Howard Hughes Holdings - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning, and welcome to the First Quarter twenty twenty Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch tone tone. To withdraw your question, please press star then 2.

Please note this event is being recorded. I would now like to turn the conference over to David Streiff. Please go ahead.

Speaker 1

Good morning, and welcome to the Howard Hughes Corporation's First Quarter twenty twenty Earnings Call. With me today are Paul Lang, Chief Executive Officer David O'Reilly, Chief Financial Officer and Peter Reilly, General Counsel. Before we begin, I would like to direct you to our website at ww.howardhugh.com, where you can download both our first quarter earnings press release and our supplemental package. The earnings release and supplemental package include reconciliations of non GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP financial measures. Certain statements made today that are not in the present tense, but 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 first 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.

Speaker 0

I will now turn the call over

Speaker 1

to our CEO, Paul Lane.

Speaker 2

Thank you, Dave, and thank you all for joining us today. Welcome to our first quarter twenty twenty earnings call. These are unprecedented times and it is safe to say that we have all been affected in some significant way by the COVID-nineteen pandemic and none of us have ever experienced anything like this before. I want to begin by extending my sincere sympathy to all who have lost a family member or loved one during this pandemic and express all of our gratitude to the frontline workers who are risking their own health and safety on a daily basis. As I have an extended family member who is an ER physician, I know the stress on the family, but also the extreme pride of service.

At the Howard Hughes Corporation, our team members across the country have risen to meet the challenge of this crisis, both in their personal lives and on behalf of the company. I am grateful to each of them for their dedication. The health, safety, and well-being of our employees, tenants, and customers has always been our top priority. As the pandemic unfolded, we promptly instituted a work from home policy for our employees and put our executive crisis team into immediate action. This team connects daily to stay abreast of the rapidly evolving issues to ensure a strategic and consistent response throughout all the regions of our company.

We also assembled our HHC task force consisting of experts in various disciplines to prepare and implement best practices and guidelines in alignment with the CDC and protocols set by state and local government and to help ensure that we have a safe and healthy environment for our employees, tenants, and customers to return to when they reoccupy our properties at the appropriate time. We are implementing actions such as requiring office tenants to wear face masks in the common areas of our office buildings and requiring all of our employees to wear face masks upon returning to the office. We are also working on creating what is known as the six foot office, which helps people with physical distancing among other safety measures. During the crisis, our team members across the portfolio have been rolling up their sleeves to support local first responders, frontline workers, and those in need. As an example, in The Woodlands, we repurposed our valet line at the Weston Hotel and used it as a drive through pickup line for food prepared by our hospitality team for first responders and for those temporarily laid off employees.

In Summerlin, New York, and Columbia, employees have all delivered food to first responders and medical workers. In Hawaii, HHC employees went to work running a farmer's market booth for a local resident to support her during the pandemic. In New York, our HHC team members stepped in to help operate a Seaport store for the owners who are in the at risk category. We have partnered with local community philanthropic organizations in The Woodlands and at The Seaport to help our fellow HHC hospitality team members across the country who are facing a financial strain due to the COVID-nineteen pandemic, which has had a devastating impact on the hospitality industry and has caused countless layoffs nationwide. I am proud of how our company has responded to the challenges of this crisis.

Although we have physically separated, we have remained united in our commitment and collaborative in our efforts to continue to serve our communities in any way we can. For anyone who would like to know more, I encourage you to take a look at the many inspiring images across our social media channels. Now let's take a look at how our businesses performed and some of the actions we have taken. When we look at our first quarter numbers, they will obviously show the immediate effect that the crisis has had on our results. But they also tell a larger story of a successful company that acted quickly to proactively protect its employees, communities and businesses while positioning itself for an expedited recovery and a quick return to its business of development and growth.

The results from the 2019 were among the strongest in our company's history and our momentum continued through much of the 2020. We were well on our way to eclipsing our Q4 results when the coronavirus pandemic shut down the country. Operating asset NOI was up 35% sequentially when compared to the 2019. This performance is due to the Woodlands Towers Waterway acquisition and the continued stabilization of our assets. Excluding this recent acquisition, the sequential increase was 10.4%.

In our MPC segment, we saw a strong 5.7% growth in our price per residential acre sold during the quarter across our portfolio. Net new home sales increased 24% during the 2020 compared to the 2019, led by a 41% increase at Richland and a 27% increase at Summerlin, a great leading indicator for future land sales. In our strategic development segment, we successfully launched public presales of our newest project at Ward Village, Victoria Place, where we sold two twenty five homes during the quarter, bringing the project to 64.5% presold as of March 31. We sold five additional homes in April, although some of the April sales are still in their rescission period. We did, however, have to take a charge of $98,000,000 at Waiaea for our general contractors construction defects.

We do expect to recover this amount, however, but it may take some time. All in all, our company's performance in quarter one indicates despite the challenges facing our country, in our core business is solid and well positioned to move forward on our path to success. Much of our momentum can be attributed to the implementation of our transformation plan, which we announced back in October. Plan, as you recall, is built upon three strategic pillars. First, we set and have already significantly executed on our goal to reduce our overhead expenses by 45,000,000 to $50,000,000 We will start to see these reductions materialize in the coming quarters, especially following our corporate move to The Woodlands, which is planned for later this year and will result in our company's 40% reduction of our office space.

Second, we committed to selling approximately $2,000,000,000 gross of noncore assets, generating approximately $600,000,000 of net proceeds. In the fourth quarter of last year, we announced that we had closed on the sales of three noncore assets for a total of $95,500,000 and recorded a net gain associated with these sales of $27,300,000 This quarter, continuing our dispositions, we closed on the sale of 100 Fellowship Drive, The build to suit cancer care facility was sold for $115,000,000 which resulted in net cash proceeds of 64,200,000.0 and a total profit of $51,700,000 We also paid off the $50,000,000 loan associated with this project. Note that the cash received on the sale was being held in escrow at quarter end as it was part of a reverse 10 31 exchange and therefore was not in our cash balances as of March 31. It has since been released to HHC and now sits on our balance sheet. Obviously, the timing of the dispositions of the remaining noncore assets has been slowed by the pandemic, especially with regard to our hospitality properties and the outlet collection at Riverwalk in New Orleans, giving the closure of nonessential retail there, but we continue to press on with this initiative.

