Howard Hughes Holdings Inc. Q3 FY2022 Earnings Call

Good day, and welcome to The Howard Hughes Corporation Third Quarter Earnings Call. Please note that this event is being recorded. I would now like to turn the conference over to Eric Holcomb, SVP of Investor Relations. Please go ahead.

Good morning, and welcome to the Howard Hughes Corporation's third quarter 2022 earnings call. With me today are David O'Reilly, Chief Executive Officer; Jay Cross, President; Carlos Olea, Chief Financial Officer; Dave Striph, Head of Operations; and Peter Riley, General Counsel. Before we begin, I would like to direct you to our website howardhughes.com where you can download both our third 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 or that discuss the company's expectations are forward-looking statements within the meaning of the federal securities laws. Although the company believes that the expectations reflected in such 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 third 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, David O'Reilly.

Thank you, Eric. Good morning, everyone, and thank you for joining on our third quarter earnings call. To start off today's call, I'm going to provide a brief overview of our third quarter segment performance, highlight the results of our master plan communities in Seaport. Dave Striph will cover the performance of our operating assets, and then Jay Cross will provide an update on our development projects in Ward Village. Finally, Carlos Olea will provide a review of our financial results before we open up the lines for Q&A. Looking at the results for the quarter, each of our operating segments performed really well relative to the same period in 2021 despite these ongoing economic headwinds. And MPC EBT rose 39% and operating asset NOI remained elevated despite the impact of divested assets. At the Seaport, revenue increased 57% and generated a net operating profit before equity losses related to the start-up costs at the Tin Building. At Ward Village, we completed Ko'ula and closed on a total of 404 condominium units generating net revenue of $419 million, with a strong gross profit of 30%. In addition, we launched presales at Kalae, our tenth condo tower, at the end of September, which was met with exceptional demand, having already presold more than 40% of the units. Overall, our strong results, both this quarter and year-to-date are a testament to the resiliency of our business model and our one-of-a-kind portfolio, which continues to withstand economic volatility like we are experiencing today. Before I dive deeper into some of these results, I first want to congratulate our team who leads our ESG efforts and the entire Howard Hughes team on the progress made to further our sustainable and inclusive communities. Some assessments are a benchmark of sustainability performance and best practices for real estate companies worldwide ranked Howard Hughes number one in the U.S. diversified listed peer group. We were also recognized as a sector leader in the Americas diversified category. I'm ecstatic that our efforts and commitment to environmental and social best practices, which are integrated throughout our communities all across the country are being recognized. Now looking to our MPCs. We had another strong quarter despite considerable headwinds in the housing market. In our core markets of Houston and Las Vegas, new lot supply remained at historically low levels, prompting homebuilders to continue purchasing land and replenish inventories to keep up with future demand. Although new home sales in our MPCs were down significantly relative to the unprecedented levels seen during 2021, we continue to see solid demand for new homes at premium prices. This was reflected in our quarterly results with continued depreciation in land prices and strong growth in builder price participation revenue. Overall, our MPCs recorded earnings before taxes of $75 million, a 39% increase compared to last year. Looking at the details in Houston, both Bridgeland and Woodland Hills posted strong results, which contributed to a 61% year-over-year EBT improvement in this market. In Bridgeland, we saw steady residential land sales, which were complemented by a 25% increase in price per acre to $520,000. Together with a 17-acre commercial land sale and a near doubling of builder price participation revenue, Bridgeland's EBT grew to $15.9 million, a 72% increase versus last year. In Woodland Hills, EBT grew 31%, fueled by a 6% improvement in residential acres sold and a 17% price per acre increase to $412,000. Shifting West to Summerlin, we sold one 23-acre residential super pad and one custom lot for a combined implied price of $1.3 million per acre, a staggering 75% increase from the third quarter of 2021. Summerlin also saw a 59% increase in builder price participation revenue as new home values remain strong. At the summit, we only closed one custom lot during the quarter, which compares to 8 lots in the prior year. With this premier gated community nearly sold out, we reached an agreement with our joint venture partner, Discovery Land, to launch Phase 2 of the summit last July. As part of this expansion, we contributed 54 acres of land, which will be used to develop 28 additional custom home sites. Our land contribution, which was marked up to fair value, resulted in a $13.5 million gain in MPC equity earnings, signifying the strong inherent value of future land sales in this ultra-luxury community. Finally, in Phoenix, West Valley, we celebrated the official groundbreaking just last week where we unveiled a new name for Douglas Ranch, Teravalis. We continue to work diligently