Q2 2019 Earnings Call
Good morning, and welcome to the Howard Hughes second quarter 2019 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to David Stasse Executive Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to the Howard Hughes corporations second quarter 2019 earnings call.
With me today are David Weiner, Chief Executive Officer.
And her Lynch President, David O'reilly, Chief Financial Officer, and Peter Reilly General Counsel.
Before we begin I would like to direct you to our website.
Www Dot Howard Hughes Dot com.
Where you can download both our second quarter earnings press release, and our supplemental package.
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 well that discuss the companys expectations are forward looking statements within the meaning of the federal Securities laws.
Although the company believes that the expectations reflected in such forward looking statements.
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 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 Im wondering.
Thank you Dave and thank you all for joining US today welcome to our second quarter 2019 earnings call.
I am pleased to report that we had another very productive quarter, creating value across the portfolio and our core business segments.
A few highlights.
Total I know why from operating assets was up 32% compared to the second quarter of 2018.
MPC residential land sales were up 14%.
Compared to the same period last year.
And net new home sales the driver of land sales were up 13.4% and our communities.
Two of our communities ranked within the top 11 nationally at the halfway point of the year.
Summerlin ranking for and bridge Len 11th.
It is worth noting that home sales in Bridgeville and are up 35% in the first half of this year compared to the same period last year.
Strong sales at board village continue with another 56 home sales during the quarter.
We also have the delivery of the 99% sold K kill Uh Huh.
Which provided additional revenue of 212 million.
Additionally in July we broke ground on our newest building Cola that 64% pre sold as of June Thirtyth.
We began construction on a new multifamily project in the woodlands that will deliver an 8% return on cost and an additional $3.5 million of in Hawaii.
Now I'd like to start with some details from our strategic development segment, Ben Grant will talk about our Mpcs and operating assets followed by David O'reilly on our financial results.
We had another strong quarter in our strategic development segment.
With robust sales of Condominiums award village in Honolulu.
As I mentioned, we sold a total of 56 homes during the quarter, including 45 and Cola.
The building, which will have 565 homes and launch sales in January of this year was already 64% pre sold as of June Thirtyth and 65% pre sold as of July 31st.
An incredible pace of approximately 60 homes sales per month for this building.
Uh-huh Lee, which began construction last October was 82% pre sold as of June Thirtyth.
We were very pleased to welcome residence, Teekay, Kilada, which I mentioned delivered during the quarter.
The delivery of this building allowed us to pay off the construction loan in full.
To date, we have sold 1991 homes with total contracted revenue of approximately 2.3 billion excluding cool.
Bringing us to 93% pre sold on our first five buildings as of June Thirtyth.
Ward village has truly become a vibrant vertical master planned community offering its residents walkable healthy lifestyle that is unique in a while.
We are extremely proud of what the team has accomplished with this asset.
And given the strong sales momentum we are studying how to increase the pace of development.
At the Seaport District, we saw total revenue increased to 12.9 million this quarter compared to 7 million last quarter and 4.5 million in the second quarter of 2018.
This is the result of the launch of the 2019 Summer concert series, along with the Garden bar being open and higher summer traffic.
We are especially pleased that traffic has increased approximately 50% over the same period last year and continues to grow with each new opening.
Our highest profile opening in the quarter, which John Georges incredible new seafood restaurant the fault.
Which opened in late May and provides a glimpse of the seaports long term potential as a one of a kind destination.
The restaurant is receiving outstanding reviews.
Subsequent to the quarter end, we celebrated the opening of David Changs Bar Y O on July 25th.
We're looking forward to the opening of Malibu farm this month.
Followed by the opening of Andrew Karma, Ladies New restaurant next year.
Consistent with what we said last quarter, while these openings increased the top line revenues.
Helped to create critical mass and moved the seaport closer to stabilization.
We expect that we will continue to incur preopening losses for these new businesses until we have a critical mass of offerings.
For the quarter, we had a net operating loss at the seaport of 2.9 million, which again was primarily due to funding startup cost for the retail food.