Third, we moved to a decentralized operating model to allow us to accelerate growth in our core MPC business, which will drive value creation in our decades long development pipeline. The increased autonomy of our regions and empowerment of our regional presidents allow our leadership across the country to react more nimbly and efficiently. A model that was instituted pre COVID and has been especially beneficial as we navigate forward through this constantly changing and rapidly unfolding time. My weekly calls with our five regional presidents as well as the ongoing support provided by our streamlined corporate team ensures that our company remains unified and guided by a clear, strong and strategic vision. Overall, the transformation plan has been quickly implemented and has already served us well in strengthening our company's defensive financial profile and helping insulate our sales from market variances.

Now turning to our recent acquisition of The Woodlands Towers at Waterway. First off, we are thrilled to be able to announce that we executed a new lease for 134,000 square feet at 9,950 in The Woodlands. With this signing, the building is now 35% leased. As you can imagine, given the recent volatility in oil prices, we are keeping a close eye on all of our energy related tenants in Houston. Obviously, Occidental Petroleum, which is our largest tenant representing approximately $27,000,000 of annualized NOI, is one of those tenants.

Since the pandemic and oil fluctuations, Oxy has taken meaningful steps to increase their credit profile that we view as positive. In short, Oxy has reduced operating and corporate costs by 1,200,000,000 reduced their 2020 capital budget by over 2,400,000,000.0 paid their April 2020 Berkshire Hathaway preferred dividend in common stock. And today, they have a $5,000,000,000 credit facility available in addition to $1,000,000,000 in cash and no remaining debt maturities in 2020. However, on the heels of a great quarter, we experienced the confluence of the COVID pandemic and a global oil price war, which has created a situation that no one could have predicted. Concerns regarding the unfolding crisis were discussed at length in as early as mid February among our board of directors.

The strategy, as always, was to be prepared for the worst and positioned for the best. Early on, we saw that the storm seemed to be uniquely positioned over the regions where we operate and would affect many of the sectors that have been meaningful drivers of our financial results. Example, in retail, which accounted for approximately 28% of our Q4 twenty nineteen annualized NOI, we only collected 44% of our billings in April. And although the data is not in yet, we appear to be on a similar pace for this month. In addition, our hospitality business was completely closed, although we are currently looking at a slow reopening.

In light of these challenges, we immediately reviewed our spending across the board to eliminate or reduce any expenditures that were not absolutely necessary. And as David will explain, we went to work on extending any short term debt maturities. The Board also determined that our company would undergo an equity raise to ensure our ability to prevail and solidify our position moving forward. The equity raise provided meaningful benefits across the company. Of course, the most critical benefit of raising 600,000,000 or $594,000,000 net in equity is that we now have the capital to weather any storm that this crisis presents.

In addition, equity raise gives us the ability to execute on great value creating projects such as Victoria Place, the fastest selling tower in the history of Ward Village. This is a project which we can now advance even in this potentially more challenging lending environment and even if it requires more equity than we've traditionally invested. Note that we have many months before we have completed our engineering and architectural design, including adding post COVID modifications to the building. In fact, given our liquidity from the equity raise, we are continuing to judiciously invest in key areas of our business. Specifically, are spending limited predevelopment dollars into three multifamily developments in our MPCs.

So when demand presents itself, development can commence immediately. Personally, I believe that our recent success in Ward Village can be partially attributed to our strong balance sheet as our buyers know that their counterparty is a well capitalized public company and has the financial wherewithal to deliver on its commitments. David will detail a bit later the incredible volume of financings we executed during the quarter and subsequent to the crisis causing a broad market disruption. Our equity raise provides both a certainty of execution and allows us to execute on meaningfully better terms. Tenants want to know that their landlord will be there for the full term of their lease.

A great case study of this was our recent lease to Western Midstream in The Woodlands Towers at the Waterway, where equity raise helped us execute on our leasing strategy. It's obvious that this pandemic has already impacted much of our business in the short term. However, there are also some potential silver linings. We are just now starting to see states lift the stay at home restrictions and resume operations such as in Texas and Nevada, two of our largest markets. While there are still many uncertainties on the road ahead, our company is extremely well positioned and we believe there are reasons to be optimistic.

We have great assets in excellent locations, the majority of which are in low cost, low tax states. As state taxes increase and more people want to get out of the larger denser cities, our properties offer a very attractive option. And in the case of Hawaii, an island lifestyle that is increasingly compelling for many following this pandemic. In addition to low taxes, we see Texas and Nevada among the first states to resume operations and allow our customers to reopen their various businesses. I'm not sure if you've heard, but a few days ago, Tesla announced that they would be moving their headquarters from California to either Texas or Nevada.

Well, Elon Musk, if you're listening, we have some great real estate options for you. I believe there is a flight to quality during times of crisis, a trend that has always helped Howard Hughes during market downturns. I strongly believe that we will see this anticipated flight to quality in our multifamily, office space, and MPC home and condo purchases moving forward. We've also been pleased to see some pockets of resilience in home sales in Bridgeland and Summerlin, where our builders sold thirty eight and thirty net homes respectively in April. Also, in our leasing velocity at our multifamily units across the country where we leased 92 apartments in April.

We believe it's possible that these home sales during stay at home periods could be indicative of a larger trend that could emerge from the pandemic, and those who have previously delayed home purchases will now seek the freedom and extra indoor and outdoor living space that comes with homeownership. If this proves to be the case, our master plan communities in Bridgeland, The Woodlands, Woodlands Hills, and Summerlin are incredibly well positioned to be beneficiaries of this potential trend. I am happy to report that despite the challenges of the pandemic, our rent collections for April for multifamily and office have performed exceedingly well, both in excess of 94%. At the Seaport, we are taking advantage of this opportunity to make changes that will better serve our goals as we look to reopen and begin our next chapter with a new tenant mix. We made the difficult decision to close Tencorso Como, New York and look forward to sharing news as it comes available.

