Howard Hughes Holdings Inc (HHH) 2016 Q4 法說會逐字稿

Welcome to the Howard Hughes Corporation fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Peter Riley. Please go ahead.

Good evening, and welcome to the Howard Hughes Corporation's fourth-quarter 2016 earnings call. With me today are David Weinreb, Chief Executive Officer; Grant Herlitz, President; and David O'Reilly, Chief Financial Officer.

Before we begin, I would like to direct you to our website at HowardHughes.com, where you can download our fourth-quarter earnings press release. The earnings release includes a reconciliation of non-GAAP financial measures that will be discussed today, 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 US 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 assurances that these expected results will actually be achieved.

Please see the forward-looking statement disclaimer in our fourth-quarter earnings press release 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'll now turn the call over to our CEO, David Weinreb.

Thank you for joining us today, and welcome to our first-ever quarterly earnings call. Since the Howard Hughes Corporation's emergence as a public Company six years ago, we have been sharply focused on building our business and unlocking the inherent value across our portfolio. We have made meaningful strides transforming raw land and underutilized real estate into vibrant destinations that generate substantial recurring cash flow.

A number of factors differentiate HHC. Our ability to control supply and the customer experience within our small cities, where we have created our own ecosystems and high-barrier sub-markets. Our three complementary business segments, and our pipeline of development opportunities. Together, these position us to deliver some of the most attractive, risk-adjusted return opportunities in the public real estate sector.

Over the past six years, our focus has been on building our business and increasing the value of our assets. Today a larger portion of our portfolio is beginning to generate recurring income. And as such, we feel that now is the time to begin conducting quarterly earnings calls and providing increased transparency to investors.

Given the relative diversity and complexity of our business model, we recognize there is an opportunity for us to bring increased clarity to our assets. So that our shareholders and future investors can more effectively underwrite the HHC value proposition and bridge the gap between our current market capitalization and what we believe is an appropriate net asset value for the Company. In addition, over the coming quarters, we will be providing supplemental disclosures with our earnings releases, that will provide additional visibility into the performance of our three business segments, as well as information that will allow you to better-understand the net asset value of the Company.

With that as a backdrop, I would like to start by providing a quick recap of 2016, as well as speak briefly about a number of our key goals for the year ahead, before spending a few minutes highlighting our progress at The Seaport District and Ward Village. I will then turn the call over to Grant, who will take a deeper dive into our MPC and operational asset segments. Finally, David O' Reilly, our CFO, will speak to our financial results and financing strategy, before I finish with some closing remarks, and then open the call to Q&A.

The fourth quarter represented an important step in our evolution as a Company. Some of the key highlights of our fourth-quarter and full-year 2016 results include making meaningful progress towards growing NOI in our operating property segment. Our fourth-quarter 2016 annualized NOI was $155.6 million compared to $128.4 million for the prior quarter, a 21.1% increase. We continue to grow our NOI closer to our pro forma stabilized NOI goal public last quarter of approximately $215 million, excluding The Seaport.

It is worth noting that this improved performance was driven by growth across all our product types. Office, hospitality and multi-family were responsible for a majority of our quarterly gains. Additionally, along with our operating assets, our MPC residential land sales continue to be a substantial course of cash flow and equity capital to self-fund our strategic developments. We sold $49 million of residential land to homebuilders in Q4, and $163 million for the full-year 2016.

At Bridgeland, year-over-year new home sales were up 67.3%. We believe that the strength of this community is driven by its location near job centers in Northwest Houston and the opening of the Grand Parkway, which bisects our MPC. Additionally, in response to our view of the changing market, we adjusted our lot pricing and sizes to accommodate more moderately priced homes in 2016. The substantial increase in new home sales validated our plan and ability to adjust to a challenging economy, while taking market share.

While the success of 2016 was encouraging, we believe that it is just the beginning of continued acceleration of this MPC. Already in 2017, we have experienced a very dynamic start in Bridgeland, with 42 new-home sales in January, far outpacing the 15 homes sold in January 2016. In 2017, we will look to take advantage of growing demand for homes by increasing infrastructure investment to support higher land sale velocities. We will also ramp up horizontal development of our new community, The Woodlands Hills, in order to contract our first lots for sale by year end.

For the fourth consecutive year, Summerlin generated over $100 million in land sales. And we see no signs of this slowing down, given its unrivaled position in the market and the robust Las Vegas economy. We look to continue the strong and steady sales we have experienced over the past four years.

In our strategic development segment, we had a number of accomplishments worth noting. First, we delivered Waiea, our first residential tower at Ward Village, that is approximately 93% sold. We also welcomed Nobu to the base of the building, relocating from their Waikiki location. We believe that this relocation is indicative of Ward Village becoming the new center of Honolulu's urban lifestyle.

We obtained a $90 million tax increment financing, known as a TIF, to fund horizontal infrastructure that will support 5 million square feet of vertical development in Downtown Columbia. We executed a lease and build-to-suit agreement with a credit tenant in The Woodlands for 203,000 square-foot medical building at 100 Fellowship Drive. And early in 2017, we acquired the Macy's parcel at Landmark, paving the way for a substantial mixed-use development.

2016 was a very strong year, and I expect 2017 to be one of significant progress as well. Our key focus for 2017 is to continue to grow NOI by leasing up and stabilizing many of our operating properties as we close the gap between actual in-place NOI and our stabilized NOI targets, made up of our existing operating properties and strategic developments under construction.

In addition to growing our NOI closer to our target, another one of our important goals in 2017 is to continue to increase our long-term stabilized NOI forecast as we move ahead on new developments. As we announce and begin construction on new development projects, we move the goal line on what our targeted, stabilized NOI can be. Case in point, the new projects that we announced in the fourth quarter created a $16.8 million increase in our NOI goal, from $215 million to $231.8 million, excluding The Seaport.