Beverage and other operating joint venture businesses.
Earlier in the second quarter, we closed on a new loan for the Seaport District, which David O'reilly will speak to in more detail.
As a result of this financing the total project cost for the Seaport district increased to $768.5 million up from 731 million net of Hurricane Sandy insurance proceeds.
This cost increase is entirely a result of the loan.
As I said last quarter.
We remain cautiously optimistic about our long term success and have not changed our analog target for the asset in our supplemental.
With that I will now turn the call over to grant to discuss the details of our operational results.
Thank you David.
And our MPC segment, we continue to see strong demand from homebuilders for residential land driven by healthy fundamentals and demand drivers in the residential themselves markets in our communities, which are located in lower cost markets with no state income tax.
Residential landfills were $58.3 million during the quarter compared to $51 million during the second quarter of 2018, an increase of $7.3 million or 14%.
The sales increase was led by bridging then followed by the woodland Hills and some of them.
The increases in each of these communities were partially obscured in earnings before taxes, which increased only $651000 over the second quarter of 2018 due to lower sales at the summit.
That's not something we have closed on 118 logs totaling approximately $375 million and were 14 more under contract for approximately $59 million as of the end of the second quarter.
These results reflect a combination of modestly slower sales and a shift from custom watch where the margins are higher two homes built by the joint venture where the margins or lower.
With a product mix shifting from custom logs to more bocom as the project progresses, we expect margins to remain low in the coming quarters.
Also the somebody is an ultra high end community and sales will always be lumpy from one quarter to the next.
With all of that said the project has exceeded our expectation for sales since inception, notwithstanding the current quarter over quarter decline you Beachy from this joint venture.
British than they were 217 lot sales this quarter.
110, more lots sold than in the same period last year.
Total acres sold were 40.7 this quarter compared to 22.6 in the second quarter of 2018 and 80% increase.
In addition, we continue to see robust demand for new homes, which is the underlying driver of landfills to our homebuilders.
And the second quarter of 2019, there were 250, new home sales compared to 150 in the same period of 2018, a 43% increase.
We attribute this increase to the continued maturation up this master plan said and the momentum we are creating there.
Bridgelux is in the path of Houston's growth was excellent access to the greater Houston area, Yeah, The Grand Parkway top notch schools and amenities.
As we said last quarter. This is a testament to our team's strength and Curating a sought after masterplan city environment and a critical reason for our continued success at bridge Lynn.
We continue to be very excited about the future of the city.
At Summerlin landfills totaled 44.3 acres, an increase of approximately 15% over last year.
New home sales are up 8.6% in Switzerland for the quarter with 365 homes sold compared to 356 homes sold in the same quarter of last year.
Year to date, New home sales are down approximately 10.3% was 667 homes sold in the first half of 29 team compared to 744 in the first half of 2018.
As we said last quarter a good portion of 2018 sales were pushed into the first quarter as buyers were attempting to purchase before mortgage rates increase.
New home sales during the first quarter of 2018, we're almost double that of 2017, we continue to expect that the balance of the year will be very similar to 2017, and 2018, which were both excellent views.
Third party builder sentiment continues to be very positive on cell Mullen and the Las Vegas market as a whole given the excellent economy and the fact that 30 year mortgage rates have dropped to below 4%.
We have received excellent bids on all of the parcels that were put up to market. So far this year.
And consistent with our outlook on himself anticipate another strong year of landfills similar to 2017 and 2018.
While the overall weighted average price per acre decreased 2% from $538000 to $528000. We actually increased the price per acre in every community, except the woodlands, where we are effectively out of residential land.
The reduction in the weighted average is purely due to this mix shift of selling more land in our lower priced communities like bridge land and the woodland Hills, which is bringing down the average.
In conclusion, our mpcs performed remarkably during the quarter.
Turning to our operating asset segment.
We increased our second quarter total NOI by $14.5 million from $45.8 million in 2000 $18 million to $60.4 million in 29 team, it's 32% increase.