All in all, we have reason to believe that we will come out of this crisis better positioned for the future. We have faced crises and tenuous situation before, albeit never one this severe, and we have seen our business endure and continue to thrive. For example, when oil last dropped to the mid twenties per barrel, The Woodlands office portfolio enjoyed tremendous outperformance. In 2016 and '17, when the overall Houston Class A office market had negative absorption of one point four and one point five million square feet respectively, rental rates collapsed and vacancy, excluding sublease space, approached 20%. However, in our Woodlands office portfolio, we enjoyed positive absorption of 325,000 square feet and a 144,000 square feet respectively and only a modest temporary decline in rental rates.

And we finished the year 2017 at only 10% vacancy. And now I'm going to turn the call over to our CFO, David O'Reilly.

Speaker 3

Thank you, Paul, and good morning, everyone. Let me start with a detail on each of our segments' performance during the quarter and then discuss how the pandemic has impacted each segment's performance for April and May before I turn to our recent equity raise, balance sheet, upcoming maturities and liquidity. First, starting with our operating asset segment, our total NOI for the quarter increased by 24% compared to the same quarter of 2019. In addition, sequentially, it increased 35% compared to the 2019. This, of course, is largely due to the Woodlands Towers at the Waterway acquisition.

Excluding this acquisition, our NOI increased 1.2% year over year and 10.4% sequentially. In our MPC segment, new home sales during the first quarter were six eighty eight compared to five fifty seven in the 2019, a 24% increase. This was led by a 41% increase at Bridgeland and a 27% increase at Summerlin. We saw strong growth in the price per residential acres sold during the quarter across our portfolio. Bridgeland's average price per acre increased by 58,000 or 15% to 439,000.

In Summerlin, we saw the average price per custom lot increased 23% to $925,000. And at The Woodlands Hills, the price per acre increased 8.2% to 303,000. These strong results demonstrate the demand for best in class MPCs and bodes well for when home sales normalize. Moving to Hawaii in our strategic development segment. During the first quarter, we sold two thirty nine homes at Ward Village.

Our latest project that began sales in December 2019, Victoria Place, was 64.5% presold as of 03/31/2020, and there continues to be an enormous housing shortage on Oahu. The projects that are under construction or completed are well sold at approximately 90%. We have 20% hard deposits from our buyers, and we don't have any buildings delivering until late twenty twenty one or 2022. We really couldn't be in a better position given the current circumstances. Staying with Hawaii.

During the quarter, we recorded a $98,000,000 charge associated with our general contractor's alleged construction defects at Waia. The majority of this is for window wall issues that create a popping noise that we previously disclosed and took a charge for. We expect to reach a settlement with the building's homeowners association under which we will agree to fund the expected cost of certain alleged defects related to the construction of the project. We expect to fully recover these costs from the general contractor or the other responsible parties. So all in all, as Paul noted, it was a tremendous first quarter for Howard Hughes.

And while we are feeling the impacts of the pandemic, we believe that our best in class assets in irreplaceable communities has potentially provided a bit of insulation from the impact on the broader market. To that end, in our operating asset segment, our office portfolio, which accounted for approximately 39% of our q four twenty nineteen NOI, is performing well. And our collections for April have been strong, collecting approximately 95%. Month to date in May, we are in a similar track to April. We're monitoring our tenants on a daily basis, but do believe that there's generally a flight to quality during difficult times, which would benefit us in all of our office markets, and we remain optimistic about the continued performance in our office segment.

Multifamily had a similarly strong performance in April and so far in May. Multifamily, which represented approximately 13% of our fourth quarter nineteen NOI, has been excellent and close to historical norms. In April, we collected 95% of our billings. And so far in May, we're on a similar trajectory. While there is potential for softening in the coming months as unemployment grows, our portfolio of newly constructed, highly amenitized assets are among the highest quality in the respective markets, which we expect will benefit from the traditional flight to quality challenging times.

Our retail NOI, which accounts for approximately 28% of our Q4 twenty nineteen NOI, has experienced a more dramatic drop in collections as the number of our tenants are closed. We've actively engaged with all of our tenants, but particularly with our small businesses, our local tenants, who need assistance the most and where our help in the form of rent deferrals can make a real difference in their ability to survive. For the month of April, we have collected approximately 44% of the amounts billed so far. In May, our collections are similar to where we were at the same point in April. With the banning of most travel and business conferences across the country, our hospitality portfolio was our hardest hit asset class.

Almost overnight, our occupancies were reduced to a point where it did not make sense to keep our properties open. Consequently, we closed all three hotels and have temporarily laid off the majority of our staff there. We've retained key personnel who will be required to efficiently start up operations when the timing is right. NOI will drop from a Q4 twenty nineteen run rate of approximately $28,800,000 on an annual basis or 13% of the total to an estimated negative $3,000,000 for the second quarter if we remain close. Obviously, we're working to keep that number as low as possible.

On a positive note, we are already actively engaged with our team detailing plans for reopening our hotels following state and local guidelines along with hotel flag recommendations, which include enhanced cleaning and safety protocols. We are looking at opening a limited number of rooms at the Woodlands Resort and Conference Center along with our pools in Lazy River on May 20 and possibly reopening the Embassy Suites on June 1. We will keep you posted on our progress. We, of course, will take all the necessary precautions to protect our employees and guests. Our ballpark in Downtown Summerlin, which accounted for $8,000,000 or 4% of our q four twenty nineteen annualized NOI, will also be impacted by the pandemic.

We are uncertain if and when Major League Baseball will resume a minor league season and what the eventual impact could be for the year. I wanna note that we own a minor league baseball franchise that plays at our stadium there. We have no control over the season, and we'll follow whatever the league decides is best. So while we saw a meaningful drop in retail, hospitality, and at the Las Vegas Ballpark, we are really pleased with how we have performed in April and so far in May, specifically in office and multifamily. Turning to our MPC segment.