I would like to provide a little bit of color on our strategic developments where we currently have more than 50 million square feet of vertical entitlements. At our MPCs, our strategy is to create complementary assets that connect our customers. They live in our communities, work in our office buildings, and shop at our retail destinations. Because we control supply in these ecosystems, we have the unique ability to capture demand ahead of the curve, and accelerate development by focusing on a given product mix based on market needs. This results in us having tremendous NOI upside, with limited risk, and provides us with the ability to deliver outside risk-adjusted returns.

Additionally, we internally fund our equity requirements for strategic developments through MPC land sales and recurring NOI. These developments will continue to raise the bar on our stabilized NOI projection, and increase the net asset value of the Company.

A few highlights worth noting. At Ward Village, we will deliver Anaha, our second residential building, that is approximately 95% sold, in the third quarter this year. This will generate substantial cash flow for the Company. We also currently have two other buildings under construction, Ke Kilohana, more than 90% sold, and Ae'o, which will have Hawaii's flagship Whole Foods Market at the base of the building, and is approximately 58% sold. The buildings will be delivered in 2019 and 2018, respectively.

We have also obtained approvals for our next tower. Presales will commence in 2017. As has been our past practice, we do not intend to commence construction until we achieve a minimum of 50% presales on a building.

In Summerlin, we have been master-planning approximately 5 million square feet for the next phase of our downtown. At Downtown Summerlin, look for us to welcome the completion of the NHL practice facility later in the year, as well as commence construction of additional projects, including an office building and multi-family project. We have also continued our discussion with the city to potentially relocate the minor-league baseball team and build a state-of-the-art baseball stadium in the heart of our downtown.

In The Woodlands, we will break ground on the 203,000-square foot build-to-suit medical office building for a credit tenant, as well as a 292-unit multi-family project in the Creekside neighborhood. We are currently working to secure additional build-to-suit opportunities, and will evaluate further developments as Three Hughes Landing continues to stabilize.

In Downtown Columbia, we will deliver Two Merriweather, a 130,000-square foot office building, and m.flats, a 437-unit multi-family building. We will also commence horizontal infrastructure development, and look to secure additional anchor tenants for a potential third office building, as well as design our next multi-family development. In addition we will commence construction on our first self-storage facility in the region.

At The Seaport, we will continue to open new tenants in the Uplands through 2017 and 2018, and advance development of Pier 17 for a summer 2018 grand opening. Additionally, we will advance design on the food market in the Tin Building, to open in 2019.

Before turning the call over to Grant, I thought it would be worthwhile to spend a few minutes providing additional context on both The Seaport District and Ward Village. First, at Seaport. Our vision for The Seaport District is well on its way to becoming a reality. The initial redevelopment encompasses seven buildings spanning several city blocks along the East River waterfront in Lower Manhattan. The development consists of four distinct areas: the Historic District, Pier 17, the Tin Building, the new market site.

The Historic District, or as we call it, the Uplands, consists of 180,000-square foot of retail space, which includes the 100,000-square foot Fulton Market building. Our first cornerstone tenant to open in the revitalized district was iPic theaters, which opened in October 2016 and has a 20-year lease on 46,000 square feet in the Fulton Market building. The iPic at The Seaport is Manhattan's first new commercial multiplex movie theater opening in over a decade, and currently iPic's only Manhattan location.

In September, we announced that iconic retailer 10 Corso Como, founded in Milan in 1991 by style visionary and former fashion editor Carla Sozzani, will open in the Uplands as well. The store will be 10 Corso Como's only US location. For those of you not familiar with 10 Corso Como, it is the world's original concept store, and emulates a living magazine, with its wide range of offerings that include a restaurant, bar, art gallery, fashion, home goods, design objects, books and more. 10 Corso Como will join other previously announced tenants in the Historic District, such as McNally Jackson books, Scotch & Soda, by CHLOE, and Big Gay Ice Cream. We expect the Uplands to be substantially repositioned by mid-2018.

Turning to Pier 17, the new building will house approximately 170,000 square feet over four levels overlooking the East River and Brooklyn Bridge. The first two levels will house a mix of dynamic restaurants and experiential retail, including concepts from acclaimed restaurateurs Jean-Georges and David Chang. Floors three and four will consist of approximately 90,000 square feet of space that will likely be a mix of creative office, experiential retail and event space.

Pier 17 will be highlighted by a 1.5-acre rooftop event and entertainment venue that will be home to a restaurant, private events, and a summer concert series. As well as a vibrant winter village experience in what will be one of the most unique settings in all of New York City, with unmatched views of the Brooklyn Bridge, East River and the New York skyline. The rooftop will be able to hold approximately 4,000 people standing, or 2,600 people seated. Pier 17 and the rooftop will open in the summer of 2018.

The Tin Building will encompass approximately 50,000 square feet, housing a food market that will rival the most popular experiences in the world. Operated by a Chef Jean-Georges, the market will pay homage to the original Fulton Fish Market that opened at The Seaport in 1822. The existing building will be carefully de-constructed, removed from its deteriorated platform, and rebuilt 30 feet back from the FDR Drive, to restore its visibility and move it above the floodplain. The reconstruction is expected to be complete in 2019.

In 2017, we intend to advance discussions with the city on the new market site, which will allow us to take advantage of the remaining 650,000 square feet of air rights we have in The Seaport District. We will work with the city to bring these assets to their highest and best use. Upon full build-out, The Seaport will be well-positioned to serve as an anchor to Lower Manhattan, and capitalize on the vibrant growth occurring in this area.

In curating the district, we have structured many of our leases to have a significant component of percentage rent. As such, our ability to realize returns at the higher end of our expectations will be driven by the ultimate sales productivity per foot that our food and restaurant offerings achieve. We could have accepted a more traditional business model, with base rent and lower returns. However, I believe we can create greater risk-adjusted returns and a priceless piece of real estate by creating a destination with distinct experiences, and participating in each of our tenant's successes.