The increase is largely due to placing the Las Vegas ballpark into service in March of 2019.
The continued stabilization of our existing office and hospitality assets and the placing into service of assets completed since the second quarter of 2018.
The ballpark provided approximately 7.9 million of increased in Hawaii, We saw approximately 3 million of improvement from our office sector led by aristocrat three issues landing to marry whether one cell mullen and to sell Mullen as these assets continue to stabilize.
In addition, our hospitality sector in Hawaii increased by approximately $1.9 million or 25% led by the woodlands resort and the west and at the woodlands.
We're very pleased with the performance of our operating assets.
Total NOI also increased sequentially from March 31 of 2019 to June Thirtyth of 2019, probably approximately $9 million or 17%.
At the same time, our stabilized NOI target decreased from $321 million last quarter to 317 million this quarter, a 4 million dollar reduction.
This is due to a decrease in the amount of equity and we will invest in 110, North Wacker based upon a loan modification that was completed in may.
The modification provided additional loan dollars and therefore decreased our acquired the equity contribution which changed our ownership percentage and therefore, our share of the NOI.
We continue to expect that the building will achieve an 8% yield on costs, but our overall return will improve with a lower equity investment in the same order pull structure without preferred equity partner.
Just prior to the quarter end, we signed a 120000 square foot lease, bringing the total leased to approximately 1 million square feet or 67% on a project that is not scheduled to complete until late 2020.
The 8 million dollar reduction in NOI from 110, North Wacker was partially offset by the commencement of construction on millennium Phase III, a 163 unit apartment project in the woodlands, which is anticipated to create an additional three and a half million of and Hawaii or an 8% yield on a cost of approximately $45 million.
This quarter is another excellent example of how are we continuously create value for our shareholders by transforming our existing land into dynamic operating assets that create additional in Hawaii and shareholder value.
And with that I will turn the call over to David O'reilly for our financial results.
Thank you grant.
I'd like to start with a quick overview of our earnings before summarizing our recent financing activity and then turn to our current leverage and liquidity metrics.
I hope that Youve been able to review our 10-Q earnings release and supplemental package filed yesterday, which contains details of our financial and operational results.
First on the earnings.
We completed the second quarter with GAAP earnings of $13.5 million or 31 cents per diluted share as compared to a net loss of $5.1 million or 12 cents for the second quarter of 2018.
The increase was driven by the closing of condominium units a cake Johan Ward village.
The absence of a $13.4 million charged a window repairs that are why air condominium tower, which was recorded in the second quarter of 2018, but did not recur in 2019.
The increases were partially offset by higher operating expenses at the Seaport District.
Hey, redefined FFO was 121 per diluted share for the quarter as compared to 53 cents for the second quarter of 2018. The increase is primarily due to the same factors I just noted.
Turning to our financings.
As David mentioned, we closed on a $293.7 million construction loan for the development of Ali on June six.
The loan bears interest at one month, LIBOR, plus three point, 10% as a three year term with a one year extension option.
During the quarter. We also closed on a new construction to permanent loan for $35.5 million or 87, 70, new trails in Houston, our build to suit for a light solutions.
The loan bears interest at one month, LIBOR, plus 2.45% and has an initial term of two years with a 127 month extension option.
At the Seaport District, we completed financing of a five year $250 million term loan bears interest at 6.1% initially.
It will begin to bear interest at one month, LIBOR, plus 4.1% with a lie more cap of 2.3% at the earlier of June 22021.
With a date certain coverage ratios are met.
The collateral pledged for this debt includes important market building pure 17, the museum block Screamer Horn Roe.
And the 10 building.
The 10 building can be removed from the collaterals to news is completed with no repayment obligation lender consent and no penalty of any kind.
We believe that this is a strong financing for Howard Hughes as it provides non recourse capital to complete the project.
Reduces our equity commitment to the Seaport district and is repayable as early as one year.
On June 3rd we exercise the second extension option for the 250 water Street note and pay that loan down by $30 million to $99.7 million.