During the last six weeks, we've seen a slowdown in both the sale of new homes and correspondingly, our builders' appetite to take down land. As we've always said, we continually endeavor to limit the amount of land that is in our builders' hands at any one time, only allowing enough land to be sold on current home sales. We are a price maker, not a price taker of our continually appreciating residential land. And as Paul noted, we remain optimistic about the prognosis for recovery in future home sales as many apartment dwellers are feeling that having more space is more important than ever. In April, we saw new home sales across our communities dropped sequentially 47 and a half percent from a 158 homes sold in March to 83 in April.

Year over year, we sold 218 homes in April 2019 as compared to the above noted 83 homes this April. Turning to Hawaii post pandemic, I wanna commend our team on the ground there, not just on the amazing efforts with the successful launch of Victoria Place, but also for the continued ingenuity in immediately creating a virtual sales experience that has led to new sales in April. Now I wanna turn to the Seaport District. As you all know, New York has been among the hardest hit areas of our country, and we've had to close down the Seaport. At this time, we do not know how long it will remain closed.

Timing will depend both on government lifting restrictions and the demand for travel, dining, shopping, and entertainment that ensues following this pandemic. After careful study and as part of our review of the project as a whole, we did make the difficult decision to permanently close down the 10 Corso Como retail and restaurant operation, which resulted in a $17,400,000 charge. Construction has been stopped by the city of New York, and we do not know when the ban will be lifted. But the team at the Seaport is continuing to work hard to move things forward and control costs wherever they can. Now I'd like to detail our equity raise that provided the meaningful liquidity that will allow us to continue to execute on our business plan.

At our last full board meeting in the February, we became very cautious on the potential economic impact that COVID nineteen could have on our business. We plan for the worst, but hope for the best. As it became clear that our concerns were unfortunately materializing, we immediately moved to action. We built multiple stress, downside cash flow models with conservative assumptions to try to gauge how much additional capital we would need if the conditions persisted. Our stock traded down from the mid-120s dollar range at the beginning of the quarter to a low in the mid-30s, likely the result of market participants questioning our long term financial viability.

After consulting with our investment bankers, it was clear that the high yield debt market was closed and that our only option for capital would be equity. With limited visibility into the depth or the length of the current economic crisis, numerous downside cash flow scenarios, a lack of alternatives in the capital markets, a delay in the sale of noncore assets, and given our upcoming short term debt maturities, the independent directors of our Board decided that an equity raise was a prudent action to ensure that we would always be in a position to make the best long term decisions for our shareholders. Therefore, on March 27, we completed an offering of 2,000,000 shares at $50 per share, plus an additional 270,900 shares as part of the underwriter's green shoot. In addition, we entered into a simultaneous purchase agreement with Pershing Square Capital Management for 10,000,000 shares of common stock, also at $50 per share. We received net proceeds of approximately $593,700,000 from these transactions.

It was clear and confirmed by our investment bankers that the equity raise would not have been possible at the size or price where we executed without the support of Pershing Square. Also, I'd like to note that Pershing Square was only willing to do this if we resolve the maturity issues for both the Oxy Bridge loan and the Downtown Summerlin financing, which I'll touch on in a minute. Now with this incremental liquidity, HHC is positioned to weather the storm even in a draconian scenario. Even in a situation where we do not sell any residential land or condos, keep our hotels closed, and have no retail or ballpark revenues, we have enough liquidity to be comfortably financed through the 2022. I'm gonna pause there and spend a minute and talk about the right hand side of our balance sheet in a little more detail.

As of the end of the quarter, we had approximately $4,300,000,000 in total debt, of which approximately $2,400,000,000 is floating rate. Of that amount, dollars $7.00 6,000,000 has been swapped to fixed. An additional $230,000,000 is subject to an interest rate collar. That leaves approximately 1,500,000,000.0 unhedged. The vast majority of this debt is associated with our Woodlands Towers Bridge facility, construction loans, including 110 North Wacker, and our Downtown Summerlin mortgage loan.

In terms of maturity profile, we have approximately $627,000,000 of debt maturing in 2020 and 163,000,000 maturing in 2021. As part of the modeling and liquidity analysis that I mentioned earlier, we have first reviewed all of our short term debt maturities and immediately worked to execute extension discussions with many of our lenders. As of today, we're working on the following. We're documenting a three year extension for the loan facility for Downtown Summerlin and the attached one Summerlin office building, which represents 257,000,000 of our $627,000,000 maturing in 2020. The existing loan which matures in September has a built in one year extension option through September 2021.

However, it contains tests that would likely require a significant pay down, especially in light of the pandemic. The new extension provides three additional years of term and a meaningfully smaller paydown of approximately $35,700,000. We're also finalizing documentation on an extension to the Corporate Bridge facility with Bank of America that was used to purchase the Oxy buildings in The Woodlands last December. The original loan was reduced by 63,500,000.0 to 280,300,000.0 in March when we refinanced the 596,000 square foot 9950 Woodloff Forest office building. The loan extension includes two six month extensions for the remaining balance and are priced at LIBOR plus 230 5 and 290 basis points respectively.

The final maturity will be June 2021. The only other loans that mature in 2020 are two Merriweather and three Use Landing. Two Merriweather has a one year extension in the loan, which we should qualify for with little to no pay down. With regard to three years landing, which now matures in September, we've started extension discussions with existing lender and do not anticipate any issues getting that accomplished. As for our 2021 maturities of 163,000,000, we have extension options for 133,000,000 of those loans.

