in the fourth quarter of this year.
At the end of June, we launched pre-sales for Malia and Al Lima Ward Villages, 12th and 13th. Condo developments. We've seen exceptional demand for these towers in a very short period of time and we look forward to discussing these results as soon as the launch is completed and the pre-sold units are beyond the rescission period.
With that, I'll turn the call over to Carlos, to discuss our updated full year guidance and our balance sheet.
Thank you, David and good morning, everyone.
Make items for the year.
As David mentioned earlier, this was an excellent quarter led by the outperformance of our NBC and operating asset segments. And we now project our adjusted operating cash flow will range between 385 and 435 million in 2025 with a midpoint of approximately 410 million or approximately 7.32 per share.
This represents an increase of 60 million of the midpoint compared to the original Guidance. With a corresponding increase of 32 cents per share, despite a higher share count resulting from the person's Square transaction.
In our MPC segments, led by robots demand from home, builders and continued low inventory of vacant developed Lots.
We now expect full year MPC VT to be approximately 430 million of the midpoint reflecting an increase of 55 million compared to our power, guidance, driven by strong anticipated, super fast sales in Summerland and improved residential law delivers in Richland in the second half of the year.
In operating assets, we are increasing full year guidance from our previous 262 million, midpoints to 267 million led by the strong leasing activity of our office in multi, family portfolios.
Those guidance would represent a new 4 year record.
We are reiterating both our cash GNA and condo sales guidance for the year.
Gas GNA is expected to be in the range of 76 to 86 million. With a midpoint of 81 million. As always, our guidance excludes non-cash, stock compensation and 1-time items representing approximately 15 million and 10 million certain expenses respectively.
Our guidance also excludes the person's Square variable advisory fee. However it does include 10 million dollars per person, squares, based advisory fees, which we have substantially offset by Future savings. Resulting from a reduction in our Workforce and other cost reduction initiatives. We have recently implemented
on the revenues remained projected at approximately 375 million for 2025.
Reflecting the scheduled closings at 1 and the fourth quarter with no gross profit expected from this Workforce housing Tower.
Starting to our balance sheet, we had 1.4 billion dollars of cash in 515 million to fund our online lines of credit combined. We had approximately 2 billion dollars of available liquidity.
Together with our strong guidance, expectations for the full year, we are, well, positioned to further, strengthen our balance sheet and deploy Capital appropriately.
At the end of June, the remaining Equity contribution needed to fund our current projects, which will not all be spent in 2025 was approximately 279 million.
From a debt perspective.
We had 5.2% of, which 92% was fixed or hedged at an average rate of 51%.
During the quarter, we made meaningful Headway on reducing our near-term. Maturities successfully completing 2 major financing to lower our 25 mature to 282 million
Notably, we extended the construction loan on our Marlow multi Family. Properties to April 2027 and secured a new 75 million 5-year fixed rate mortgage for 1700 Pavilion, replacing a construction loan previously scheduled to mature later this year.
With this extension is completed. Our remaining maturities for this year. Primarily consists of Merryweather Road, 6100 Merryweather, and tana Darrow.
We expect all this will be successfully refinanced during this year with Advanced discussions already underway.
And finally, we closed on the sale of M receivables, during the quarter generating, cash proceeds of 180 million.
This funds were used to pay down the bridge. 1 notes, reducing their balance to 85 million at quarter end and leaving 515 million available for drawing the facility.
With that, I will now turn the call over to our executive chairman Bill Amman to provide an update on Howard Hughes holding strategy.
Success of Berkshire has come from uh the acquisition beginning in the 1960s of an insurance operation and the growth of that business over the ensuing, UH, 60 years and what's interesting about insurance. It's a cash generative business generally, you write premium that, uh, you receive cash up front that you can, uh, invest. And if you run a profitable Insurance operation and you invest the capital well you can earn very attractive Returns on Equity. Um you know we want Howard Hughes to grow its intrinsic value per share at a high rate over a long period of time. Uh the beauty of a successful Insurance operation is it's a business where we can, you know, grow at a very nice rate over time without having to issue or raise Equity, capital in order to uh, grow our business model. So that's been a very high priority for us. If you were to examine Berkshire, over the last sort of 60 years, what's interesting is Buffett, took a very different approach to the way, he managed his insurance operation, a typical insurance company writes about as much premium as Equity Capital every year.
Uh, and then, uh, invests, uh, the float in, uh, you know, fixed income Investments principally. But uses a fair amount of Leverage to get an attractive return. So, about 3 times, the assets relative to equity is a typical, uh, balance sheet structure for insurance operation with those assets invested principally in low-risk fixed in income, uh Securities. Um, what Buffett did is he ran a very low leverage insurance company instead of writing
You know what premiums equal to equity? Every year he wrote, he's written premiums equal to about a third or anywhere between 20 and 40% of equity in any 1 year. So very, very underlever. In terms of uh, you know, the the risks assumed and the insurance operation, he took 100% of that float uh from writing premium and invested in very short-term. Us treasuries, basically taking no risk on the insurance company flowed. But then he invested about a 100% of the equity of the insurance operation, and Common Stocks, and Buffett's been a good stock picker, uh, and the result has been insurance company. That's earned, you know, well, into a 20%, uh, return on Equity over a very long period of time and the power of compounding is built, uh, really led to the success of virtual Hathaway. It's really been driven off of the insurance operations and the investment operations associated with that, uh, business we've taken a page from Berkshire. Uh, we are looking to acquire, uh, a Diversified Insurance operation and we intend to run it.