in the community's first village, formerly known as Trillium, to install the infrastructure needed to contract the first 1,000 lots to homebuilders. During the third quarter, JDM Partners exercised its final option on Teravalis, repurchasing approximately 3% incremental ownership interest for $15 million. This takes JDM's total ownership interest in the non-fluoridated portion of Teravalis to approximately 12% or $65 million. JDM and HHC continue to have a 50-50 joint venture which comprises approximately the first 3,000 acres of Teravalis. Looking at new home sales. As expected, we experienced a sharp decline in the quarter with a total of 284 homes sold, representing a 48% reduction when compared to the prior year. This reduction was largely attributable to Summerlin, which saw a 57% decline in new home sales. In Houston, lower home sales were also recorded in Woodland Hills. In Bridgeland, however, home sales remained favorable with volumes in line with the third quarter of 2021. Overall, the pace of new home sales within our communities continues to trail behind the unprecedented levels, which were experienced in 2020 and 2021. Clearly, this is a result of high mortgage rates, record inflation, and recessionary fears, which are impacting new home affordability. Additionally, homebuilders continue to encounter supply chain disruptions as well as slow municipal approvals which are impacting the pace in which they're able to deliver new homes. Despite the reduction in sales, we continue to see solid demand for homes at higher price points. As these buyers, who are often moving from higher cost states, tend to have strong purchasing power. It allows them to better withstand rising mortgage rates and inflationary constraints. This has contributed to further increases in median home sales prices in all of our communities as well as the strong levels of builder price participation revenue realized this year. As an example, in the third quarter, the median home price in Bridgeland was $595,000 or an increase of 19% year-over-year. Similarly, the median home price in Summerlin was nearly $750,000, a 13% increase compared to the prior year. Conversely, we are seeing headwinds in lower-priced homes where buyers are more likely to be impacted by mortgage rates and recessionary pressures. Throughout our MPCs, we offer a wide variety of new homes at various price points, providing prospective homebuyers multiple options to meet their budgets. However, with record-low inventories in all of our core markets, we are actively working with our homebuilders to ensure we have the right balance. As a result, we're developing new lot programs, which are designed to target additional homes at affordable price points for the purpose of increasing the pace of sales in the near future. With this in mind, we may encounter some periods of reduced land sales in the short term as we continue our discipline of only selling land to meet the underlying demand. The long-term intrinsic value of our MPCs remain extremely strong, and we believe people will continue to be attracted to our highly desirable communities, which offer an unmatched quality of life, abundant amenities, short commutes, and improved work-life balance. Shifting over to the Seaport. We continue to advance our vision to revitalize this historic neighborhood, most notably with the highly anticipated opening of the Tin Building by Jean-Georges. We are extremely pleased to make this one marketplace a reality, together with our joint venture partner, world-renowned chef Jean-Georges. With more than 20 different food and beverage experiences from around the world, there's something for everyone at the Tin Building. In early August, we launched a soft opening for the Tin Building, which was met with large crowds and much acclaim from the media. In late September, we celebrated our official grand opening and ramped up operating hours. With strong foot traffic and sales since the grand opening, I'm pleased to report that we're making steady progress in our efforts to onboard and train additional employees. As a result, we're adding more service days, and we anticipate that the Tin Building will operate at full capacity by the end of the year. At Pier 17, we had another strong quarter with a significant increase in foot traffic driven by private events and an extremely successful summer concert series. This quarter's lineup, which included 38 concepts, 30 of which were sold out, netted over 110,000 guests to the Rooftop. All of this helped drive increased concession revenues as well as higher customer volumes into our restaurants and retail businesses. As a result, we saw a 48% increase in our restaurant sales per square foot versus the prior year quarter, helping to drive a strong year-over-year NOI improvement. Overall, Seaport revenue increased to $32 million in the quarter, reflecting a 57% increase over the same period last year. This improvement resulted in the Seaport generating net operating income of $1.6 million before the company's share of equity losses, which totaled $11 million during the quarter, primarily due to the start-up of the Tin Building. Overall, we see significant progress at the Seaport. With the Tin Building now open, we expect to see continued growth in volumes in the months ahead as more and more people come to experience New York City's hottest dining and entertainment destination. All of this should continue to benefit the Seaport's financial results going forward and help to bring the segment closer to stabilization. With that, I'll turn the call over to Dave Striph, our Head of Operations, to review the operating asset segment results.