We do not anticipate any issues refinancing or extending these property level loans. From a liquidity perspective, we finished the fourth quarter with approximately $972,000,000 of cash on hand and $64,000,000 in escrow from the sale of MD Anderson, which has since been released to HHC. As you can see from the projects under construction table on Page 48 of the 10 Q, we have a net equity requirement of $248,000,000 Approximately January of that $248,000,000 of net equity requirements are for the Seaport District, where construction is stopped due to state ordered restrictions. This this leaves a net equity requirement $89,000,000. With our increased liquidity from the equity raise and the sale of MD Anderson, we have enough cash on hand to meet all of our current funding commitments.

And with that, I'm going to turn the call back over to Paul for some closing remarks.

Speaker 2

Thank you, David. I remain optimistic that we are quickly coming out of this period of great uncertainty. A lot depends upon the timing of potential vaccine and advances in successful treatments for the virus. While no one knows what exactly recovery will look like, being well capitalized will surely put HHC in a strong position to take advantage of whatever recovery will look like. As we emerge from this pandemic, people may choose to stay home more and travel less.

They will want larger, nicer homes with more amenities. We know that millennials are looking for walkable suburban communities with all the urban conveniences. After sheltering in place, many people are seeking wide open spaces with walking trails and green space and a high quality of life and are prepared to pay for it. I believe we have the ideal solution. For the Howard Hughes Corporation, our MPCs at the core of our business have always been extremely desirable places to live and are perfectly suited to meet this growing demand.

Our communities offer some of the best health care systems in the country. We provide safe, walkable environments with extensive amenities. Our communities are in beautiful natural settings with expansive open green space. The Woodlands, for example, is 28,000 acre forested community with over 130 parks, more than 200 miles of hike and bike trails, and with nearly 8,000 acres. That's 28% of remaining dedicated open space.

For those of you who have not had the opportunity to visit The Woodlands or any of our other communities, I invite you to visit our websites to view photographs and to get a better visual sense of what our communities offer and what makes us so successful in attracting and retaining today's top employees, tenants, and business. If not for the unforeseen pandemic, we would be talking this morning about our two recent consecutive quarters with the most successful results in our history. While we cannot ignore the realities of today, we are doing the right things. We're keeping our employees, our tenants, customers, and others safe, helping those less fortunate in our communities, and reinforcing the trust and goodwill of our stakeholders. In addition, I've created our future studies think tank to ensure that our company is at the forefront of our industry as we explore and evaluate best practices with regard to design, architecture, and construction, and how they will continue to evolve in the post COVID world.

And we have the capital, approximately $1,000,000,000 in cash, to position us to thrive for the future. We are in the strong position now for two primary reasons. One, we've always dedicated ourselves to acting as the stewards of our communities, not just a developer. Our commitment to all of our stakeholders has established a longstanding legacy of trust. Two, our financial discipline and prudent actions have established our company as being on solid footing and here for the long term.

In subsequent quarters, I believe that we will look back and see that the steps we are taking will have served us well in our ongoing pursuit of the long term growth of the Howard Hughes Corporation. We will now turn to Q and A. Before we open up the lines to those who have called in, the first few questions have been generated by our investors over the past week through our newly implemented SAY technology application and will be read by Dave Streiff. Dave, can you read the first question?

Speaker 3

Sure, Paul.

Speaker 1

It appears that we have answered most of the SAGE generated questions in our prepared remarks. I'm only going to read a few of the ones that we haven't touched upon. The first question is, burn rate, current estimated NOI and expense run rate.

Speaker 2

Thank you, Dave. Why don't we let our CFO, David O'Reilly, take this one? Thanks, Dave.

Speaker 3

Happy to take it, Paul, and thanks for the question. And it's a great question. It's one that's front and center in a lot of investors' minds. And candidly, at this point, given that we're only five and a half weeks into the second quarter, it's very difficult to say what we think that rate will be. In fact, it's even too early to say whether or not it will be a burn or a surplus.

Like we mentioned in the prepared remarks, we're really excited about their collections in office and multifamily. And while retail has lagged, we're hopeful that as these stay at home orders are lifted in Nevada and Texas, we're able to start receiving more and more retail rents. But, again, it's a little bit too early to talk about where that burn rate will be for two q. I do think it's really important, though, and one item that's worth highlighting again is that a given the fact that we were able to raise the equity that we did and raised just under $600,000,000 in net proceeds, even if the storm clouds of economic uncertainty created by COVID nineteen persist in a long consistent manner in a very draconian scenario where there's no land sales, no condo sales, or hotels are closed, and the retail and ballparks really have no revenue, we have more than enough liquidity to be comfortably financed at the 2022. Dave, back to you.

Speaker 1

Okay. The next question. Are you considering using one ten North Wacker type deal structures to generate better risk adjusted returns in the future? That seems like a home run deal in terms of high returns on minimum capital.

Speaker 2

Thank you, Dave, and thank you for the question. That particular deal was a great structure for one off deal outside of our core assets. We're unlikely to do this again given that we're selling noncore assets and would not entertain a JV type structure in our MPCs other than possibly for a noncore asset type like hospitality or possibly senior living. For example, a JV on an office building in one of our MPCs would introduce competition into the market and would create issues, for example, if we want to move tenants between our buildings, which we have done in the past. Dave, the next question.

Speaker 4

Thanks, Paul.

Speaker 1

Could you please provide an update on asset sales? What's on ice? Hotels? What may still happen?

Speaker 2

Thank you. Another great question. Hospitality, obviously is closed and, unlikely to sell in the near future since we closed the hotels for the safety of our employees, tenants, customers and community. I think 110 North Wacker could definitely sell given the quality, extreme high quality of the building, the strength of the tenants and the fantastic location in Chicago. Some of the land deals like Monarch City could potentially sell, but I think we are looking at a general slowdown in what we anticipated last year.

Dave, the next question.

Speaker 1

Could you please provide a revised guesstimate for timing of Seaport completion?

Speaker 2

Thank you. We are not sure of the timing given that we were ordered by the city of New York to shut down all construction. We are not sure when this will be lifted and even after it is lifted how easy it will be to obtain labor and materials. Given likely slowdown in construction, we may be able to obtain better pricing, clearly a positive. This is the asset most affected by the current crisis.