Given The Seaport's layered possibilities, it is currently more complicated to value than other core assets, and as such, will likely take time to season. Our vision is to create a destination of properties that is irreplaceable as it relates to location, architecture, and iconic nature, in the heart of one of the fastest-growing neighborhoods, in the world's most vibrant city.

We are updating our total construction cost for The Seaport District, now inclusive of the Tin Building, to be a gross cost of $785 million, or $731 million net of our Superstorm Sandy insurance proceeds of $54.1 million. We are targeting a stabilized annual return on this investment between 6% and 8%. However, there are no true comps to a district like The Seaport. And as such, we believe that upon stabilization, The Seaport's valuation could be enhanced by its potential ability to command a below-market cap rate. At a minimum, I am confident that The Seaport will be worth well in excess of our projected costs, with the potential to ultimately be valued at several multiples of our costs.

Shifting to Hawaii, at Ward Village, we are essentially developing a vertical MPC on the 60 continuous-acres we owned there in the heart of Honolulu. With the completion of Waiea and the opening of Nobu in late 2016, expected completion of Anaha in 2017, and opening of the flagship Whole Foods at Ae'o in 2018, Ward Village's transformation is becoming more of a reality each passing day. We are creating a critical mass, where Ward Village is the most desirable area to live and play in the city. No other development can offer the curated, master-planned environment of this great community.

Our scale has not only helped to create a sense of place, but also provided us with some key competitive advantages. First, it has created barriers to entry for other potential condominium developers. Other developers have substantially higher predevelopment costs, and could have trouble competing for the limited material and construction resources available on the island.

Further, our scale provides us with firsthand in-depth market knowledge, a strong competitive advantage, along with our $25 million sales gallery, that is one of the most dynamic sales experiences ever seen. This information flow helps us as we are in the early development phase of our next towers, and we are using the information gathered, as the largest condominium developer in Oahu, to design units and target buyers where we see that demand is greatest to help drive our future success.

While 2016 was a great year for Howard Hughes, we still have much to accomplish. We are squarely focused on the goals ahead. In 2017 and beyond, to continue to deliver exceptional risk-adjusted returns and value creation for our shareholders. Now I would like to turn the call over to Grant.

Thanks, David. I would like to start by taking a deeper dive on some of the underlying themes driving our recent results in our MPC, operational assets and strategic development segments. And then spend a few minutes highlighting some of the capital recycling activity that resulted in some important strategic acquisitions in the fourth quarter.

First, within our MPC segment. At The Summit in Summerlin, our joint venture with the Discovery Land Company, we structured the joint venture to monetize land that we were not planning to develop for over a decade. We contributed undeveloped land to the venture and agreed-upon value of $125.4 million, or $226,000 per acre.

It is important to note that developing a typical Summerlin subdivision would require an additional investment of approximately $175,000 per acre. However, under the terms of our joint venture, we are not required to contribute any further capital. Discovery is required to fund up to a maximum of $30 million for development costs as their capital contribution. After receipt of our capital contribution and a 5% preferred return, Discovery is entitled cash distribution until it has received two times its equity contribution. Any further cash distributions are shared 50/50.

Land development began at The Summit in the second quarter of 2015, and continues to progress on schedule, based upon the initial plan. For the year ended December 31, 2016, 60 customer residential lots closed for $184.9 million, and an additional 11 lots are under contract for $41.5 million. As of the end of 2016, we have already received distributions of $22.9 million and reported $43.5 million as our share of earnings from this joint venture. The success we have enjoyed to date clearly validates our strategy of monetizing land earlier than projected, which accelerated cash flows to the Company without putting additional capital at risk.

Also in Summerlin, we have made great strides to increase the velocity of land sales. One area we're focused on has been on developing a product that meets a broad approval of potential home buyers. In the Greater Las Vegas region, approximately 70% of home sales are at $400,000 and below. In Summerlin, we have not historically been able to meet that segment of the market demand while maintaining our current market price per acre of land. As a result of our success in terms of leading the region in home prices, we have been unable to capture 70% of the new home buyer market.

Our efforts here have been around developing a lot size, structure, and product type that can maintain the high quality of product in Summerlin, allow us to have a home price point that meets this demand and maintains our current market prices per land acre. The goal would be to accelerate the sale of land into 2017 and 2018 that would otherwise not be monetized for many years into the future. This could provide for both the acceleration of near-term cash flow, and also be executed in an MPV-positive manner, driving value creation for our shareholders.

Within our operating assets segment, we drove the NOI increases David discussed through positive leasing absorption and bringing new projects online. Specifically, we experienced quarterly office NOI growth of $2.5 million, which was primarily attributable to the continued stabilization at Two Hughes Landing and 1735 Hughes Landing, as well as contractual rent increases across our Woodland's office portfolio. We increased leasing across the portfolio from 82% to 84% quarter over quarter.

I would also like to highlight Three Hughes Landing, our most recent 320,815-square foot office development in The Woodlands, where we leased over 35,000 square feet in the fourth quarter, and over 64,000 square feet for 2016. Given the lack of available space in The Woodlands, we would have lost these deals if it were not for Three Hughes Landing. Moreover, the vast majority of these tenants are moving from 4 Waterway to Three Hughes Landing, as the primary tenet in 4 Waterway expands.

Hospitality NOI quarterly growth of $2.7 million was driven by increased activity at The Woodlands Resort and Conference Center, as well as continued stabilization of the recently completed Westin and Embassy Suites in The Woodlands. Multi-family NOI quarterly growth of $1.4 million was driven by the stabilization of the Metropolitan in Downtown Columbia and improved performance at both of our millennium multi-family assets in The Woodlands Town Center. We aggressively leased our multi-family assets from 81% to 86% quarter over quarter.