Thank you, David. In the third quarter, our operating asset segment delivered $61 million of net operating income, which was a $2 million or 3% decline from the same period last year. This was primarily due to the sale of non-core assets, including the three Woodlands-based hotels and the Riverwalk outlet in New Orleans. These assets generated $3 million in the prior year's quarter, excluding these divested assets, NOI was up $1 million or 2% year-over-year. The largest increase in our portfolio was seen in our multifamily assets, which produced quarterly NOI of $12 million, representing a 27% increase versus the prior year. This improvement was primarily the result of strong lease-up at our newest communities as well as strong performance at our stabilized properties. At the end of the quarter, these assets were all leased in the mid- to high 90% range despite market pressures many multifamily properties across the U.S. are experiencing today due to rising rents and affordability. We believe this is a testament to the demographics of our MPCs as well as the attractiveness of our upscale, highly amenitized multifamily properties. With these robust leasing percentages and exceptional demand for rentals in our MPCs, we continue to see strong multifamily rent growth. In the third quarter, our in-place effective rent increased nearly 13% on average when compared to the same period last year, and we commanded some of the highest rents in our markets. During the quarter, we completed and began leasing units at our latest multifamily development, Starling at Bridgeland, which is experiencing strong initial demand. With additional multifamily projects under construction in Bridgeland, Summerlin, and Downtown Columbia, we continue to see meaningful opportunities to drive incremental NOI growth as these new projects are completed in the coming quarters. Office NOI of $29 million increased 3% versus the prior year. This improvement was primarily the result of the roll-off of free rent and new leasing activity in our Class A office buildings in The Woodlands and Downtown Columbia. In these markets as well as Summerlin, we continue to see heightened demand from companies who are looking for a business-friendly environment with a talented pool of employees and high quality of life. Our premier office assets, which offer high-quality amenities and a walkable urban setting with convenient access to shopping, dining, and entertainment continue to attract new tenants. As evidenced, during the third quarter, we executed nearly 94,000 square feet in new office leases in The Woodlands, including 60,000 square feet at Woodland Forest bringing this building to 59% leased. In Summerlin, we've had similar success with our newest Class A office tower, 1700 Pavilion, seeing unprecedented pre-leasing ahead of its completion later this year. Jay will talk more about that in a moment. In retail, NOI of $13 million reflected a $2 million decrease compared to the prior year. This reduction was primarily due to one-time rent payments at Ward Village during 2021 which were associated with recovery from the COVID pandemic. The remainder of our retail portfolio performed well with improved occupancy in all of our markets. Finally, the Las Vegas Ballpark generated $4 million of NOI, representing a reduction of $1.6 million compared to the prior year period. The decline was primarily due to poor weather during the quarter, fewer games played in the current year as well as outsized fan attendance in 2021 after COVID restrictions were lifted. With that, I will now turn it over to our President, Jay Cross.