It is completely closed, is entertainment focused with retail, outdoor bars, and as you know, the concert venue. Good news is that this gives us a chance to look at how to position the asset for the future. Most significant action was making the hard decision to close Tancor Sicomo. Dave, I think now we'll open it up to question and answers, correct?

Speaker 1

Yes. Operator, we're ready to open

Speaker 2

the lines, please. Thank you.

Speaker 0

Alright. At this point, we'll begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. Here, using a speakerphone, please take up your handset before pressing the keys. To withdraw your question, please press star then two.

And our first question comes from Alexander Goldfarb of Piper Sandler. Alexander, please proceed.

Speaker 5

Thank you, and good morning down there. The first question is, David, as you've had discussions with your lenders and various capital providers for the refinancing this year and into next, has there been any indication from them that the refinancings would be less than the current levels, meaning you guys would have to contribute more capital or there would be or there would be change in the metrics, covenants, etcetera?

Speaker 3

Oh, great. Good question, Alex. And I I'd tell you that there isn't kind of a one size fits all as it relates to that question. You know, with Downtown Summerlin, for example, when you have a one year extension option, but it's subject to the in place NOI at that moment in time. And when you're at that moment in time happens to coalesce with a stay at home order when a lot of our tenants are closed, obviously, there's meaningful pay downs and something that was very challenging to work through.

We're thrilled that we're able to get a three year extension there with a relatively modest paydown of just over $35,000,000. For other assets like a three used landing or two Merriweather office buildings with a great rent roll and solid cash flows, we don't expect any sort of meaningful changes in getting extensions there. Alex, I think that the short answer to your question is largely dependent on the asset performance, the asset type and the geography of where it's located. And there's, like I said, not a one size fits all approach. It's unique case by case basis.

But we're thrilled that we were able to execute the incredible number of financings that we did and get the number done that we did post really the the crisis taking hold. So I think it was a great success for the team, and I'm really proud of the Capital Markets Group for being able

Speaker 2

to execute as well as they have.

Speaker 5

Okay. And then as far as, Ward Village goes, Wailea, the windows that you guys are taking care of, obviously, good that you guys are are stepping in and and remedying that. But as far as the contractor goes, how confident are you guys that the contractor has, you know, basically a 110,000,000 of capital, or insurance for that amount to to to, you know, pay you back versus that this may be a permanent capital charge that you guys take.

Speaker 2

Dave, do you wanna continue with that?

Speaker 3

Sure thing, Paul. No. Look. I think it's the right question, Alex. And we do feel good that the financial viability of our counterparty there, the general contractor, Nordic PCL, has the financial wherewithal to stand up and do the right thing and fix their defects.

We don't feel like that it's a high risk item at all at this point. And it's a good question, Alex, because it really it really talks about what we're doing and our commitment to our projects. And from our view, Waia is one of the most desirable residents in an incredible Ward Village community. And we are incredibly committed to Waia and the Ward Village community overall. And, we still believe that it is a premier place to live in all of Hawaii.

And I think the evidence of our commitment that we're agreeing to fund the cost of these repairs to correct certain construction defects despite the fact that we're not the responsible party and we have no legal obligation to do this really cements our our commitment. We're also agreeing to work with the Hawaii homeowners association to jointly pursue Nordic to recover these costs and all of the repair and construction defects that they are legally liable for. Oh. You know, look, I I think this level of commitment, shown by being in Ward Village is unprecedented for a developer, and it's another example of how important our homeowners are to us and how dedicated Howard Hughes is to the health, welfare, and success of our community and all of our customers.

Speaker 5

Okay. But, David, just for those of us who aren't familiar with Nordic, are they like a Tischman? Like, they're a large, you know, multinational or extremely well capitalized entity, or are they just an entity on the island?

Speaker 3

I would say that they are a I'll go back to my earlier answer, Alex, and say that we believe that they are well capitalized enough that they can, do the right thing here, correct their defects, and execute the way they were supposed to when they were originally hired to do the job. Thank you, David. Appreciate it, Alex.

Speaker 0

And our next question comes from Faheed Khorsand of BFW. Fahed, please proceed.

Speaker 4

Hi, good morning. Thanks for taking my question. First question, on concessions, I know you have comparatively on the long term spectrum roughly about $13,000,000 of renewals for rents this year. Are you in communications in terms of concessions of any kind? And similarly, on your unstabilized properties in lease up mode, are you having conversations with potential tenants on concessions?

Speaker 2

This is Paul Lane. I appreciate your question. It's a good one. With specific to office renewals, we have found that if you look back, as I mentioned in some of my prepared remarks, the last oil downturn, The Woodlands was substantially stronger, both from absorption and our strong occupancy numbers. And this flowed through to maintaining a higher net effective rent or face rate and fewer concessions than Houston, for instance.

We are tracking all of our renewals on the office side and retail, of course, but on the office side very closely. And I'm expecting slight increases in concessions but not substantial if it's anything compared to all the other ups and downs in our market.

Speaker 4

Great. I have two more questions. One is going to be about the Ballpark and the other one about Seaport. On the Ballpark, I know you have the sponsorship agreement with the convention center authority. Is that something that still continues to get paid even if the Ballpark is closed?

Speaker 2

Thank you for that question. They are contractually obligated to continue to pay the naming rights sponsorship.

Speaker 4

And then in Seaport, have you approached the Port Authority? I believe that's who owns the land and who you're leasing it from. But if not, please correct me. But have you approached them about concessions in terms of lease payments or extensions since, you know, it's a mandated closure and you can't do any work on the site?

Speaker 2

Yeah. Thank you for that. David, do you wanna take this one?

Speaker 3

Sure. I I would tell you that it's it's a good question, and it's part of an overall dialogue that we're having with all of the officials in New York City. And it's not just around the ground lease payments that we have, but we're also in discussions, as you are aware, around the air rights, around some of the uses that we have and other items that we're trying to, change around the Seaport. Again, it's on the table. It's very early in any sort of dialogue, and I wouldn't wanna comment one way or the other on whether we think we'll get any sort of benefit whatsoever there.