We expect occupancy to grow significantly at One Lakes Edge and The Constellation, as it continues to stabilize in the coming quarters. Specifically, performance at The Constellation in Downtown Summerlin has been especially pleasing, as we experienced a quarterly increase in percentage leased from 42.7% to 62.9% as of year end, on a project we only opened to tenants in the third-quarter of 2016.

In our retail portfolio, we experienced quarterly NOI growth of $590,000, that was driven by the continued stabilization of our Hughes Landing retail and Downtown Summerlin projects. We continue to lease Downtown Summerlin and replace underperforming tenants. We still remain committed to achieving our targeted stabilized NOI projections of $32 million within the next few years. Additionally, I should note that residential landfill prices are up approximately 25% in Summerlin since opening our downtown, a great example of the complementary benefits of business segments and the virtuous cycle associated with developing in our MPC ecosystems.

In the third-quarter of this year, we did experience some headwinds in our efforts at Downtown Summerlin, with the bankruptcy filings of both Sports Authority and Goldsmith. We are actively engaged with tenants on their potential backfill, and hope to have an update on these boxes in the coming quarters.

Our other Sports Authority location was in Ward Village. This was a rare situation where a tenant bankruptcy, despite its short-term negative NOI impact, was actually good news for us. In Ward Village, Sports Authority had a long-term non-temp [bo] lease, which was an impediment to the next phase of our development. The bankruptcy and our eventual acquisition of their lease paved the way for a more cost-effective, faster re-development of that parcel.

We made substantial advances within our strategic developments. I would like to discuss our more-nuanced achievements, and highlight key accomplishments that were years in the making and critical to creating value for our shareholders. At The Seaport, we made critical progress in advancing our transformative vision for the district. In October 2016, we received approval of our Pier 17 minor modification, which includes the reconstruction of the Tin Building into a giant George Food Hall. In January 2017, we executed the ground lease amendment with the City of New York, incorporating the Tin Building into our leased premises.

We sold the 80 South Street Assemblage for $390 million, or $477 per square foot, significantly bolstering our cash position, finding us for new opportunities, and preparing the Company for changes in the real estate cycle. 80 South was an example of our team's innovative approach and ability to complete large, complicated transactions, as we generated approximately $140 million in profits on this deal.

Turning to Columbia, in November of this past year, the Howard County Council approved a $90 million tax increment financing, or TIF. As part of the TIF arrangement, entitlements exist to construct an additional 774 affordable housing units totaling approximately 1 million square feet for the local community, increasing total entitled space to over 14 million square feet for all of Downtown Columbia. The TIF will provide capital for the development key [rows], infrastructure and an approximate 2,500-space parking garage to service our local office buildings and other commercial development within Merriweather District.

The infrastructure and parking that will be funded by the TIF are critical in our 5 million-square foot build-out over the Merriweather District that is currently underway. The first office building, One Merriweather, was recently delivered, and we will complete the second office building by year's end. We are actively planning future office and multi-family projects in the district.

In The Woodlands, we recently delivered our first self-storage facility on time and on budget. The second facility will be delivered in the second quarter. This is another example of our Woodlands team's ability to transform non-income-producing commercial land into long-term cash flowing assets.

While speaking about The Woodlands, I would like to spend a minute discussing the overall performance of the commercial real estate market in Houston, and contrast that to our performance in The Woodlands. Obviously the commercial office market in Houston has taken a sharp decline over the past year and a half, and that decline has materialized in higher vacancy rates, increased sub-leased space, and weakened net absorption. In 2016, according to CoStar, office direct vacancy rates closed the year at over 22%, exclusive of approximately 11.8 million square feet of sub-leased space. This is in stark contrast to the office performance in The Woodlands, where we closed the year 12.3% direct vacancy, and experienced over 49,000 square feet of positive absorption in the fourth quarter alone.

Turning to our recent acquisition and disposition activity, we engaged in several transactions that will allow us to recycle our capital from non-core assets into our core markets. In January 2017, we closed on the sale of a parcel of land at the Outlet Collection at Elk Grove of approximately 36 acres, for gross sales proceeds of $36 million. The disposition accelerated the monetization of land value at the asset, while allowing us to retain upside in the remaining 64 acres, which we plan to develop. In addition, we will recognize a tax loss on this build of $37.5 million, as our tax basis in the asset was substantially higher than our sales price.

In addition we sold Park West, the non-core, open-air shopping center in Peoria, Arizona, for $32.5 million, unlocking a $17.6 million tax benefit. The combined $68 million of proceeds from the dispositions will allow us to redeploy the net cash proceeds into acquisitions and existing developments.

We were able to make great progress in our re-development efforts at Landmark Mall in Alexandria, Virginia, by purchasing the 11.4-acre Macy's store and parking lot for $22.2 million. We plan to transform the mall and Macy's parcel into an open-air, mixed-use destination, with retail, residential and entertainment components.

In addition, we redeployed capital by acquiring two office buildings in Columbia, Maryland, that are strategic for our ongoing efforts to create a cohesive downtown in Merriweather District. We acquired the American City building for net cash proceeds of $13.5 million. While this office building is vacant, its value lies in our ability to unravel complicated and restrictive parking easements, which will allow us to redevelop a significant portion of the Lakefront District in Downtown Columbia for up to 1.5 million square feet of additional density.

Lastly, we acquired One Mall North, a 100,000-square foot, 100%-leased office building in Columbia, Maryland on 5.37 acres for $22.2 million. Without assigning any value to the improvement, the implied purchase price of the building would equate to the value of the land we contributed to our first joint venture with Kepler for the construction of the Metropolitan. We believe our basis in the buildings positions us to create value over the long term.