We also modified the $512.6 million facility for the 110, North Wacker joint venture by increasing the total commitment to $558.9 million.
Of which the company guaranteed approximately 100.6 million.
We modified the loan on the Mr. Cc port joint venture to increase the total commitment to $41 million the loan bears interest at one month, LIBOR, plus 4.5% and matures in May 2022, but also has one six month extension.
Lastly on June 5th as mentioned earlier, we paid off the construction loan pre K. kilada.
As of the end of the second quarter, our total consolidated debt to total assets was approximately 44.4%.
And our net debt to enterprise value closed the quarter at 30.2%.
From a liquidity perspective, we finished the quarter with approximately $650.7 million of cash on hand.
As of June Thirtyth, we had 28 projects to be completed with anticipated total cost of 4.8 billion.
Of that amount we have previously funded approximately $3.2 billion, leaving approximately $1.6 billion in estimated remaining costs.
We expect to meet this obligation with a combination of existing construction loans, which at quarter end had approximately $1.2 billion of committed but undrawn capacity.
And with an anticipated loan and $31 million for millennium Phase three apartments.
And with approximately $90 million of buyer deposits.
This leaves a net remaining equity requirement of approximately $345 million.
We expect to fund our remaining equity commitments through a combination of our free cash flow from our operating assets and MPC segments.
Net proceeds from non core asset sales and lastly, our existing cash balance.
Again as of the ended the quarter with approximately $650.7 million of cash on hand.
And net equity requirements of $345 million, we have enough cash and liquidity on hand to meet all of our current funding commitments without any additional cash being generated from MPC land sales were operating properties.
With that I'd like to turn the call back over to David for closing remarks.
Thank you David.
As you can see we had another quarter of strong results and we continue to be thoughtful creative and opportunistic in allocating capital in a manner that we believe best increases the value of the company for our shareholders.
Before we end the call I would like to touch on one other topic.
On June 27th the company confirmed that our board of directors retained Centerview partners to assist in a review of potential strategic alternatives to further drive shareholder value.
The board is committed to exploring this review to best serve the interests of our shareholders.
A broad range of options is being considered including a sale joint venture or spin off of a portion of the company's assets.
A recapitalization of the company changes in the corporate structure of the company or a sale of the company.
As we said in June our businesses continue to perform extremely well across our three core segments.
However, our stock price continues to lag below its net asset value per share.
We are determined to close this gap.
We have not set a timetable for the conclusion of this review.
We will provide an update as appropriate and do not have anything further to add at this time.
As such.
We ask that you please limit your questions to our quarterly results.
As we will not be taking questions on this subject during Q1 day.
Lastly, please note that we have uploaded a deep dive on ward village to our web site. So please review that at your convenience.
We hope that it will be helpful to you.
Thank you for joining us today.
And with that I will open up the call to QNX.
Thank you.
We will now begin the question answer session.
Ask a question you May press Star then one on your tax.
So if you are using a speakerphone please pick up your handset before pressing the keys.
Sure.
A question. Please press Star then too.
The first question today comes from Alexander Goldfarb with Sandler O'neill. Please go ahead.
Hey, good morning.
David listen I appreciate your comments on the strategic but you know obviously it is a big focal point and you know investors realize that disconnect.
That exists, but maybe just big picture Yeah, maybe you can just provide a little bit of color on.
If the recent market volatility has impacted the process and two as you guys. You know talk to folks you know is a is it going as you would've expected, meaning types of buyers types of projects or outcomes that may be interested or have there been some price some surprises.
That have come out either on the buy an odd interested parties or interested in transactions.
Hey, Alex This is David it's way too early and it's not appropriate for me to provide any color or details at this time in terms of.
Our unexpected outcome unexpected parties or anything along that.
The only thing I'll tell you is that that.
I would say.
The language in the press release accurate it really reflects exactly what we're doing with this we're trying to turn it over every stone to maximize value for our shareholders to close the gap between our share price and intrinsic value and that it could include anything from a sale or joint venture of an asset to a sale. The company recapitalization. All those things that were listed I can assure you that it is being treated with the seriousness that it deserves.