Thank you, Dave, and good morning. During the third quarter, we continued to make great progress with our development pipeline of multifamily, office, and medical office buildings in Houston, Las Vegas, and Downtown Columbia. At Ward Village, we completed construction at Ko'ula, our sixth condo tower, and we launched presales at our latest condo development Kalae. Starting with Houston, we completed three projects during the quarter, the largest of which was Starling at Bridgeland, a 358-unit multifamily development in Bridgeland Central. We welcomed our first residents in mid-September and experienced solid initial lease-up with the complex already 16% leased as of quarter end. In The Woodlands, we delivered a 20,000 square foot Memorial Hermann build-to-suit Medical Office Building ahead of schedule. And lastly, we completed construction of the Kirby Ice House, which is located in the heart of The Woodlands. This venue, which boasts the longest bar in Texas, opened in late September with much celebration. Elsewhere in Houston, we continue to make good progress with Creekside Park Medical Plaza in The Woodlands, which we expect will be completed in the fourth quarter. In Teravalis, our 263 single-family build-to-rent project also continues to advance with initial construction well underway. We expect to start welcoming residents in early 2024. Just last week, we announced our plans to develop Village Green at Vision Central. This 23-acre mixed-use site will be anchored by HEB Grocery store and will also include our first office project in Vision, which will also be our first mass timber development. We will provide more information on these projects as construction begins in early 2023. In Las Vegas, we are nearing completion of 1700 Pavilion, our newest Class A office tower in Downtown Summerlin. This 267,000 square foot building has seen tremendous demand and was already 51% leased with another 40% in LOI or lease negotiation at the end of October. We expect this building will be complete late in the fourth quarter. We are also making steady progress with Tanager Echo, our newest multifamily offering in Summerlin. This 294-unit LEED Silver development will be unlike any other in the Las Vegas Valley. We expect this project will welcome its first residents in the first quarter of 2023. Switching to Downtown Columbia, our newest multifamily project, Marlow, is also nearing completion. This LEED Platinum complex located in the Merriweather District will have 472 units with another 32,000 square feet of ground floor retail space. We started leasing in October and have already welcomed our first residents. In the Lakefront District, we commenced construction on our 86,000 square foot medical office building during the third quarter as well. This development is already 21% pre-leased and will serve as the next health and wellness destination for this MPC. We expect to complete construction in early 2024. Looking quickly at the Seaport. As David mentioned, we completed the Tin Building and celebrated its grand opening in late September. In the Uplands, design development and initial foundation construction continued at 250 Water Street. However, during the summer, a third-party lawsuit was filed challenging the City of New York's approval of the project and a temporary restraining order was granted pending a hearing in early December. Until that time, we have paused construction efforts but have been allowed to continue with site remediation work. We believe this case has no merit and will continue to vigorously contest the claims. We'll keep you apprised as more information becomes available. Turning to Ward Village in Hawaii. We generated $418.6 million in condo sale revenue during the quarter, including the closing of 398 units for $413 million at Ko'ula, which was completed in mid-September. As of quarter end, this tower was 97% sold with 19 units remaining. And subsequent to quarter end, we closed on another 146 condos at A'ali'i, representing an additional $202 million in net revenue. These closings will be reflected in our fourth quarter earnings. In the third quarter, we also closed on 6 units at 'A'ali'i, generating another $5.6 million in revenue. This tower ended the quarter 95% sold with 37 units remaining. Despite headwinds in the housing market, presales activity at the Park Ward Village and Ulana have remained strong. We contracted 42 units at these towers during the quarter. As of September 30, the park was 91% presold, and Ulana was 96% presold. In October, we broke ground in the park, and we expect to start construction on Ulana late in the fourth quarter. With significant demand for quality housing in Hawaii, we launched presales at our tenth condo tower Kalae in late September, and we have already presold more than 40% of the units for this tower, and expect to see strong presales momentum as we progress through the fourth quarter. All of the presales of these towers as well as Victoria Place, which has been fully sold out for some time, represent significant future revenue in 2024, '25, and '26 that is secured by nonrefundable cash deposits. These projects are expected to provide meaningful profit contributions to the company, which will be used to fund future developments in our pipeline. And with that, I will hand the call over to our CFO, Carlos Olea.

Thank you, Jay. Our results in the third quarter demonstrate the strength of our business model as we continue to benefit from strong demand throughout our communities despite headwinds in the real estate market. In summary, during the third quarter, we reported net income of $108.1 million or $2.19 per diluted share compared to net income of $4.1 million or $0.07 per diluted share during the prior year period. Our MPC is generating strong EBT of $75 million, an increase of 39% year-on-year, despite reduced super pad sales in Summerlin. This improvement was primarily driven by increased demand and pricing in Bridgeland, favorable builder price participation revenue, strong appreciation in the average price per residential acre sold, and the equity contribution from our partnerships. Our operating assets delivered $61 million of NOI with improvements in multifamily and office. While this represented a 3% year-on-year reduction when excluding the impact of our divested hospitality assets and the older collection of Riverwalk, operating assets NOI increased $1.2 million or 2%. At Ward Village, we closed on 404 condo units, resulting in $123.3 million of condo profit at a 30% margin and continuing the strong pace of presales for our projects in development. At the Seaport, we recorded a $9.5 million NOI loss primarily as a result of startup costs associated with the Tin Building. However, we have seen a tremendous increase in foot traffic and sales for our managed restaurants, concerts, and private events, as evidenced by a 57% increase in revenue compared to the prior year period. Overall, we are very pleased with the performance of our business segments in the third quarter and year-to-date. Together with our favorable outlook for the fourth quarter, we have increased our 2022 full year guidance for the MPC and operating assets segment. In MPC, in spite of significant challenges in the housing market, we now expect full year EBT will decline only 10% to 17% year-on-year, which compares favorably to our prior guidance of a 25% to 30% reduction. Notwithstanding that EBT can be inherently more uncertain due to market conditions and the timing of closings for large land transactions. In operating assets, with strong brand growth and lease-up in multifamily, new office leases, and favorable retail results, we now expect full year NOI will increase by 3% to 5% compared to 2021. Discipline improvement relative to our prior guidance, which contemplated a year-on-year NOI reduction. With respect to share buyback during the third quarter, we repurchased nearly 369,000 shares of stock for $25.4 million. These shares were repurchased at an average price of $69, which is well below its current value. At the end of the quarter, we still have $15 million in available capacity. Looking at our balance sheet. At the end of the quarter, we had $355 million of cash on hand. The timing of Ko'ula, of which nearly 150 units were completed in early October, will generate more than $150 million of additional cash flow in the fourth quarter, providing us with plenty of capital to advance our development pipeline. At the end of the third quarter, the remaining equity contribution needed to fund our development projects was $322 million before anticipated new financings for Wingspan in Bridgeland and the Columbia medical office building, which we expect will close later this year or early in 2023. From a debt perspective, we have $4.6 billion outstanding at the end of the quarter with limited near-term maturities and approximately 82% due in 2026 or later. On the financing side, we closed on a $392 million construction loan for the development of the Park Ward Village in Hawaii. During this rising-rate environment, it is important to note that 86% of our debt is either fixed or swapped to a fixed rate, which significantly mitigates our interest rate risk. With that, I would like to turn the call back over to David.