We will continue to look for opportunities to accelerate monetization of non-core assets and redeploy that capital into higher-returning core development projects. With that, I will turn the call over to David O'Reilly for our financial results and outlook.

Thank you, Grant. I would like to start with a quick summary of our earnings and adjusted earnings per share, before summarizing our recent financing activity, and then finally, turning to our current leverage and liquidity numbers. We completed the fourth quarter, with GAAP earnings per diluted share of $1.02, as compared to $0.59 for the fourth-quarter 2015. As you are probably aware, we adjust GAAP net income for the non-cash impact of appreciation, amortization, and warrant liability gains and losses. We have provided a reconciliation of adjusted net income to gap net income on page 8 of the earnings release.

Adjusted earnings per diluted share for the fourth-quarter of 2016 was $1.69, which compares favorably with $1.23 per diluted share in the prior period. This 73% increase in our fourth-quarter EPS over the same period in 2015 is largely attributable to stabilization of properties in our operating assets segment, continued strength in residential land sales in our MPC segment, and increased condominium sales volume in our strategic development segment. For the year, we had earnings per diluted share of $4.73, compared to $1.60 in 2015.

For adjusted earnings for the full year, we recorded $7.78, compared with $3.24 for 2015. This represents over a two-fold increase in our adjusted earnings per share year over year. Our sale of the 80 South Street Assemblage, where we recorded a gain on the sale of $140 million, drove a large portion of this increase. This sale contributed $3.29 of the $4.54 increase in per-share adjusted earnings.

Similar to the improvement in our fourth-quarter adjusted EPS, the remainder of the full-year increase was driven by a stabilization of properties in our operating assets segment, continued strength in residential land sales in our MPC segment. And increased condominium sales volume in our strategic development segment. Again, continued strength across all three business segments drove material adjusted earnings growth.

Turning to our balance sheet, we closed on a number of important financings during and subsequent to the end of the fourth quarter. Our capital markets team has done a tremendous job accessing debt capital and finding Howard Hughes' unique, creative and efficiently priced debt capital. The fourth quarter was another great example of their efforts.

First, we closed on a $142.7 million partial recourse construction loan for Ke Kilohana at Ward Village. This loan has a three-year initial term with a one-year extension, and bears interest at LIBOR plus [3.52]%. The initial maturity date is December 2019. Total development costs for Ke Kilohana are expected to be $219 million, and we expect to use $19 million in deposits to fund a portion of our required equity for this project.

Also at Ward Village, we closed on a $230 million construction loan for Ae'o. This loan bears interest at one month LIBOR plus 4%, and has a three-year initial term, with two one-year extension options. The initial maturity date is December 23, 2019. Total development costs for Ae'o are expected to be $429 million, and we expect to use $52 million in deposits to fund a portion of our required equity for this project.

In addition, we completed to long-term fixed rate financings on a few stabilized assets in The Woodlands and Columbia. In the fourth-quarter 2016, we financed our used Landing retail property with a $35 million, 3.5% 20-year fixed-rate loan. And in early 2017, we financed our Columbia Regional Building with a $25 million, 4.48%, 20-year fixed-rate loan.

Also subsequent to year end, we upsized the 10 through 60 Columbia Corporate loan by $14.5 million, to finance the acquisition of the One Mall North [box] building. As of the end of the fourth quarter, our net debt to total market capitalization and total assets remained at conservative levels. Our net debt to total market capitalization closed the quarter at 36.8%. And our total debt to total assets was at 42.3%.

From a liquidity perspective, we finished the year with over $665 million of cash on hand. As of December 31, 2016, we had 15 projects in our strategic development segment, with anticipated total costs of $2.76 billion. Of that amount, we have previously funded $1.4 billion, leaving $1.35 billion in unfunded commitments. We expect to meet this obligation with a combination of existing construction loans, which currently have approximately $714 million of committed but undrawn capacity, prior deposits of approximately $118 million, and new construction financing totaling $82 million.

That leaves a net remaining equity requirement of $439 million. The majority of this amount is tied to The Seaport District, which we have not yet sought construction financing for. We expect to fund our remaining equity commitments through a combination of new construction financing, our free cash flow from our operating assets in the MPC segment, net proceeds from non-core asset sales, and lastly our existing cash balance.

This puts us in a very strong position for a development Company of our scale. We currently have more than enough cash and liquidity on hand to meet all of our funding commitments, without any additional cash being generated daily from MPC land sales and our operating properties. With that, I will now turn the call back over to David for closing remarks.

Thank you all for joining us today. One of our goals that I mentioned earlier, is to provide additional clarity on our assets and business to shareholders through increased communication and supplemental disclosures. I hope that this call is a solid step in that direction.

I would also like to mention that we are planning our first Analyst and Investor Day on May 17 at The Seaport District in New York City. Please save the date, and we will follow up with additional details as the date approaches. And with that, I will open up the call to Q&A.

(Operator Instructions)

Steve Shaw, Compass Point.

Hey, guys. Did you give an NOI number for The Seaport?

We did not give an NOI number, but in David's prepared remarks, and this is David O'Reilly, he gave an estimated yield range between 6% and 8%. And highlighted that, given most of our leases there are not -- it's traditional, they are more dependent on a percentage of sales, that, that range between 6% and 8% will be dependent on the sales per foot of the underlying tenets. Which is why that range is a bit wider than what we would perhaps normally would quote.

Okay. And then terms of delivery on specific assets, I think David had said summer 2018 for the Pier, 2019 for the Tin Building. When is the historical section being delivered?

Hi, it's David. The Historical District, obviously we opened up iPic last year. If you have not been down, I hope you will come. It is really a dynamic experience. And we think critical mass is important, so we are now targeting basically everything to open sometime between the second quarter and then during the summer of 2018.