It's an incredibly disruptive process and one that you'd prefer not to have all but just based on the impact it has to our employees and culture that work. So hard every day to maximize value with Howard Hughes and to give you any color beyond that just isn't appropriate at this time.
Okay. And then second question is you guys had a big benefit from the aviators, which is great. FNB is is is active at the seaport odd but on the other hand, these our seasonal businesses.
To what extent would the nights or other parts of your business be able to provide similar benefit in sort of the fourth quarter and first quarter meeting that how much extra ancillary income.
Through your portfolio through different things like these that aren't traditional real estate, but clearly are benefiting and why do you see in the portfolio.
Alex This is grant I think throughout the portfolio, we have different teams working on different streams of ancillary income the vast majority of it is coming from the sources that you've already outlined so they won't be a big impact to that how you are looking for.
Growth in NOI from our operating assets, you're going to consistently see quarter over quarter growth in those operating assets by virtue of the fact of new assets coming on line every quarter.
Free rent burning off from office tenant retail rents increasing office rents increasing across the entire portfolio, we still expect to get to that 321 run rate in Hawaii, excluding the seaport and I'm very pleased with the quarter results.
That shows the progress.
Okay and then just finally I think you mentioned that the higher sea port costs were related to the loan, but maybe you could just provide a little bit more color on that.
Yes, absolutely, Alex I mean pretty straightforward.
By having new financing, we have long closing costs.
Mortgage recover coronation title and capitalized interest as part of that loan is related to construction at the 10 and tenant fit out.
So the increase in cost is purely associated with the lawn and not a change in the underlying cost to construct the seaport in anyway.
Okay.
Thank you David.
Thanks, Alex.
The next question comes from.
Of course.
Yes, and financial please go ahead.
Good morning, Thanks for taking my question first one just following up on what Alex.
There were reports earlier this summer that major League baseball was looking into move in a franchise into Las Vegas have you calculated in that into the aviators conversation and is that a ballpark that could be converted into a major league baseball stadium.
This is David wine Red we have not.
It is possible at some point in the future that major League baseball will consider Las Vegas, as a new home for one of their teams.
But at the moment that it's not anything being considered.
Okay, I mean, it would be good news for the summit if that were to happen obviously, but next question on the condo sales I believe in the last call. We were told that grants you were saying, but the condo sales will be recognized in the second and third quarter is that still something thats on track.
Welcome to the fields were recognized the caylloma, Okay kilo Honda because we closed that in the second quarter as well as for Io.
And any remaining on why the units so that did happen, yes that did close on schedule, we won't see anything in the third quarter of magnitude other than one off unit sales and as you know we have very little remaining units available across the five towers that are.
Complete four towers that are complete.
Okay, and then on on the MPC segment.
On the conversation on gross margin on land sales just can you provide a little bit more color on how you see gross how we should model gross margins going forward on land sales. Thank you.
On a cash basis, we provide guidance within the supplemental on our MPC pages in terms of where those cash margins will be for land sales over the long term from a GAAP perspective, those margins change pretty significantly because we're recording costs that were spent associated with those lots there could be decades ago and from a cost of goods sale. They get translated into those lot sales every quarter.
This quarter was impacted as shifting shift in margin over all although I'd say each of the communities were relatively consistent with past quarters and the overall shift in margin was partially driven by lower sales at the summit that comes through as an equity interest in a joint venture.
But just remember when when David speaks about cash margins, that's really one of the most important thing because.
Masterplan cities in our case, which is our term now for those for those communities because they are so big or.
The vast majority of the infrastructure early on gets spent and then it's a reimbursed through remote or municipal utility district in our receivables and the special improvement district, and those because we put that cash out upfront.
Those margins are much lower early on in the life of the asset and much higher at the end of the assets. So in the woodlands late late in the cycle you get to 90, plus margin and at Bridgeman 60, 70, together with some of them at about the same.