In a similar fashion, low leverage in terms of the premiums written relative to equity low, leverage in terms of uh, the amount of assets, uh, relative to equity. So, call it, uh, 1 and a half times versus 3 times for a typical insurer uh investing 100% of the float in you, uh, short-term use treasuries, and taking no risk on kind of float, balances, and then invest in Common Stocks and very high quality durable growth companies of the kind that persing square uh has identified and invested in uh, over time. Um, you know, we want to sort of
Interesting question would be why don't more, uh, insurance companies operate this way? And the answer is, what was unique to Buffett, is he brought, uh, investment skills, uh, that really are generally absent. Uh, certainly on the common stock side, uh, of an insurance operation. You know, insurance companies today really focus on maximizing, the profitability of their insurer, and I would say, the asset side of the balance sheet is a bit of an afterthought and part of that is insurance companies. Have difficulty recruiting uh kind of best-in-class talent to run a successful uh investment operation, particularly 1 that invest in equities, 1 of the things that we bring to this uh transaction with Howard Hughes is an investment operation and that investment operation comes for free if you will to the insurance, uh, subsidiary. So the plan would be, we acquire ensure, uh, we run it at a low leverage insurer, uh, with conservative extremely conservative in the way we invest the insurance company flowed and then Persian Square, Persian Square team invests. Uh the uh the assets of that insurance, the assets uh, equal to about the
Equity of the insurer uh in a common stock portfolio that we manage for the company uh for free. Uh, we are looking at a number of potential uh transactions. Uh we hope to be in a position. Uh if we find the right company at the right price, uh to have a transaction, we can announce. Uh, we would hope uh, by the fall and at which point obviously we'll be able to share sort of more information. Um, we have our, our annual meeting will be on September 30th. Uh we're hosting it uh this year in New York City, it will be at
Uh the Persian Square signature Center on 42nd Street. It's a theater complex.
Of Howard Hughes, we've had some, you know, as we spent more time thinking about the business, we think we will be able to kind of present some metrics that uh, you know, people should be focusing on as we kind of build this company. Over time to kind of measure our progress. Uh, and measure our success uh over time.
uh, so really encourage you to come to that uh meeting we're also going to have, you know, an open
Q&A session, uh, where Ryan myself David U uh will be available to answer really any questions you have and I think will be really a fun interesting session. Uh, so we really think it would be a great way for you to learn more about our plans going forward, 1 last comment with respect to, uh, well I sort of failed to mention as I described our plans with the insurance company can be 1 of the other benefits, uh, that this insurance operation in Brookshire had is it was part of a diversified holding company and result of that is that incremental credit support. That came from the holding company, gave the insurance, operation more, uh flexibility in terms of its ability to invest. Uh its assets, we believe we offer something quite similar here. In the sense that 1 we have Howard Hughes Holdings, uh, as the owner of this insurance subsidiary in a completely unrelated, uh, business that will start to spin off, uh, substantial amounts of cash, uh, over time really unrelated to the insurance operation and then Howard Hughes itself is owned 47%.
Um, by uh, the Persian Square funds, uh, namely uh, purging Square Holdings, which is an A minus rated, uh, company with about 15 billion of equity and the Persian Square management company. Uh, which is a basically unlevered business very profitable unlevered business. Uh, that is not currently rated, although we do intend to rate the business, but was valued in a transaction last year at about 10 and a half billion dollars. So, you have about, you know, 25 billion of equity in terms of the 47% owner of Howard Hughes, a very high, you know, creditworthy, uh, Enterprise. And an unrelated business, uh, to insurance and then Howard Hughes itself owning uh, you know, hopefully the insurance operation and the relative short-term, uh, that we will run in a similar fashion, uh, in terms of some approach uh, that Berkshire has taken over time in terms of low, leverage on both the asset and liability side of the balance sheet and a higher return strategy with respect to the assets of the company uh with that. Uh we would be happy to open it up uh for questions and
Operator: Uh, you could take the questions, please.
As a reminder to ask a question. Please press star, 1 1 1 on your telephone and wait for your name, to be announced to withdraw your question. Please press star 1 1 1 1, again please, stand by while we compile the Q&A roster,
Our first question comes from the line of Alexander Goldfarb from Piper Sandler.
Hey, uh, morning, morning down there. Uh, two questions. Uh, the first one is going to be on the MPC business, and then I'll get to the, uh, the bigger picture, David. Uh, your land sales, the volumes have increased. That's despite what we're all reading about challenges in the single-family market. Uh, obviously you have the premium product that you guys sell, but there's also a wider array. So can you just give some more granularity on, you know, it's impressive what you guys deliver? But still, against the higher interest rates, housing affordability, etc., you know, how do we think about your properties, the price points, the diversity of buyers versus what's going on in the broader market, and your confidence that, you know, this can endure, uh, can continue to endure even in the face of, you know, elevated interest rates and sort of all the macro concerns?