Okay. And how is the pace of leasing right now? Is it slowing down, or is it faster than you guys were thinking originally at Seaport?

I think it is what we expected. You really have to come to see the property, and now that the property is getting to a point in its completion that you can walk it and really feel the experience that we've created. The people that we have been talking to on an ongoing basis are very excited. Again, I encourage you to come down if you haven't. And we've got a lot of strong interest that we have not announced. We are quite confident that the end product is something that everyone is going to be very pleased with.

How is the leasing at One and Two Merriweather?

I'll take that, Steve. This is Grant. What we have experienced is, great demand through 10 through 70 Columbia of small tenants. Our goal is to fill a floor full of tenants at One and Two Merriweather. As you know, we turned over the space in December to MedStar in One Merriweather, who will occupy around 50% of the building. We have some smaller deals working.

We are also going to fill out a floor with spec suites, which we've found to be very successful. But there is not much that much space left in One Merriweather, and Two Merriweather has of retail space at the bottom. So we have a year to complete that.

It looks like conference activity is picking up in Houston. Is that an indicator for how things are in the overall market?

Obviously as all prices stabilize, we are seeing increased activity. That still has not yet translated into a pick-up in office activity, but we are seeing absolutely an increase in the hotel. We had a phenomenal January, and February has been great.

Thanks.

Thank you.

Craig Bibb, CJS.

Congratulations on your first-ever conference call.

Thank you, Craig.

You were extremely thorough. It was very professional for your first time out. The Seaport, just to make sure I 100% understand, nothing is really going to happen this summer, so it is really Q2 in summer of 2018? Or are things going to be opening in the interim?

I think your comment is accurate as it relates to the Pier and the Tin Building, based on David's comments earlier. But within the Historic District, we are already opening some long-term tenants, like iPic. We are under build-out right now with Scotch & Soda and by CHLOE. And as those are complete, we will be opening those tenancies.

Right now, it is already turning over, and it's already very vibrant on this side of the FDR. But consistent with David's prepared remarks, the Pier will be open summer of 2018 for its grand opening, and the Tin Building in 2019.

Okay. And then --

And I think that what you can expect to see, particularly with the Pier and the Rooftop, the summer concert series will commence in 2018, but we are planning several dynamic events on the roof that will happen in the second quarter. But we have not announced yet what those will be.

Okay. And any progress on the third and fourth floors of Pier 17?

We have a number of tenants looking, and we expect that during this calendar year, we expect to be in a position to announce who will be leasing the majority of those floors.

Okay, that's great. The velocity of land sales in Houston, particularly Bridgeland, really picked up. Do you have a broad target of where you could be in terms of lots or acres at Bridgeland next year?

For 2017, we are hoping to be at or above where we were for 2016. But we expect the velocity to pick up dramatically, given the price points that we are achieving at Bridgeland. If you look at Woodlands as a historical comparison, Bridgeland as it develops could generate as many as 1,000 lots per year. Woodlands was doing that at its peak, even 2,000 lots per year Woodlands did at its peak.

And as development expands northwest in Houston, and the opening of the Grand Parkway, our competitors are running out of land, such a Cinco Ranch. Bridgeland is the next major master planned community. We expect great things out it.

Okay. And it looked like you pushed back Anaha by a quarter, or am I mistaken?

It was always targeted to be delivered either in the summer second quarter or third quarter. So it's probably a month difference. But there is no delay on that project.

And you had some nice press in the Wall Street Journal, I think it was this weekend. Can you talk about what is going on competitively with other large towers?

I think this is a really interesting phenomenon. What we did a couple years ago was build the sales center out, which we spent around $25 million creating. This sales gallery is a one of a kind. Most condo developers will build a sales trailer that shows off their product.

We have the ability to command a premium on pricing, because we offer condo product at all price points. That creates an immediate barrier to entry for any new developer. Our two major competitors were forced to cancel two projects. I think part of the reason they did that is because we are dominating the market.

The second reason is that we have scale. It is 60 acres of continuous property overlooking the water. It is the best land in Honolulu, with the vision of a cohesive project. So we are creating natural barriers to entry. In addition, a single developer has to reach a 50% pre-sell threshold, as well as spend $5 million to $10 million on predevelopment.

We are moving forward with one tower ahead of schedule. We are already received our approvals for our A'ali'i. We are in the midst of designing in the next tower as well. Once we bring A'ali'i to market, we continue to move ahead, and it is very difficult to compete with us in that market.

I would add also that with Ward Village, we are essentially developing a vertical MPC, as I mentioned, earlier in the call. And what is exciting about getting the buildings open now, with Waiea opened, and Nobu opening at the base, Anaha opening this year at Merriman's, should be open before the end of the year. And then their flagship, Whole Foods opening up by the end of the first quarter of 2018. People are really going to start to understand the vibrancy of what we are curating there, what we have created.

And quite frankly, there won't be anywhere else that people are going to want to live. It will be very hard to match the offerings of lifestyle that will be available there.

Okay. And then the last one on Ward Village. I think it is Ward Warehouse that was demolished recently, or getting ready to be demolished, and that is to make way for the Gateway Tower. Has there been sales movement on that project?

We have had additional sales. We're very committed to that project. We are taking that building down. As we do with everything that we believe in, as we do that, those two buildings, we are planning on staying the course. Clearly there is a slower demand in that higher product type, but we have great confidence in the first of those two towers moving ahead ultimately. We don't have a target date on when we will start actual construction, but we are taking first steps towards that goal.

All right, thanks a lot guys.

Thank you.

Sam McGovern, Credit Suisse.

Hey, guys, thanks for taking my question. I was hoping you could talk a little bit about how you use the balance sheet, how you use that project debt versus corporate debt, and if you have any target leverage metrics?