Okay. Thank you.
Next question comes from Elizabeth a private Investor. Please go ahead.
[laughter] Hello regarding how would you is this investment at 250 water Street.
It has come to my attention there is a significant deposit of elemental mercury at the site. This could prove very costly to clean up and remediate has this finding impacted Howard Hughes his plans for 250 water Street.
Thanks, Elizabeth This is David O'reilly I would say that with all of our plans in all of our projects.
We're taking the same approach, which is to maximize risk adjusted returns on all the capital that we allocate across the portfolio to 50 water Street will be no different as I'm sure you're aware, we havent announced any plans for this project yet.
And when we do we'd be happy to discuss in more detail. Thanks.
Well I understand that the potential liability from elementary mercury exposure to the surrounding community could be hundreds of millions or billions of dollars how is management limiting exposure and risk to this project.
With all of our projects, where we're looking to maximize returns on a risk adjusted basis and if there is substantial liability associated with that we will measure that in our investment decision in our capital allocation decision and I. Just this is David Weinberg I want to add that we take any time, there's an environmental issue we take it very seriously.
And the appropriate steps are being taken to make sure that.
If and when it's where mediated it's done in the best way possible.
[noise].
The next question comes from Jon Petersen with Jefferies. Please go ahead.
Great.
I realize that the the plots for single family home sales are.
Relatively lumpy, but we've obviously seen interest rates come down and mortgage rates come down quite a bit.
Just into the third quarter. So far just curious if you can give any color on.
How that changes your expectations for us for land sales.
Yes, John so.
You know, we evaluate landfills based on home sales and we're seeing a great appetite from all of our builders across all out.
Cities to increase the pace at which they consume.
Loss, specifically Enbridge land, which is in the path of really the growth of Houston northwest.
We are seeing a huge run rate increase on.
On on lot sales you can see in our quarter end at 43% increase year over year.
Total and 8.6% in the woodland Hills, obviously, 136% increase.
Right.
And then I guess, maybe along a similar line Im curious at Ward village.
If you kind of if mortgage rates have some of the similar dynamics and maybe to step back if you could kind of remind us the typical.
Type of type of buyer, there, whether it's a cash buyer, whether it's for and whether it's domestic.
Whereas the demand come from for that project in Hawaii.
John I'd say that the demand has shifted since that time, we first started selling our first our why add to what we're selling now it.
And Ali Engel rule of we've seen an increase in local buyers from about 50% to about two thirds still a pretty consistent 20% to 25% Japanese and the rest is a little bit of a smattering of other Asians and some mainland us et cetera.
That market in the purchases, they're heavy much lower percentage that are buying with mortgages than what we're seeing in our other communities.
And I would say that the strong sales volume that we've seen in ward village, while we could attribute part of that success to lower interest rates I'd like to think that more of it has to do with the culmination of the community. The opening of whole foods. The real critical math, it's taken place there as well as the thoughtful design that the team in ward has put into place to develop products in a product size and unit mix it really matches that local buyer demand.
Pretty well.
And maybe sticking with more diligence one more for me.
Yes, I think you guys have been building about one building a year is that just given the demand is there an opportunity to increase the pace of development.
We're cautiously optimistic that we can you know I would say that given how quickly we've been able to sell and getting north of 60% of cooler pre sold on a building that we just launched in January it gives us a lot of the positive encouragement in terms of increasing pace of sales.
When we when we say that though I want to be careful I don't want.
To think that we're communicating that all of us and we're going to launch two or three towers at the exact same time. This is more about going from one tower year to perhaps one tower every nine months and see how that goes before we think about accelerating further than that.
Okay that makes sense. Thank you.
This concludes our question and answer session I would now like to turn the conference back over today that line right for any closing remarks.
Just a quick thank you for joining us today as always we're available you can reach us through our Investor Relations page on our website.
Feel free to contact us.
Through there if you have any further questions and look forward to being with you again.
In a short few months.
Thank you.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.