Morning, Alex, you know, it is a question. It's a great question and 1 that we've spent a lot of time discussing and we go through an excruciating detail, our communities with the teams and track as you know, home sales within our communities maniacally and we see those home sales as a leading indicator for what the home builders will need in land purchases on a go forward basis.
To date our home sales have been incredibly resilient and I think that is due to the quality of assets that we have our MPCs have the best schools amenities quality of life. They're attractive for residents and Home Builders
The home, builders are building homes and they sell at a premium relative to those areas around them. And as a result, our land remains incredibly attractive.
And you know our communities. I've been saying for years, we're not immune
but we're insulated and there's always a flight to Quality Inn in markets when there is
And buy homes.
Um,
The home prices that we're seeing the transactions at vary across the Spectrum in Bridgeland. Our homes are in the 300s to the 500s in Summerland. They're in the 400s to the you know, 10 million dollar range. Uh so we're seeing it with your um first-time home buyer. Your move up home, buyer and your luxury buyer. It, it has been pretty consistent across the board. It has been uh, even somewhat surprising to those of us in the room, giving the national headlines. I wake up, I read the headlines, I think. Oh my God, today's the day, the music stops, and
Gosh darn it. If the report doesn't come in on Monday morning, that says we sold another 20 homes in each of our communities, which is an incredible pace.
So we're thrilled with the results, we see continued strength for the balance of the year, the record price per acre. I think speaks to the quality of our communities, the desirability of our land. And at the end of the day, that land we have is the precious raw material that the home. Builders need to ca to stay in business and remain profitable. And if you have the opportunity to buy land as a home builder and a cuspy market, where you don't, not sure if you can generate a great margin or buy land in Summerland that for 25 years is demonstrated success in our performance. I still believe that those home builders will buy land in our communities.
Okay, and then the second question is for Bill Bill. When we met with you uh a few months ago, you spoke about you know, the potential for, you know, creating your own insurance, entity, hiring an individual and and creating homegrown. It sounds like now you're thinking more on acquiring an outside entity. So 1 is your thoughts on homegrown versus acquiring and then 2 as you ramp up the the Howard Hughes and that and that investment, you know, cash flows. It almost sounds like from the outside like we should think about this to be 2 to 3 years before those cash flows really start to ferment. Uh, but just curious, if we should be thinking longer, or you think that the accretion could be sooner
Uh, sure. So, you know, our thinking on building versus buying is uh if we can find the right asset and we're I would say increasingly confident we can there are a number of potential transactions of a size and a I think quality uh, that would be a great start for us and um, you know, again it's going to come down to terms and price and and uh, work. But I think uh, we've got a number of potential things that we're looking at. So that gives us some confidence, there's a deal to be done and there's a big Advantage uh to, you know, starting from truly scratch. You know, the issues in terms of Licensing, building an organization technology. Uh it's not reported this way, it's not a running start, whereas we actually buy an existing well-run Insurance operation. Then you're, you know,
Often, you know, off the ground in running, you know, sort of immediately, um, you know, our expectation, uh, based on the things that we're looking at is this would be a material uh, transaction to Howard Hughes. Uh, assuming we do 1 of the transactions, we're looking at, uh, meaning it would very quickly represent an important, uh, part of the business. Uh it, you know, and as successfully run Insurance operations, the way that we've identified is a business that can consistently over time. Earn, I would say Returns on Equity, uh,
That are, you know, meaningfully higher than even the best run. Uh, kind of real estate operations. So we do expect Insurance. Uh, and the relative intermediate term uh, to become, you know, very material, uh, to the company. To the point that people will probably stop thinking about Howard Hughes is a real estate company with a little Insurance operation. I think they'll think of it in the way that we uh, you know. So our business plan as a perhaps an insurance holding company or a diversified holding company with a major Insurance operation but that's that's the business plan. Uh but again it's all subject to our ability uh to find the right company. The right price. Uh you know uh and that we won't know until we get a transaction done. But I would say we are cautiously optimistic uh that there are a number of potential candidates and we're working hard to do a transaction, okay? And then if I could just add when we think about the earnings potential, we should think about a significant part coming from the insurance business.
Business or that. The stock portfolio is going to be more of the generation of the earnings contribution. Sure. So um you know again going into the Berkshire model. I would say the investment. Part of the insurance operation, has been more materially more important to the profitability of the insurer than the insurance company itself. Um, you know, uh,
But, and I think, you know,
The fact that he's investing in assets that can earn, you know, Equity type returns um and the insurance company itself is a focused on profitability. Um, you know, the the typical Insurance operation is pretty aggressive in making as much money as possible from insurance, and using leverage to get an adequate return on assets. Um, you know, we we, we, we think this approach is both lower risk and kind of higher return. So, I think, the way you should look at the insurance operation over time is, you know, how are we going to? You know, if we had a billion dollars of equity invested in Insurance? Let's say, and we can compound that Equity at 20% or more over time. Um, it will become very, very material to the overall intrinsic value of power to use. I think that's the way to look at as opposed to earnings. I think you're going to going to want to focus you on, you know, the growth in the, you know, the equity value of this insurance company over time. And and, you know, I the how much use is tried over time to come up with sort of a per share, kind of cash flow or earnings metric, um, to try to fit.