Sure, Dan. This is David O'Reilly again. So what we typically do or what we traditionally finance, has been to pursue nonrecourse debt, by far and large whenever possible, on a construction site for the new developments. As those projects stabilize, we take out that shorter term construction financing with long term mortgage debt, eliminating short term interest-rate risk, and taking maturity off the table. We're really focused on making sure, from a balance sheet perspective, that we always have enough cash on hand to finish all the projects that we have under construction.

So it is not as much a leverage target, because our leverage metrics -- at that enterprise value, we are going to bounce around where we are trading on any day. Our net debt to EBITDA can be very volatile, because we can go from eight times last quarter to 5.5 times this quarter, based on the timing of condo sales.

So those metrics, while we have targets internally to make sure we have appropriate coverage, they are not great targets, given the volatility. What we really target is, making sure we have the liquidity to finish all of our in process construction projects without having to go to the market, sell assets, or be in a position to get caught. So that is what is paramount to us as a Management Team, making sure that we do maintain that liquidity, and take that risk of getting caught in the wrong point of the cycle, off the table.

Got it. That's helpful. Thanks so much. I will pass it along.

Thanks, Dan.

Alex Barron, Housing Research Center.

Hey, guys. Congratulations on all the progress over the last few years.

Thank you.

I wanted to ask about your views on the Houston housing market. Obviously that market has been hit pretty hard over the last couple years since oil fell, and it has had to readjust. But wondering what your view of that market is at this point in time? And what you are hearing from the various builders that you are talking to as you are preparing to sell land to them?

To try it answer that, we started 2016 thinking that it would be a much slower year for Bridgeland. We moderated pricing, and by doing so, we attracted demand. By moderating the pricing and increasing velocity, we accelerated our development spend to allow for that to recur in 2017. January and February have been exceptional months compared to January and February last year, and that is for the moderated product.

The Woodlands is still not selling as fast as it was before, although January and February have been better compared to the year before. What I would say here is that, Texas is a vibrant state. There is job growth all over the state. Houston has built an economy that is, although still dependent on oil and gas, has diversified into healthcare and other sectors.

It is still has the second largest port in the country. There is job growth even in one of the most severe declines. So what we would like to think is that, this is an affordable place to live in the country. And as it continues to grow, and as job growth accelerates, that will increase demand for housing.

Okay. And at The Woodlands, how many residential lots are left there before you guys run out? And when does Conroe property kick in?

The Conroe property, we expect the first sales to take place in the fourth quarter. We've accelerated development there, and are looking forward to that grand opening. And as for the number of lots, I'm going to turn that over to David O'Reilly.

We have 338 residential acres left in The Woodlands, and 781 commercial acres left. Number of lots -- we can give you an estimate.

About 1,200.

But that's going to change as we adjust lot sizes to maximize pricing of the acres and velocity as necessary.

Okay. And you are not including the Conroe property numbers, right?

That is correct. Those acreage exclude Conroe.

Okay, great. If I could ask one on Hawaii. Which buildings are you recognizing revenues at this point? Is it just Waiea and Anaha, or some other ones as well?

Just those two.

Do you expect the others to start pretty soon; next quarter or so?

Well, I would say that as construction progresses, and if it starts moving on schedule, I think the earliest -- probably towards the second half, end of this year, is where we would see the next tower start to show. It all depends on the number of contracts that we have that qualify, and how fast that construction progress is, to make sure that we are meeting our threshold with the percentage of completion method.

Okay. And as it pertains to those units, especially like Waiea, that is pretty much completed, what kind of units are left? Is it the penthouses? Or what is left to sell?

The remaining 12 units or 13 units in Waiea are a higher-priced unit. They around a $4 million per unit or higher. And the two top penthouses are currently listed at $35 million a piece.

But we just completed the 36-floor penthouse, which is the penthouse that was noted in the Wall Street Journal article. And we have a lot of sales associates all over the world that are now showing this to clients. And we have had a strong interest in seeing the product from people that have been there. We also have the upcoming art biennial, which will be the first of its kind, in Honolulu. And we expect a lot of wealthy people from the West Coast to be in town for that, and we expect them to be touring those properties during that time.

Okay. And if I could ask one last one. On the line item equity in earnings from real estate affiliates, where you booked $57 million this year, can you provide any sort of guidance for 2017?

We historically have not provided guidance on any individual line items, or really at any level within Howard Hughes. I think we are going to look to see what would be the most appropriate guidance on a going-forward basis as we progress through the rest of this year, as we start to increase our disclosure. Our non-consolidated joint ventures and the income that we received there have been largely a result of our joint venture in the Summerlin, with Discovery Land at The Summit. And we expect that, that will continue to be very successful and generate significant equity and earnings.

Okay, thanks, and congrats on the progress.

Thanks, Alex.

Tracy Pulvers, RBC Wealth Management.

My first question is for Grant. Grant, how many lots remain unsold in The Summit?

Tracy, that's a good question, and if you hang on one second, I can get you the exact answer. There are 278 lots total, of which I want to say about 60 lots are sold, and there are about 40 under contract right now.

Okay, thank you. And then the next two questions are for David O'Reilly. How much cash will be generated by the exercise of the warrants?

Which warrants are you referring to? There are two warrants. There are sponsored warrants and management warrants, both of which I would expect to be net-settled, such as they would not generate any cash for the Company. But I don't know for sure that, that will be the case with the management warrant. Right now, the sponsored warrants only have the ability to net-settle.

And if the management warrants are exercised, then what would be the additional cash be to the balance sheet?

It would be $100 million, if they were cash-settled in full.

And my last question, David, is, some of my predecessors who already spoke mentioned in their research reports that the Company is undervalued and under-followed. What are you doing to see that the Company is no longer under-followed?