I think as you know from the detail in the back of our supplemental, our ground lease payments, as it relates to the Seaport, are not, you know, of order of magnitude that creates a tremendous amount of financial strain for us. And, obviously, we're gonna continue to make those payments because that's our obligation. But having the dialogue to see if there are other ways of finding concessions is something that we're always in the market to try to do.

Speaker 1

Thank you.

Speaker 0

Our next question comes from Alex Brennan of Housing Research Center. Alex, please proceed.

Speaker 6

Yeah. Thank you. Hope hope you guys are all well. Thank you, Alex. I wanted to ask about sorry if I missed this in in your prepared comments because I I got disconnected.

But I wanted to address, I guess, the subject about land, purchases by the builders. I know most of the builders have indicated they were gonna talk to the land sellers about postponing, takedowns and stuff like that. So I was curious, you know, whether how you know, what's happening on that front, whether builders are asking for lower prices or they're just asking to postpone dates and, whether you're starting to see signs that they're reengaging to start buying again or whether maybe they never stopped.

Speaker 2

Thank you, Alex. Always good to get your questions. Let me start, and then I'll turn it over to David. We have been surprised the last few weeks and so pleasantly surprised in the sales. For instance, at Bridgeland in Houston, last two weeks, there's been 14 to 16 net sales, home sales.

And obviously, the home sales directly will tie to the willingness of the takedowns. We believe that the strength of our master planning communities such as Bridgeland, The Woodlands, Woodlands Hills, Summerlin, the builders want to be there. They want to have an appropriate number of lots or super pads to build on. And so as home sales increase, we think we're very, very well positioned. The other thing I'd like to say, Alex, is that coming out of this quarantine slowly and safely, I believe that we're going to see more demand for people coming out of apartments, people coming out of smaller homes, people coming out of non master plan communities and wanting to take advantage of that flight to quality that we've seen in other downturns.

The flight to quality to master plan communities like ours, frankly. They have that open space, the green space, the walking trails, you know, some of the best hospital systems in the country. So I think that we are very well positioned to get this uptick in new demand as a silver lining, from the COVID-nineteen pandemic. David, you want to add comments?

Speaker 3

Yeah. Paul, I think that was really well said. The only thing I'll I'll tell you, in terms of the discussions with builders, look. We are, as we said repeatedly, we're a price maker, not a price taker. And if a builder who has a contract with us thinks that they have a right to come back and modify the price and that we'll accept that, absolutely not.

We have an incredible amount of belief in our land. We know that it continually appreciates. And if they're not willing to pay the appropriate price today, we're not willing to sell it. Again, we're only going to continue to sell land to homebuilders to keep up with underlying home sales so that we limit the amount of land that's in the builder's hands at any one time. With that said, if there are certain situations where home sales are slowing as we've seen here recently, although, you know what?

It's it's candidly, it's refreshing to see 38 net home sales in April in Bridgeland during a stay at home period. 30 home sales in Summerlin in April during a stay at home period, albeit that's well off of their pace of April, but enough home sales that that indicates that we should be selling some land to builders and making sure we're getting a full price for that land that we do sell.

Speaker 6

Okay. That's, that's helpful. And then on your comments about, selling land to Tesla, Have you guys, I guess, given some some thought where they would be, you know, potentially best positioned? I'm guessing that would be maybe headquarters in Woodlands and and the actual land in the Bridgeland, but,

Speaker 4

you know, I don't I

Speaker 2

don't know. I'd love to hear your thoughts on that. But, Alex, thank you so much for that softball. That's and if if Tesla is listening, we'd love to connect with you directly and show you all of our outstanding sites that we have as potential. You know, Alex, as you know, we have not only The Woodlands, we also have Bridgeland in Houston.

We have in Dallas, Monarch City, which is, in excess of 200 acres in Allen, Texas. We have Circle T Ranch as a potential headquarters that we, sold land to for Charles Schwab, and they've expanded their campus there. And then, of course, Summerlin has a number of options for headquarters. So we think we have a full array of opportunities, but not only for Tesla. This is for any company that wants to move to a low tax environment like Texas and Nevada or a master plan community, like Columbia.

So we're we're excited about what the future could bring, again, looking for these silver linings. Thank you for your question.

Speaker 6

Yes. Thanks. Well, you guys are definitely well positioned to offer many of those options, so congrats on that. Thanks.

Speaker 0

Our next question comes from Marlon Pereira with DOA Securities. Marlon, please proceed. Apologies. Our next question comes from John Peterson of Jefferies. John, please proceed.

Speaker 7

Great. Thank you. You know, first of all, I'll say as someone who's been holed up with my family in a small New York City apartment for two months, definitely agree with your sentiment that people are considering moving to houses for the first time. Yeah. I guess I'm curious on go ahead.

Speaker 2

I just got it. We we can help you out there.

Speaker 7

Don't know if I'm gonna move to Houston, but I am curious about, you know, just the Houston market. You know, you guys are in that market. You You know, we're all in different parts of the country. I'm curious just what you're seeing and hearing on the ground there. I guess, what, you know, what's kind of the the the whisper or the talk of where oil prices need to go for everything to bounce right back?

And how do you kinda feel like The Woodlands community fits into, you know, the whole, you know, oil price, you know, I guess, problems that we're having right now irrespective of the COVID nineteen environment?

Speaker 2

Sure. I appreciate it. It was, you know, that double black swan event, as some people are calling it. Houston is resilient. We've been through downturns before, never one this severe.

Luckily have a detailed OXY as the largest oil and gas energy tenant. I detailed that, what they're doing. The next largest tenant at approximately 500,000 feet is Exxon, which we're certainly comfortable with their credit and they're a fantastic customer. We are watching and have built very strong relationships with our tenant customers. They trust us as a landlord and we work closely with them.