Thank you, Carlos. And with that, let's begin the Q&A portion of the call. We'll start by answering the first few questions that were generated by state technology and voted on by our shareholders. They're going to be read by Eric Holcomb. Eric, will you read the first question?

Sure, David. The first question is, can you give an update on the debt and covenant compliance? Carlos, do you want to take that one?

Sure. Thank you, Eric. In the third quarter, we did not meet the debt service coverage ratio for Hughes Landing, which had no material impact on our liquidity or our ability to operate the assets because the consequence of that is to trigger a cash trap, which means that the cash generated by the assets has to stay at the assets and cannot be sent up to corporate, but we can use them to run the assets. The issue is related to tenant move-outs that we're actively working to re-lease.

Thanks, Carlos. The second question is with rates rising and now at 4%, what are the parameters for moving forward with a new development project? Does the 7% or 8% return on cost model still work? Jay?

Well, it's very much a project-by-project decision. I mean, like everyone else, we're being squeezed by higher cap rates and increased construction costs. Yet we still benefit, more than most, by the strength of our master-planned communities, which allows us to outperform in terms of revenue and also avoid overbuilding. So if we believe the project's economics are feasible and favorable in the long term, and it can add value to our portfolio, we'll continue to develop where possible, always based on current market factors and appropriate risk-adjusted economics. It's worth noting that each of these projects are important on their own, but also important in terms of how they combine to impact the rest of the community and drive greater value in our enviable land bank. So that drives a lot of our decisions.

Thanks, Jay. The third question is on your Investor Relations page, you have a set of key metrics. One of those is historical return on equity and it's reported to be 25%. Could you provide some guidance on how this number could be verified? An example of numbers for an actual project would be great as well. Carlos?

Thanks, Eric. First, let me say that it is very helpful. This is the cash-on-cash return, essentially, the cash received divided by the equity in a project. It's something that we update on a quarterly basis. The number being quoted right now, 25%, is what we had as of June 30, and it will be updated every quarter. This is the result of the cash returns for all assets developed by us over time, including those that have been sold. As an example, using One Lakes Edge, one of our multifamily projects in The Woodlands, one such has a 42% cash-on-cash return, which is calculated by taking the stabilized NOI of $7.2 million less the debt service of $3.3 million, which brings us to $3.9 million of cash, which is divided by the equity in the project of $9.3 million, resulting in a 42% return for One Lakes Edge.

Great. Thanks, Carlos. The next question is, how should we think about the value of your 1 million square feet of retail in Hawaii after fully stabilized? Dave, do you want to take that one?

Sure. Well, given that I lived there for seven years, I feel like I have a pretty good feel for it. The location in my mind is irreplaceable. It's across the street from a 100-acre beach park, at the base of our vertical MPC, halfway between Downtown Honolulu and Waikiki. We currently have a mix of older legacy assets and new retail assets. As we continue to develop the community, we demolish the older product and replace it with newer, better retail at the base of our condo buildings. When we do this, we increase rental rates from around $20 triple net on average to somewhere around $75 triple net. As more people move into the neighborhood, we expect this retail performance just to continue to increase.

