Q2 2024 Earnings Summary
- Record Residential Land Sales and Strong Demand: Howard Hughes Holdings is on track for the best year ever in residential land sales, with the first half of the year being "nothing short of remarkable". In Summerlin, multiple superpads totaling 87 acres were sold at an impressive $1.5 million per acre, showcasing strong demand from homebuilders and significant year-over-year price appreciation. Despite conservative guidance, the company is delivering record performance, suggesting potential for outperformance.
- Strong and Improving Occupancy in Office Portfolio: The company's office portfolio is experiencing high occupancy rates, with The Woodlands offices over 90% leased and downtown Woodlands at 96% occupancy. In Vegas, offices are almost entirely full at around 95%, and there's an increase in new incremental demand in Columbia over the past 90 days. This reflects the strength and resilience of HHH's office assets, potentially leading to increased NOI from this segment.
- Positive Impact of Seaport Spin-off: With the spin-off of the Seaport segment effective August 1, HHH will become a pure-play master planned community (MPC) company, which is considered "incredibly exciting" by management. The Seaport has been reporting net operating losses, and its removal is expected to improve financial performance by eliminating these losses from earnings. This strategic move allows HHH to focus on its core competencies and could unlock shareholder value.
- Potential Decrease in Summerlin Revenue in Q4 2024: Management indicated that while they expect a strong third quarter in Summerlin due to more superpad sales, the fourth quarter may be quieter than previous years. The acceleration of superpad takedowns by builders has shifted sales that typically occur in Q4 to earlier quarters, potentially leading to reduced revenue from Summerlin in the fourth quarter.
- Management's Cautious Outlook for Second Half of 2024: Despite delivering a remarkable first half and anticipating the best year ever in residential land sales, management is maintaining their full-year guidance without raising it. They cite uncertainties in the second half, noting that stretching expectations further in an environment with "some question marks" might be overly aggressive. This cautious stance may suggest potential challenges ahead.
- Challenges in Office Portfolio Occupancy Recovery: The company's office portfolio, particularly in Columbia, continues to face vacancies due to smaller tenants choosing to work from home. While there has been a slight improvement with incremental demand over the past 90 days, returning to pre-pandemic occupancy levels remains uncertain amid ongoing work-from-home trends affecting office space demand.
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Capital Allocation Plans
Q: How will you allocate capital over the next 12-18 months?
A: With the Seaport cash drag gone and strong cash generation, we're focusing on investments that drive intrinsic value per share. Given inflationary pressures and lower development returns, we're prioritizing high-return opportunities and considering share buybacks higher on the list. -
Nevada Studios Project
Q: Any update on the Nevada studio legislation and capital needs?
A: The studio bill is being drafted for the February legislative session. If passed, the project could cost around $450–$500 million, requiring us to share the remaining equity after a typical 60% construction loan with Sony. -
MPC Guidance
Q: Why maintain MPC guidance despite strong results?
A: Our guidance already implies the best year ever for residential land sales. We prefer to be prudent, as increasing guidance would depend on further acceleration in home sales or significant home price appreciation. -
Interest Rates Impact
Q: How have interest rates affected home sales?
A: Home sales have been strong and consistent, with no significant uptick from the modest decrease in mortgage rates. We haven't seen increased demand from builders due to rate changes. -
Office Portfolio & Acquisitions
Q: What's the outlook for office occupancy and recent acquisitions?
A: We expect occupancy to trend higher into the low 90% range, driven by leasing momentum. In the Woodlands, we're at 96% downtown. Our acquisition of Waterway Plaza II offers immediate cash yields and future double-digit unlevered returns, providing value we couldn't replicate in new development today. -
Seaport Spin-Off Impact
Q: What's the financial impact of the Seaport spin-off?
A: The Seaport segment, including the ballpark and baseball team, will go away effective July 31, with a one-time $23 million cash infusion from us to Seaport Entertainment. In Q4, we'll report as a pure-play MPC company. -
MPC Pricing
Q: Is MPC pricing driven by mix or real appreciation?
A: We've seen real price appreciation, particularly in Summerlin, where superpads sold for $1.5 million per acre. Other communities like Bridgeland and Woodland Hills also saw over 10% price increases per acre year-over-year. -
Condo Closings Timing
Q: When will Victoria Place condo closings occur?
A: Construction is progressing well, and we now expect most closings to happen in 2024, with only $30–$50 million potentially slipping into 2025, down from the previously expected $75 million. -
Ritz at the Woodlands
Q: Are you changing the sales strategy for the Ritz at the Woodlands?
A: Our strategy remains the same; we've taken most units off the market to slow sales until completion, aiming to showcase quality and potentially achieve higher pricing. Despite efforts to slow sales, units are still selling. -
Seaport Performance
Q: What factors are affecting Seaport revenues?
A: Year-over-year headwinds include weather-related impacts, a drop in sponsorships and event revenues, and decreased spending on food and beverage in New York. The new management team is focused on improving margins and profitability, but it will take time.
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