It will be a challenging time depending on where oil prices I recently was studying the history of oil prices and in 2016 the low was in the mid-20s but the average for the year was $43 So It certainly has bounced around a lot over the last ten years. But I believe Houston is, and The Woodlands especially, is well positioned. I'm not saying we have a moat around the Woodlands, but we definitely are better positioned than anywhere else in Houston in my opinion for the continuance of strong energy companies that can rebound, in our office space. David, do you want to add anything?

Speaker 3

Yes. No, look, would say that having been through this and not just with Howard Hughes, but with Parkway before, you know, look, I'm finally attuned to what goes on in the in the Houston office market and the Houston multifamily market as it relates to oil. And I think the difference this time than last time, is a couple of things. And one, last time oil went down to twenties in 2016, it was coming off of a high north of a 100, and I don't think the companies were equipped or prepared for this type of downturn. And while we may not have predicted this downturn either, we're not that far from the move from the last one so that these companies are not at the same staffing level, overhead, and CapEx spend that they were at over a $100 barrel oil.

So I think that their memories are are, you know, long enough that they remember that last They remember the moves that they need to do to stay profitable, to stay positive cash flow. And most, if not all, have reacted very quickly to do that. I do think there will probably be some fallout, some m and a, but we spend a lot of time underwriting credit in our portfolio. I'm happy to say that during the last downturn in 'sixteen and 'seventeen, we had zero defaults.

I think part of that is good underwriting and part of that is just luck. And we're hopeful that we'll come out of this one around the same place that we did the last time.

Speaker 2

If I could just add one other comment. Thank you, David. With thirty five plus years of running large regions all around the country. This is my third publicly traded real estate company. Our company is extremely positioned to collect rent.

We do it well. We have built trust with our customers that pay us rent, not only office but multifamily, retail, etcetera. And the fact that as David mentioned in his prepared remarks, the approximately 95% recovery of rents last month in both office and multifamily I think is representative of that. And that's nationwide, but the numbers for Houston in both categories that I mentioned have been very strong. So we watch it every day.

We monitor it every day. And probably I mean, I don't know if you could ever be too excessive in these difficult times to monitor your customers and your rent collections. But we've got a great team around the country that does that, and we are absolutely on top of it.

Speaker 7

Great. I appreciate all that color. There's been a lot of talk about kind of the capital raising. You guys mentioned the high yield market was closed, that's why you had to do the equity raise. I'm just kind of curious, I know you're not in a position today, but if we think multiple years in the future, is there a goal to get towards an investment grade rating so, you know, the next time we have a downturn, you know, you have that, you know, that source of capital open to you?

And kinda what does it take to get there?

Speaker 3

You know, it's a great question.

Speaker 2

I'm gonna let David take that one.

Speaker 3

Yeah. Look. I think that, it behooves us in no better market than a market right now to demonstrate the power of having a better credit rating and what the impact of a better credit rating has to your overall wage weighted average cost of capital because your cost of debt is dramatically different when markets are dislocated from single b to double b to triple b. I can't comment on, you know, how long I think or what the track will be for the rating agencies to, think about upgrading us. Hopefully, are the moves that we've done over the past several months with raising equity, sort of solidifying our balance sheet, making absolutely the right thing to do to preserve the long term value creation for our shareholders in this company, help demonstrate our commitment to maintaining a great credit profile, and it can be incrementally helpful.

But I do think that, you know, to the root of your question, we would like a better credit rating. We know that a better credit rating trades, translates into a better cost of debt, which is a better cost of capital, and that's important to us. It increases our accessibility to capital markets, and that's important to us. But I don't have a good road map because as you know, we're a public tier of one, and there's not a lot of other public companies I can point to that that are like the Howard Hughes Corporation that have an investment grade rating, so I know what I need to do from here to there. So, you know, we keep continuing to hopefully improve our credit profile every quarter, every year over time, and improve our operating results by increasing our recurring cash flow by driving NOI higher and higher every quarter.

And for us, I think that's the best, method that we can do to try to improve that credit quality.

Speaker 7

Got it. Alright. Thank you very much. Appreciate it.

Speaker 3

Thank you.

Speaker 0

Our last question comes from the line Marlene Ferreira of BLA. Marlene, please proceed.

Speaker 8

Thank you. I apologize if I missed this. I've been having a little bit of technical difficulty. But just to clarify, of the $6.27 of debt that you had maturing this year, the $2.57, you originally had a one year extension. And just to be clear, you said you actually got a three year extension and were only required to pay down 36,000,000.

Is that correct?

Speaker 6

David? So I think what I'll

Speaker 3

do is yeah. Let let me back up and kinda take it at a pretty high level because I think, we might be crossing lines in terms of, what loans have been set and which ones haven't. So we have six twenty seven of the debt maturing in 2020. One of those was a $257,000,000 loan for Downtown Summerlin. That 257,000,000 had a one year extension, but we are finalizing our negotiation and documentation to get a three year extension on that with a $35,000,000 pay down.

Speaker 8

Got it. Yep.

Speaker 3

And then largest piece is the 280,000,000 bridge loan that was associated with the Oxy acquisition. And concurrent with our equity offering, we were able to negotiate a one year extension on that to get us to June 2021.

Speaker 8

Great. And you had mentioned that was actually there were two six month, pieces to that one year extension. Did I hear that correctly? Okay. That is correct.

I

Speaker 3

used six month extensions.

Speaker 8

And are there any conditions around getting, you know, those extensions, you know, that could be an an issue? Or, you know, or in general, what are the conditions to going from one of the six month period to the next?

Speaker 3

Paying the fee and increasing the spread.

Speaker 8

Got it. Great. Thank you so much for clarifying.

Speaker 3

No problem. Thanks for your question, Marlene.

Speaker 0

This concludes our question and answer session. I would now like to turn the conference back over for any closing remarks.

Speaker 2

Thank you very much. I just want to say on behalf of our company and our entire Howard Hughes team, thank you for your support. We are here to build a legacy of trust with you, and I want you to be safe and be well. Thank you for joining our call today.

Speaker 0

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.