Well, as I think we all figured out, we started conference calls. That is a good first step. We are also going to continue to increase the depth and breadth of our disclosure, as you saw in our re-crafted 10-K, and we will follow with additional supplemental information in the coming quarters. As David mentioned, we are going to have an Analyst and Investor Day that will be here in The Seaport in May of this year, which we hope to get additional eyeballs on.

And I am pounding on doors all up and down New York City, on Wall Street, trying to highlight the value opportunity that we believe that Howard Hughes is. And how we think that smart research analysts and investors can really make a name for themselves by highlighting that opportunity to their clients.

Good. Thank you very much.

Thank you, Tracy.

Will Randow, Citi.

Hi, this is Ken on for Will. Just have a question about New York City Seaport. There's been some news about the softness in terms New York City retail brands in parts of the New York City housing. Have these trends changed your plans at all for Seaport? Is there any impact that you can foresee?

I will answer that, and David, you can add something if you have it. But I would say that we are as optimistic as ever regarding what we are building here. We always felt like this would be -- that the property would be focused on great SMB, entertainment and destination retail, as evidenced by our announcement of 10 Corso Como. We are on track to deliver that, and I think we will be creating an experience at The Seaport that is unlike any other New York, quite frankly, any other, anywhere in the country. And I think that, that is going to drive great traffic down here, particularly the locals.

I would just add to that, that the softness in the retail market is a direct result of the tenancy in that market. These are national tenants that are competing with the likes of Amazon. These are not the tenants that we are seeking for the project.

Got it, that is very helpful, thank you. And in terms of your master planned communities, can you talk about lot pricing regionally? It sounds like you are very confident and optimistic about the Bridgeland. Maybe you could talk about lot pricing in general for other areas as well?

Okay, let me take that. If we look at Summerlin, we are averaging over $500,000 per acre. That's probably a better disclosure than the per lot price, given that we sell super pads. If you look at the average Las Vegas market momentum in housing units, at the peak, it was around 15,000 units. Today we are at around 7,000 in totality.

As I mentioned on the call earlier, we are missing out on about 70% of that market, given that those home prices are selling at $300,000 and below. If we restructured our [to prepares] in certain sections to offer a higher-density product, where we won't diminish the land value per acre. And we expect that the average price per acre to be at or a little above where we are today.

In terms of The Woodlands, obviously we have seen some degradation in pricing. Our goal in The Woodlands has been to hold land. We look at land as a depleting asset. And in our mind, we are well capitalized. We have enough cash on the balance sheet, as David mentioned, to complete our developments. Therefore, selling any land in The Woodlands below what we believe is a value necessary to achieve our required rates of return or redeploy that capital on our balance sheet, is a fool's errand.

Great. Thanks for answering my questions.

[Stephen Coe], [Starling] Capital.

I have a high-level question on capital allocation. Clearly there is an attractive long term development pipeline in which to reinvest cash flow. But the stock price is also cheap. So how do you view share repurchases as a tool to lock in value in the near term? And as cash generation increases going forward, are stock buybacks something shareholders should expect to see employed on an opportunistic basis?

It is a great question, and one that is very timely, and one that this Management Team and Board discusses a lot. And it is about how we are going to use the capital that we have available to us to maximize returns for our shareholders. To date, the highest return opportunities have been with developing our portfolio, where we own and control entire ecosystems, we have limited competition from competing developers, and we can get outsized, risk-adjusted returns. As the stock has not performed up to our expectations, that dynamic can and has, at times, shifted, where a buyback could be in play.

One thing to just be cognizant of, that we are very careful of and we pay very close attention to, is that it does -- a share buyback has the added impact of increasing the leverage as we are decreasing the denominator of our equity. So for every dollar that we could use on a buyback, we are going to shut down $1.20-ish of potential dollars that we could invest into our development pipeline on a leverage-neutral basis.

So it is on the table, it is something we consider. And today, the decision has been that the highest and best return opportunities available to us have been to continue to invest within our incredible portfolio of 50 million square feet of entitlements.

Wonderful, thank you. And thank you for starting these conference calls.

You are welcome.

Steve Shaw, Compass Point.

Hey, guys. It seems that there has been a flourish of activity around what you would call non-core assets: Landmark, Cottonwood, West Windsor, Elk Grove. Is that a result of how the market is playing out and [opportunities] coming to you? Or is that a fundamental change in strategy to monetize some more things and maybe actually build on the core portfolio?

Steve, we have had these conversations before. We view our non-core assets as deep out of the money options. And what we have done is, we have a Development Team that is focused on them. That means that at times, if we monetize them, in the case of Park West and the Elk Grove landfill. At other times, we continue to focus in on them to create shareholder value by looking at development plans.

With the acquisition of the Macy's land parcel, we have the ability to redesign and re-plan Landmark Mall. This is a unique piece of land in a very dense market, where we think there is outsized returns to be had. That is why we acquired the Macy's parcel.

As to Park West, there was no further upside in that asset, and therefore, we disposed of it. In addition to that, we realized tax losses which offset our income that we are generating in the land business, in our condo business. So those are the two ways we look at the assets.

The other thing to note is, there no point in selling an asset that has appreciated, but for the tax benefits that we might offset. So I think that is the way to answer it. We continue to look at our non-core assets as value enhancements. But we do note that the majority of the value creation potential lies in the six core assets of the Company, where our shareholders will benefit.

Does that eventually turn into a member of the core portfolio?

I think it is too early to say that. We are excited about the prospect of it. We think there is significant demand in that market. But until we understand what the land plan can look like with the unified site, it is too early.

Okay. Thanks a lot, guys.

Yes.

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

I just want to thank everyone again for listening in to our first conference call. Remind you that we will have our first Analyst and Investor Day here at The Seaport on May 17, and look forward to welcoming you here and touring you through The Seaport, and showing you the dynamic destination that is being created.

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