In with, you know, other, you know, the conventional real estate companies that have an ffo or other metric.
I think that's frankly a mistake um and uh you know, and I don't I don't know that the Market's actually really given us credit for that. So we're going to come back. We're working with the team, uh, on giving you some kind of kpis that you can think about and looking at our business, like, if you think about, you know, Howard Hughes
You know today, right. You've got obviously, you know, the most straightforward part of the business is, you know, net operating income. We generate from a, you know, a portfolio of of real estate assets. We have a condo business that you can think of and a fairly straightforward way, right? We've got, you know, certain amount of profits we're going to generate from each of these various Towers kind of over time. And then we have land Holdings. Both commercial and residential. And you know what the intrinsic value of Howard Hughes depends on kind of growing, uh, you know, the cash flows from the real estate operation, uh, they and they relate to what price we're monetizing land. And what the value of our remaining Holdings are, you know, those are kind of the key sort of metrics that we're going to look at, but we think people over time, particularly as the insurance operation becomes, a bigger part of the business, we'll be focused on kind of overall, the growth of the intrinsic value of the company over years as opposed to you know a quarterly metric uh of a cache that I think is very cheap.
Challenging to do for business. You know as you know that has everything from land sales to development stabilized assets
having covered how to use for a long time and I can appreciate that. So uh thank you Bill. Thank you, David sure.
Thank you. 1 moment for our next question.
Our next question comes from the line of rayong from JP Morgan.
Hi, good morning. Thanks for taking my question. My first question is on, um, The Leverage side. Uh, bill. As you look at the leverage as of today, for Howard Hughes and you know, the Target that you're trying to go after, how should we think about a perform our profile on Leverage and given that?
You know what are the Dual size that you think we should be expecting? Would it be a 100% stake or something in in something or uh smaller stake but a larger company? How should we think about that?
Uh sure. So you know we we think that Howard hughes's real estate operation is kind of appropriately financed uh and we don't intend to kind of, you know, lever it up any kind of material way. Uh, you know, we like the business, the way it's being managed. Uh, today we have today excess cash of certainly the 900 million and pay maybe another hundred or a couple hundred million dollars of excess cash in the overall company called a billion dollars. That's sort of in the realm of the amount of capital that we would intend to use if we were to invest in Insurance operation. If that business uh if the check size was larger uh we would uh raise uh capital
You know, partner with uh, other Persian Square, uh, Affiliates, uh, and doing a transaction. But the, the goal would be for the company we acquired to be controlled, uh, by Howard Hughes, um, and uh, yeah, that that's an important element. Ryan wants to add something, go ahead and to clarify, just your question. Um, we don't need to own a 100%. As Bill mentioned, we would like to own more than 50%, uh, of it for control. But when we talk about raising Capital 1 of the values that we believe person, squares, providing the Howard's use. In our rangement is, we have the ability and it demonstrated over time.
Beyond uh, the cash on the balance sheet, we could partner in a way that would be very accretive to Howard Hughes shareholders. While at the same time, still allowing us to be able to control the entity in terms of the daily operations. Yeah. Just to to further. Um,
You know, to Ryan's point, you know, if we were to buy a business uh Insurance operation for a billion and a half dollars, a billion, uh, check written by Howard Hughes and let's say 500 million by co-investment. Uh, sort of vehicle, it's an attractive co-investment for someone. We're Howard Hughes is sort of the likely ultimate buyer when the company sort of gets to a scale where it can buy out sort of the minority Partners. So there's a interesting potential partnership opportunity. But, you know, we're not talking about buying a 5 billion dollar asset in owning 20% of it. I, we're really focused on is something order of magnitude in the billion 2 billion ish, uh, you know, kind of, uh,
You know, whatever it could be a billion to, theoretically 3 billion. You know, something along those lines, uh, where Howard Hughes is sort of the, the control, um, owner
Gotcha understood. Thank you. And the second question is on, you know, us as Bill and your team has, you know, gotten into the day-to-day in the organization. Uh you know, what are the things that you guys have changed so far? Obviously, you know, on on the GNA side we see that um, maybe just give us some thoughts on things that you have changed. And
What else are you looking at to change at this point? Um, should we expect? This is more like more or less the the the the stable status? Um and also you mentioned the mix of it. Uh, moving forward strategically you want, you know, bigger part of the business mix to be towards insurance. So does that change the remainder real estate portfolio? Do you look for
You know, changing the mix between operating assets and PC and condo like how should we think about those as well? Looking out? Uh, sure. So I would say we've changed nothing. Uh, with respect to Howard's, real estate operation. I do think it would be helpful. Uh, you know, the the GNA initiative was something that, you know, David had sort of underway in planning prior to our uh transaction and there there is a very thoughtful. I would say strategic Logic for the changes that were made organizationally. I think it would be useful for David. Um maybe you describe where those GNA savings came from, why we made those changes. Um we don't and then uh we don't have any plans to change the way Howard Hughes. We really like