Okay. Thanks, Dave. All right. We'll take one more question. Does the company maintain its position as a price maker and not a price taker regarding land sales? Do new economic conditions change who has the power in these negotiations?

I think this past quarter's result can clearly demonstrate that we're still a price maker. We had a tough economic environment this past quarter, but we continue to experience increasing price per acre sold in all of our MPCs. As we stated in our prepared remarks, we will only sell land to keep up with underlying home sales. If we don't like the price that homebuilders are willing to pay, we won't sell. We have scarce limited resources, especially in an area like Summerlin, outside of Las Vegas, which is very much land constrained. We will wait because we have that precious resource that will continue to appreciate if we don't like the price in any given quarter or year. With that said, we haven't seen deterioration. We've seen increases, and we're excited about what we'll see for the rest of this year.

Thanks, David. All right, Sarah, with that, we'll open the lines for Q&A. Can we have the first question, please?

Thank you. Our first question comes from Anthony Paolone with JPMorgan. Please go ahead.

Thank you. My first question just on builder price participations - like, I think, $52 million year-to-date. And I just want to try to get ahead of 2023. And as we think about where that could go, does that kind of fade away because perhaps whatever the base pricing was for the stuff that might get sold next year is different? Or how should we think about the risk around that number looking ahead? Because it just seems to be running pretty high.

It's a great question, Tony, and I appreciate you asking. Look, it's a number that is, in this year and last year, very high, outsized relative to our expectations. I'm going to do my best to answer this question without giving you any guidance on '23 because we're not in a position to do that on this call. However, our expectations would be that it would return to more normalized levels. This has been clearly elevated over the past several quarters. And if we're really good at selling land at the absolute right price, that should be zero. Luckily for us, people continue to invest in upgrades in their homes, pay for view premiums, and we've seen price appreciation in the underlying home sales in each of our MPCs, which has driven favorable builder price participation over the past several quarters and years.

Okay. I understand. Thanks for that. And then just a question on the condo presales, 40% in a month in a tough market. Can you just talk about maybe where the demand is coming from and just comfort that we can get the rest of that done?

Yes, absolutely. The demand we've seen is largely consistent, with about 50% to 55% of buyers local to the island. It's still about 30% Asian buyers, primarily out of Japan, and we saw an increase compared to our past couple of towers, with a modest increase through our Tokyo sales gallery, and we're still seeing strong demand from mainland U.S. buyers. It's a very consistent mix of what we've talked about and published in the past across our towers fluctuating a couple of percent here or there. In terms of our optimism for contracting and selling the remaining 60% of the building, we feel great. There are always so many days you can contract, and it takes a while for those deposits to go hard. We feel very confident that this is a number that will continue to climb throughout the rest of this year.

Okay. Got it. And then just lastly, on 250 Water Street, I understand how it's tied up in the lawsuit. But does that mean in December we get an answer? Or can that just drag out a lot longer? I know you have some debt that's on that. Just trying to understand what you do with that.

I really can't comment on the timing of the temporary restraining order, our ability to get it listed, or what will happen in the court system. We strongly believe that this is a suit without merit, and we're going to fight it vigorously. As we have an update on the timing, we will absolutely be sure to communicate it. The loan that we have on the asset, we feel is completely supported by the value that's there, especially given that since that loan was put in place, we've had the approval of the transfer of the rights, which has done nothing but increase the value. So we feel strong that we're going to be able to refinance that debt, whether or not we have the temporary restraining order lifted, which, again, like we said, we believe is without merit.

Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Good morning. David, I understand you’re not ready to discuss the 2023 guidance, but I have a question regarding your updated land sale guidance. It appears land sales may not decline as much as initially expected this year. It’s clear that performance can vary from quarter to quarter depending on whether high-end or larger pads close, which has a significant impact. I appreciate your insights that sales in the high end continue to rise, while the lower end, likely relating to Woodland Hills, seems to be more affected. Overall, it seems you’re not completely shielded from the 7% mortgage environment, yet your communities appear to be less impacted. Could you provide some perspective on this? It sounds like the business operations are performing well, with stable NOI and land sales pricing holding up better than anticipated. I’m curious about where the weaknesses might be. As we look to next year, should we prepare for significant declines in land sales due to pricing concerns? Or is it more so that builders are willing to pay the prices per acre because they want to be in your communities and are facing low inventory? I’d like to understand how your communities are performing against the market and whether you’re gaining market share because your offerings are superior to the typical MPC.

