Q1 2024 Earnings Summary
- Howard Hughes Holdings (HHH) is expanding its successful condo projects into Downtown Summerlin, with two condo projects in the design phase and a possible third, indicating growth opportunities beyond Hawaii.
- The company is experiencing strong demand and pricing power for The Ritz-Carlton Residences, The Woodlands, having raised prices by 17% since launch and expecting to achieve even higher prices upon completion, demonstrating robust market demand for its luxury offerings.
- HHH has initiated land sales at Floreo, the first phase of the Teravalis joint venture in Arizona, with significant interest from homebuilders and plans to continue sales over the next eight years, indicating a long-term growth pipeline in a new market.
- Non-Recurring Income Inflates Q1 Results: The company's first-quarter operating asset NOI was boosted by a one-time annual distribution from the Summerlin Hospital, which will not recur in subsequent quarters. Management cautioned against annualizing this quarter's performance due to this non-recurring income, suggesting that future quarters may not be as strong.
- Increased Market Risk by Delaying Sales: Howard Hughes is intentionally delaying the sale of remaining units in the Ritz-Carlton project in Houston until completion to achieve higher prices. This strategy exposes the company to market risk if conditions deteriorate before the units are sold, potentially affecting projected revenues.
- Restrictions on Share Repurchases Amid Stock Undervaluation: Despite acknowledging that the stock is trading at a disappointing level, the company is currently unable to repurchase shares due to pending public filings related to the spin-off of Seaport Entertainment. This limitation prevents the company from taking advantage of the undervalued stock to enhance shareholder value.
-
Capital Allocation: Buybacks vs Development
Q: Will you prioritize share buybacks over new developments given the stock's current valuation?
A: Management is considering share buybacks as a potential use of capital, especially given the stock's "very disappointing level". They are currently restricted from buying back shares until spinoff information is publicly filed. Once able, they may prioritize buybacks over speculative developments with uncertain returns. However, developments offering strong risk-adjusted returns, like condo towers with low equity requirements and significant pre-sales, may still proceed. -
Operating Performance and Guidance
Q: Will strong Q1 performance lead to increased full-year guidance?
A: Despite a great start to the year with increases in office and multifamily exceeding expectations, management is not raising guidance yet due to existing uncertainties. They caution against annualizing Q1 results, which included a one-time annual distribution from Summerlin Hospital. -
Strong Sales in Phoenix and Ritz-Carlton Projects
Q: Are you consistently underestimating demand given strong sales in Phoenix and Ritz-Carlton?
A: Management acknowledges they aim to "underpromise and overdeliver". Land sales in Phoenix have exceeded expectations with strong builder demand. For the Ritz-Carlton condos, prices have increased by over 17% since launch, and they've withheld most units to potentially sell at even higher prices upon completion. -
Holding Ritz-Carlton Units for Future Pricing
Q: Why not continue selling Ritz-Carlton units now instead of risking market changes?
A: They believe the remaining units, being part of the best residential site in the Woodlands with unparalleled design and finishes, will command even higher prices upon completion. While acknowledging market risks, they are confident the value justifies holding off sales. -
Spin-off Costs
Q: What are the expected spin-off costs we should model?
A: The company anticipates total spin-off costs of $25 million, a figure they are comfortable tracking toward. -
Floreo Joint Venture and Land Sales
Q: What is your ownership stake in Floreo, and how should we model future land sales?
A: They own 50% of the Floreo joint venture. Land sales are expected to be lumpy, not consistent each quarter. They foresee one to two land sale closings per year over the next eight years, aligning with home sales demand. -
Expansion of Condo Projects
Q: Are there plans for condo developments outside Hawaii?
A: Yes, they are bullish on Downtown Summerlin with two condo projects in design and the possibility of a third, believing urban products could perform well there. -
Floreo Product Type and Density
Q: Is the high density at Floreo due to attached homes?
A: No, all homes are single-family. The perceived high density is due to calculations based on net acres; they offer a variety of lot sizes to meet demand for affordable products in Phoenix's West Valley.
Research analysts covering Howard Hughes Holdings.