Obviously we've been involved with this business for 14 years. We've had a board presence. I was chair for whatever 13 or so, those years. Um, so we're very happy with where the real estate business is and the way it's currently being managed. I think the only difference today versus before would be, you know, maybe if some of the world's grid is MPC assets,
Showed up, you know, uh, across the street. I mean, not across the street, like, I don't know some other Market, uh, like another, you know, Phoenix type transaction. Where to show up, I would say we're less likely to do that today. We feel like we have enough exposure to sort of the MPC business, um, but there's a ton of work to do, uh, in the, in the existing assets and the idea is just to continue to develop, uh, the Howard Hughes, uh, communities. These sort of small cities and make them, you know, the most desirable places to live in America. And I think they're, you know, the fact that the, the, uh, home sales performance lot sales performance kind of speaks in a more, as a maybe increasingly challenged, uh, residential uh Market uh, kind of speaks to the power of those communities. But no real change to that business and the team's doing a great job of running it, but David maybe you should comment on, uh, some of the changes you've made organizationally and, and why how they generated GNA benefits. Absolutely bill it, it's a, it's a good question. Ry I appreciate it. Uh, what we really did is we took a step back long before the Persian
Square announcement was made in terms of how we operate this business and given the changing Market environment where development returns are tighter costs are up rents have not kept up with it. We thought about a rationalization of the overall organization and a focus of that development platform, into more rifle shot opportunities where we can generate the highest and best risk adjusted returns rather than taking a more scatter plot approach.
Because the velocity of development as you noted in our results has slowed. So we've been able to centralize and bring that Talent into 1 place where we can use that Talent across regions partner with our regional presidents to execute and I think operate in a much more efficient way, delivering greater free, cash flow to the bottom line. Uh, I I don't want it to be lost on our investors and our analysts that in Carlos's prepared remarks, we left our GNA guidance unchanged, despite the, the transaction with Persian and the inclusion of their fixed fee, in that Gene a guidance. I think our ability to do that and maintain GNA neutrality uh and get the ability to Leverage. The Incredible amount of expertise. It's a purging Square. Uh it shouldn't be lost on our investors. I think it's an incredible benefit.
Yeah, the other thing I would say you know it's a bit you know investing real estate development and running a profitable insurance company have sort of the same thing in common. You want to do business when the returns are attractive and you want to step away when they're not. And the problem of having kind of, you know, soup did not development teams at each of these various locations. Is, if you're a developer, you just want to do stuff. Uh, and that's when people get into trouble and kind of real estate development and you know, and it's also not great to have headquarters always turning down transactions, you propose because they don't offer attractive enough returns. And so, you know, you can actually have an absolute best-in-class team. You can take the best and brightest of all the various regions and and, uh,
Centralized them in 1 location. Um, you can take the skills like you know we have an incredible team uh marketing team that has run the uh the condo program uh for example in uh Hawaii uh led by Bonnie and uh you know, when our to use uh decided to build a condo in The Woodlands. We had you know all of that expertise and development expertise. Uh that we could apply uh to what what is going to be an enormously successful. What is already a enormously successful uh development uh in the Woodland. So there's a GNA savings. Um and it actually is it makes it it's much more attractive place to work. In the sense that in our various developments there's probably always going to be something interesting to do in a certain property type. Um, so we got a GNA savings. We got a a vesting class team. We leverage all the learnings from the various, uh, communities and and there's less pressure, you know, uh, to to do business, Brian. You want to add something? Yeah, and I'll just add, I think 1 of the most important things that we're focused on now and where you will ultimately see
Over time the value creation from the addition.
Of the Persian Square team to Howard Hughes is in capital, allocation broadly and it's both David mentioned you know, his comments on real estate and taking a rifle approach to get to the highest return projects. And as Bill mentioned, we are opening the aperture aperture in the ways in which we can deploy Capital. So we put a lot of capital on the balance sheet, 3 months ago, that can be deployed. And if you think about it, now going forward, we have an opportunity to take the highest return, real estate projects and be able to focus on those take the excess cash.
That may have otherwise been deployed towards somewhat attractive but still lower returning real estate projects and put those towards other things. Every time you write an insurance policy that isn't Capital allocation decision
The way you invest the cash from the float, that's a capital allocation decision. We have historically had in our Persian Square investment strategy. Arguably among the highest returns that you could find amongst most Capital, allocation strategies and insurance. Gives us a pathway to continue that. In addition though, we have the ability to ultimately over time look to acquire other businesses, which will both provide a diversification of the cash flows, Beyond Insurance, and real estate. But at the same time, give us another arrow in our quiver to be able to take advantage of high return opportunities. And if you look at as Bill had mentioned, birkshire is an example. We think 1 of the reasons why Berkshire has been so attractive, is that there were a number of ways in which they could deploy a lot of capital into the highest return opportunity at that moment. And that's really the value that we're trying to add to Howard Hughes as we transition it to a diversified holding company.