Alex, it's a great question, and it's one that I’ll try and answer as best I can. Look, I think that our homebuilder partners and homebuyers want to be in our MPCs. We have an unmatched quality of life, incredible amenities, short commutes, improved work-life balance, and just a lower cost of living that's driven so many homebuyer decisions and, therefore, homebuilder demand for our land. Clearly, home sales are slow. We have higher interest rates, we have inflationary pressures and recession fears. It’s having an impact. I believe we've been outperforming, and I believe we'll continue to outperform based on the quality of our communities. We're in a much different spot in this potential housing downturn than the last one. Going into the last housing downturn, we had meaningfully overshot new homes ahead of household formation. That trend is completely different today. If you look at some of the data, we estimate that we're short almost 4.5 million to 4.8 million homes today, coupled with record low vacant developed lot inventories in the hands of our homebuilders, which I would argue 20 months of equilibrium. In Phoenix, we're at 14; in Houston, we're at about 13; and here in Summerlin, we're at 7 to 8 months of supply, which is record lows. So I think the strength that we saw this quarter and our confidence in being able to take up guidance for the remainder of this year is the result of the outperformance we've seen in our communities, the record low land inventories that homebuilders have, and the continued demand for homes. Unlike the past cycle, Alex, where a homebuyer coming into the market had too many resales on the market, we see fewer and fewer resale inventories as those people that are sitting in their homes locked into a 3% mortgage aren't in a rush to trade out to a 7%. So new buyers coming into this market have really been left with newly built homes as their choice.

Okay. So David, let me ask you this. If you break out your portfolio, you said the low end is being impacted. What percent of your portfolio of land sales, or however you want to mention it, is it 80% of your land sales target the upper end that aren't really being impacted? Is it 50%? Just trying to get sort of a breakout as far as how much of your land goes towards homes that aren't seeing an impact by 7% mortgages versus the lower-end homes, the starter homes that are seeing an impact?

Yes. So our land sale strategy is to meet the underlying home sales and to fill the deepest pocket of demand. So in any given quarter, our land sales could be directed to more higher-end homes or it could be directed to more starter homes. Our land sales will adjust to meet that demand quarter-over-quarter. And to that end, I think based on the results that we've seen that we mentioned in the prepared remarks, for the next several quarters, we'll see more lots sold to those that are still driving the home purchasing and less to the more starter homes. But it's incumbent on us, Alex, and we do this, and we've talked about this, I'm sure, that we push to make sure that we have all price points available on the ground to the best we can in all of our communities. It maximizes absorption, the vibrancy of the community, and the diversity of the new families that we welcome into our communities. So our job is to make sure that we have lots on the ground to meet all those price points at all times.

Next question: it seems that the condos in Hawaii are unaffected by mortgage rates and continue to sell well. Is that an accurate assessment?

I would say based on the sales that we experienced this quarter, with both closing out Ko'ula, the continued absorption in A'ali'i, continued presales at the Park Ward Village and Ulana as well as launching Kalae, so far, we haven't seen a meaningful impact or change or dampening of demand based on any of those other factors.

Okay. Final question. I appreciate that. The final question. The labor situation you mentioned around the Tin Building and obviously, labor in general at the Seaport. Does this delay your planned stabilization by a few years because it doesn't seem like the labor market is going to get better anytime in the near term? Are you guys now assuming a longer stabilization to profitability? Or what's your view given what's gone on so far with labor?

Yes. It's tough for me to quantify what that delay has really changed in terms of the timeline to stabilization; it's not years, it's months. As we said, we expect to be open fully at seven days by the end of this year, early January, and we're chipping away at hiring every week, adding 15 to 25 new folks that are coming to join the team and learning from probably the best culinary expert in the world, in my opinion, and Jean-Georges, and helping out with the Tin Building. So we're chipping away. We feel good that we're on a roadmap now to getting open to seven days. We would have liked to have been open seven days in September, but if that becomes January instead of September, sure, because the stabilization will be pushed off by 3 to 4 months. Absolutely. I don’t know that my crystal ball is accurate enough to say exactly the day that we expect it to be stabilized. So it’s really hard to quantify what this could mean.