Yeah, when we're sort of the other benefit we have is we own 47% of the company. Uh, we are under no pressure to deliver an outcome next quarter this year, uh, and we can as a result be super thoughtful, uh, about how we think about deploying capital and that carries over to the entire Howard Hughes, sort of organization. You know, if you if as a pure play Real Estate Community developer all the cash that we generated over time, we really had no place to put it other than
and the shares outstanding uh you know don't change or if anything they shrink over time and the ability to do that uh is much greater in Insurance than if we were running around doing you know
Acquisitions 1 deal at a time, but over time the goal is, you know, as as the real estate operation, generates more and more cash, we'll have more cash for investment, the holding company, the insurance operation itself. Uh, we expect to generate a lot of cash that will be reinvested, uh, in, uh, equities, um, at least beyond the piece that we need to put aside, uh, for, uh, the insurance business there. The, you know, the, the claims potential claims in the future. Um, and that's how we we built some, a company that's very valuable and appreciate your basis.
Thank you so much for uh, from all 3 of you. This is uh very uh thoughtful. Thank you so much. Sure.
For next question.
Our next question comes from the line of John Kim from BMO Capital markets.
Thank you uh bill in your commentary earlier. Uh I think you mentioned that you were looking at a number of potential transactions and I just wanted to clarify that ultimately you'll just be acquiring 1 insurance company and not a series of acquisitions.
And then secondly, uh, for the companies that you're considering, uh, to acquire do they already operate, the way that you prefer in terms of being conservative and the levered or anticipate changing how they run. And if that's the case, how difficult is that to implement?
Sure. So what we're focused on now is buying 1 business run by an excellent management team. Uh, that's, you know, done a very good job in the, you know, writing writing business, uh, over time
All of the companies we're looking at are operated as conventional insurance companies. I would say, uh, in terms of the amount of Premium, they write relative to Capital and the way they invest their assets, uh, our plan would be to, you know, change that, uh, you know, uh, over time. Uh, but you know, the
You know, Berkshire is a pretty much, it's it's almost unique. Uh, you know, there are a couple of other examples of it, uh, of insurers that have taken kind of a somewhat similar approach. I think it's the, it's the Exemplar, uh, sort of uh, example. Uh, but you know the um, you know, the it it helps enormously uh there are very few insurance companies that are part of the verse. Right? Holding companies basically
Uh, and so that's why, uh, the targets we're looking at are operated conventionally, I would say.
Okay, that's helpful. Um, maybe turning to to David, uh, you talked about the record price per acre that you achieved this quarter. Um,
In page 23 of your supplement, you have an estimated price per acre and that didn't change sequentially uh for Summerland or Bridgeland. Is that policy not to change that figures into an estimate or anticipate that number going up?
Well, I
Uh, John, I think conservatism is always the best policy and as as incredible as our results have been this quarter in the past. Several quarters for me to try to extrapolate that to the Moon over the next 30 years, I think would be uh, a little bit Cavalier. So we take a conservative approach. We don't use 1 quarters results to impact the future per sale. Acres on a daily basis. We looked on a trailing 12 trillion, 24 months, and if we feel that it's appropriate to apply that price break or across the remaining, we will
Okay, if I could just squeeze, 1 more in on, uh, Ritz Carlton. The condos sales of sort of stalled over the last, uh, couple quarters intentionally. Actually let me, let me let me jump in there. Okay, so so I it, it's largely because of me, uh, and uh, you know, I the the team sold out the first half of the project despite raising prices on a uh you know, weekly basis, um because of uh demand.
Um, but you know we think that act since again. It's a first of its kind, uh, in the Woodlands. Uh, and really truly breaking new ground here. Uh, we're definitely leaving a lot of money on the table in the initial units that we've sold. It's still prudent to do so, so I’m obviously supportive of everything that management has done, uh, so far. But it behooves us to leave, uh, you know, a nice piece of the project, um, as it gets as people can actually see the finished product.
And are the remaining units not a higher floor or a higher price point. Uh, generally
The remaining units represent a good.
Uh, sample set of the overall units of the building. It's not as if the smaller units are left or the penthouse is are left. I think we've sold a great range of units from the smaller all the way up to some of the pain houses and what remains is a representative sample, set of the overall build.
I mean basically every time David sells a unit I tell him he sold it to the 2 cheapest and every time he hasn't sold the unit I'm told him he's not selling them quickly enough. So that's the nature of our relationship.
Great caller. Thanks.
It's like in trading where you tell the trader? Oh, we should have bought it, I would have bought it here and I would have sold it here. You know, that's it's a good way to keep management. Uh, the
Uh, their feet up at the fire, so to speak.
Thank you. 1 moment for our next question.
Our next question comes from the line of Peter abramovitz from Jeffrey's.
Yes, thank you very much for the time, and, and for taking the questions, uh, maybe just out of the philosophical question. Uh, if I could for, for bill, um, I guess, what would you say to kind of some of the common, um, push back from, from the market, and from investors on
Sort of the complexity of the Howard Hughes story. It's, it's maybe been a concern over time and and been a challenge that, um, you know, some of the feedback from the investment Community is that it can be hard to underwrite, or, you know, people struggle with some of the parts stories and, and kind of the, the long duration of capital required for, for unlocking value, the lack of comps. And, um, you know, certainly, uh, birkshire is a, is a good model to follow, but is a bit of a unicorn in its success, story in the public markets. So I guess, um, just kind of philosophically, how do you get the market comfortable, um, with some of those challenges, uh, that, that still exists in the stock. It's kind of, what would you say to some of that? Push back.
Uh, sure. So look I I completely understand it and it's something we struggled with as a independent public company focused on this business. And ultimately, you know, I think we collectively and certainly a purging Square came to the conclusion that we're never going to be able to get the kind of respect we deserve, if you will, for management accomplishments and, and the quality of our assets as a pure play Real Estate company and I think that's driven as much by complexity as actually, uh, the market assigning, a very high cost of capital to a business that's in real estate development, you know, land sales, condominium development and and and multi geography and its unique and doesn't pay a dividend Etc. So we sort of said, you know what, we're never going to overcome this. So now what what you should do instead is Embrace embrace the complexity so to speak. And what I mean by that is, you know, Howard to use the core real estate business is a phenomenal business and you'll understand that business, you know, over, you know, the next you'll, you'll understand it even more over the next 3 4 or 5 years, as it starts generating, you know, a ton of cash.
Uh, and then even more. So, overall kind of a longer period of time, but we don't want to double down in that business and just keep redeploying capital, and buying more MPCs. Because we'll, you know, it's a story that will never properly. Be told what we want to do instead. Uh, while you're right there, there are the, the examples of successful Diversified holding companies are limited. Uh, we do believe uh, that we have the kind of necessary collection of uh skills uh assets and
To kind of set a starting base, uh, to do. So, you know, if you look at Berkshire's success, a big part of it came from the fact that Buffett himself owned half the shares outstanding. So, we can take a very long-term view. Well, we own 47% of the shares outstanding. Um, the second thing that Buffett brought to the table is that he was a very talented investor, uh, a proven talented investor in the stock market and investing in common stocks.
To the table, uh, you know, to this company. Um, you know, we spent a lot of time studying Berkshire over time and you know, without Berkshire's insurance operation, it wouldn't have been a particularly interesting business. That is a key, uh, part of our strategy here. Uh, we're cautiously optimistic. As I mentioned, we can start in a good place with a good asset, with a great team, uh, and build, uh, you know, a profitable insurance operation. And we're going to manage that insurance company's investment portfolio for free. Now, I want to very carefully distinguish. Um, you've seen there are many examples of regular way insurance companies that invest their assets principally in fixed income securities.
And then there are a bunch of hedge funds. I would say that kind of either built or acquired insurance companies for the purpose of creating permanent Capital to invest in their funds and the way and and the track record of those entities is poor. I would say generally. And the reason for that is, um, you know, 1 they didn't Focus as much as they should have on on actually having the best-in-class teams running the insurance operation and 2. They invested their assets in their funds uh and charged High fees. Uh it was really a fee generating a um kind of exercise. What we're doing here is the assets of Howard hughes's. Insurance operation are going to be invested directly in Common Stocks, not in Persian Square funds, not charged fees. In fact, there will be, you know, there's that, it will be the lowest cost investment operation of any insurance company because we've literally will be doing that as part of our old.
Overall, arrangement with Howard Hughes 1 of the interesting benefits.
To the management teams, uh, that we, the management team that runs our insurance operation, is because the benefit of purging Square's investment document without any cost associated with it. That actually, obviously, is beneficial to the ability to run that company profitably. So while there's no guarantee we're going to be successful taking this approach, I think we have, you know, the sufficient degree of ownership, uh, and understanding of the existing base business. Uh, we've got, you know, a balance sheet that will enable us to do initial transactions. The company has vastly more resources that it could afford, um, because it has the entire purging Square organization working alongside Howard Hughes at a, you know, cost that is, you know, a fraction of what it costs. Um, so these are significant competitive advantages, and I would say, unlike Berkshire.
Our base business is a vastly more attractive one, and Buffett had an effect on a liquidating insurance company that was his base.
Asset and textile with you know which was basically a textile operation. Um and he redeployed that Capital fairly quickly over time into much better businesses. We have the benefit of a real estate operation that we really like as long as we don't buy another NPC, it's it starts it in which we don't intend to. Uh we can uh it will generate a lot of cash that we can redeploy and other businesses and I think as this becomes a more Diversified company, uh, the kind of uh,
Okay. The very high cost of capital that shareholders assigned to the company is going to come down. And, you know, just from a technical perspective, I would say...
Um, the universe of investors who want to invest in a pure play MPC company, we kind of know. Uh, those are the investors that have kind of come and gone over time that have owned Howard Hughes over the last 14 years. Um, Universe of investors that can invest in Diversified holding company is, you know, uh, thousand X, the scale or, you know, infinite relative to what, uh, are willing to invest in a diversified holding company. You know, the um, it takes only a small number of Berkshire shareholders, if you will, a tiny percentage of a trillion dollar market cap, uh, to decide to be interested in Howard Hughes to buy the 53% of the flow, that's not held by us for the stock to do very well over time. So, we think while there has been, you know, some, you know, I'm sure a pretty material exit from the shareholder base of kind of dedicated pure play, Real Estate Investors. Uh, those investors have been replaced, uh, by investors who are betting on kind of the Diversified holding company Story the the, uh,
You know what we intend to do here and I think you know what causes the stock price to go up over time. I think if we execute on what we hope to and starting with a great Insurance operation, we start to uh deploy that Capital intelligently people start to see results they realize this is no longer the old Howard Hughes. Um we're going to attract a much broader base of uh investors and and I think that becomes a pretty attractive uh
Stock story.