Good morning. First, a follow-up on Ward Village. You sold a couple more units in Ko'ula in Q3. Are you seeing any feedback from these customers and from sales associates as to the sales process that you're seeing there?

Look, I think that our job is to constantly take feedback throughout that process to try to improve it. Our sales team, led by Bonnie Wedemeyer on the ground there at Ward Village, does an excellent job at this. I think that excellence has shown up in our results and our ability to continue to sell.

Okay. And there were some reports for the last few months that some new homebuilders were seeking out investors to buy homes in bulk for rental homes. Are you exploring ways to expand Howard Hughes footprint in the single-family rental space?

Yes. I think the launch of our first single-family for rent community, Wingspan in Bridgeland is evidence of that. We ensure that as we sell land to homebuilders that those homebuilders are selling homes. We don't typically allow spec building, and we're pretty focused on what we allow our homebuilding partners to do long-term; it’s to build homes, not flipping land or using it for another purpose. So we haven't seen that phenomenon in our community. But we're optimistic about our single-family for rent community, Wingspan in Bridgeland. We think there's tremendous demand, and we can't wait to get that project completed.

Okay. And the last question is regarding the maturities that are coming up. Any plans on how to deal with that? Do you want to refinance and add more debt at higher interest rates? Or are you just going to divert cash flow from stock buybacks to the debt maturity? Anything you'd add there?

Our expectation is that all the near-term maturities will be refinanced at similar or slightly higher, slightly lower proceeds than what are currently standing.

But does the current environment actually allow that? I mean, interest rates have gone up quite a bit since the maturities are coming up.

So far, so good. We feel comfortable with that comment.

Okay. That's helpful. Thank you.

The next question comes from John Kim with BMO Capital. Please go ahead.

Hey, good morning, guys, it's Eric on for John. Can you just think about the builder price participation segments? Can you just remind us of the dynamics and the drivers behind that?

Sure. Yes, absolutely. So when we sell land to homebuilders, whether that's in a super pad or a lot, the typical contract that we sign is based on a hard deposit, a take-down schedule, a price per acre, and a residual participation known as builder price participation, which is typically between 16% and 20%. So illustratively, if we assume that builder price participation is 20%, and we sold land to a homebuilder where we thought the end home price would be $500,000, so our implied land value there based on 20% is $100,000. If, in fact, that home is sold for $600,000 as a result of new premium upgraded quality of finishes that the home buyer elects to put in their home or other areas that drive the price higher, we're going to participate in 20% of that delta. So if the $500,000 home is sold for $600,000, we would receive a $20,000 check for builder price participation.

Okay. That's helpful. And then just based on the large super pads sold in the fourth quarter of last year and given the housing prices relatively strong in the upper-end market. Is it kind of safe to assume that there's a potential upside in the builder price participation when those houses do come online and are sold?

Eric, it's really hard for me to predict what the price of a home is going to be when they're sold. It could be 3, 6, 9, or 12 months from now. Sure, I’d love to think that they’re going to continue to go up, and we'll see participation, but that's not something I'm willing to predict.

That's fair. Maybe switching to condos. On the margins, they came in a bit above expectation. Just kind of curious what were the drivers there? And how should we be thinking about what was closed in the fourth quarter?

Look, I think it tends to bounce around a little bit. What we've always said is that we're targeting a 30% margin on average across all of our towers. Some of those towers are front row, which typically have a higher margin, while some are second row and third row, which typically have a slightly lower margin than the front row. In general, we expect to achieve about 30%, and this past quarter, we were able to get there, especially on Ko'ula. I think some of the price appreciation we’ve had as we’ve gone through the sales process of these towers has helped solidify strong margins.

That's helpful. And then last one, on the same-store that you guys provide in the breakout for the office segment, it seems like occupancy was up year-over-year, but same-store NOI ticked down just a little bit. Can you just walk me through the results?

In the office, we've seen positive absorption, as noted by the increase in occupancy. But with new leasing and positive absorption comes free rent. Our same-store results are published on a cash basis, and I can’t pay my bills with GAAP rent; I can only pay with cash rent, which is why that's what we publish.

Okay. Thank you, guys.

This concludes our question-and-answer session. I would like to turn the conference back over to David O'Reilly for any closing remarks.

Thank you all for joining us today. We look forward to seeing you in our Investor Relations event in the near future. If there are any follow-up or additional questions, we're always here to help. Please don't hesitate to reach out, and thank you again for joining.

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