Picking up.
Yeah, no, it's a great question. We're couldn't be more excited because this is an asset that I'm looking out the window, and I can see here, right? On the heart of the Waterway, is the first office building you come to as you exit 45. It's a pristine Class A building that is entirely empty.
It is the only vacancy in the Waterway submarket of the woodlands. Uh as we've leased up all of the other assets that we've had almost entirely full
And it's a market where we're able to do achieve and are building like that high 20, net rents uh with a basis today of around 80 dollars a foot and after we put in TI, we'll still be Sub 2000. We think it's an outstanding opportunity to generate risk adjusted returns and uh, allow us to meet the existing demand that we see in this submarket that we just currently can't accommodate. Because our assets in the submarket are full,
So, we're we're meeting the demand to offer tenants that want to be in this submarket. We're doing it and outstanding basis. And I think that we have a, a really good opportunity here to lease this thing up. Quickly, similar to how we did this building here at 9950, uh, that we acquired. Uh, you know, if you recall right before the pandemic.
All right. That's all for me. Thanks for taking the time.
Thanks Peter. Thank you. 1 moment for our next question.
Our next question comes from the line of Josh Caffyn.
Hello, good morning. I just had a question about macro hedging regarding hedging strategies. How will the positions be constructed, for example, in the scenario of the CDs trades that Perishing held? If HHH were to be in that situation now, would the trade be executed through both of them, or how would the size of those positions be constructed?
And for future Acquisitions with similar approaches be used. Thank you.
Sure, I think it's a very good question. So 1 of the things that Persian square has done over time, with respect to our Investment Portfolio, is the bulk of our assets have been invested in you know Common Stocks of high-quality durable growth companies.
Periodically, I would say, episodically, uh, We've identified what I would describe as Black Swan, type risks in the market or cases, where we've got a very, I would say very in view, uh, on interest rates or commodity prices or, uh, you know, currencies. Uh, and the market offers us the opportunity, uh, in the form of a option like instrument, uh, to make a large profit relative to our investment if the expected uh or the potential risk, we're to occur. And we've used that to kind of hedge risk and in some cases a little more opportunistically just to
Make money. Um,
You know the uh, if we were to identify such a risk, uh, and we thought it appropriate for Howard Hughes to hedge that risk. We would size a similar sized, uh, hedge in Howard Hughes. Um, by buying either an interest rate option, or credit, default swap at Howard Hughes, like we like we do in the purging Square portfolio and we'd size it relative to what we think is appropriate in light of how much Equity or how much exposure we have to that, you know, particular kind of risk. Um, and that would also be a strategy within the insurance company Investment Portfolio. Uh, that we would, uh, you know, operate. Uh, similarly. Yeah, and I, I think the key to, to think about that as Bill mentioned, is when we buy these, uh, typically options or option, like instruments. If the risk that we're worried about doesn't come to fruition, and the option doesn't pay off. We size into an amount where we like to think about it is effectively, you don't notice it and the aggregate results because the amount of money you can lose will be small enough at the same time, if
If the risk that we're worried about actually comes to fruition the payoff, from a relatively small investment will be large enough where it will have a very material impact. And those are really the only types of Investments we make where they're very asymmetric. So that, um, when we're hedging something, if it doesn't work out, it will not be a material negative impact, uh, to the Howard Hughes business, but it would be a very material positive. If that risk were to come to fruition that. That would be the key in how we sized, uh, these, what we call asymmetric Hedges, which is the way that we
Markets. Howard Hughes was not in a position, uh, to do so. Didn't have the expertise, wasn't set up in order to be able to write that insurance, didn't have arrangements in place with various, uh, financial institutions. Howard Hughes didn't participate. Uh, we made a very large amount of money on a very small amount of premium investment; uh, you know, invested $27 million in premium, we made $2.6 billion ultimately in profit from that trade. You know, if we could have done $10 million for Howard Hughes, uh, or if we had done $5 million for Howard Hughes at the same time, Howard Hughes would not have had to do a $100 million equity offering a month later. Um, you know, it's maybe a very real-life example.
Of uh, of you know what we hope to achieve uh in the future?
In the conference back over to David O'Reilly for closing remarks.
Once again, thank you all for joining us. If there are additional questions or thoughts, we are always available to answer those. I'll close by reiterating what Bill mentioned earlier: we would like to invite everyone to join us on September 30th in New York City for the annual shareholder meeting. It will be on 42nd Street in Manhattan. Information details and your ability to register will be available as soon as our proxy is filed, beginning on August 18th, on the Investor Relations page of our website, howardhughes.com. Thank you again.
This concludes today's conference call, thank you for participating. You may now disconnect