Howard Hughes Holdings Inc (HHH) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Howard Hughes Corporation Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to David Striph, Executive Vice President of Investor Relations.

Please go ahead.

Good morning, and welcome to the Howard Hughes Corporation's Fourth Quarter 2017 Earnings Call.

With me today are David Weinreb, Chief Executive Officer; Grant Herlitz, President; David O'Reilly, Chief Financial Officer; and Peter Riley, General Counsel.

Before we begin, I would like to direct you to our website, www.howardhughes.com, where you can download both our fourth 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 the 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 law.

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 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 will now turn the call over to our CEO, David Weinreb.

Thank you, Dave, and thank you all for joining us today.

Welcome to our fourth quarter 2017 earnings call.

I am pleased to report that we had a very productive fourth quarter, which capped off a strong year in which we made significant progress across our core markets and business segments from New York to Honolulu.

I would like to start by providing a brief recap on our key accomplishments for the year before turning the call over to Grant, who will provide a deeper review of the results in our master plan community, operating assets and strategic development segments and then finally onto David O'Reilly, who will speak to our financial results.

We will conclude by opening the call for questions.

Before we turn to the details, I want to take a step back and talk for a minute about the metrics that we use to judge our success at the Howard Hughes Corporation.

Real estate is a long-term business, and as a result, decisions are often made that negatively affect the short-term earning results of a company, but are the right decisions to maximize long-term value.

To that end, our management team, and we believe, our investors should not solely focus on quarterly GAAP earnings when judging our results.

We evaluate metrics at a segment level to provide the best tools to help determine our progress and success.

In our MPC segment, we are focused on the number of acres sold, the price per acre and overall MPC earnings before taxes referred to as EBT.

Land sales are often volatile so we feel these metrics are most accurate when viewed on an annual basis.

In our Operating Asset segment, our annualized NOI is the metric that best tracks our operational execution.

And within our strategic development segment, we track new construction starts as we transform our raw commercial acreage into vibrant new assets.

This transformation materializes in higher projected stabilized NOI for the company.

Finally, we are always mindful of the continued progress at Ward Village, where condominium sales are a strong proxy for our success.

With that in mind, I am pleased to report that each of our 3 business segments performed extremely well last year.

In our MPC segment, our overall residential land sales and MPC EBT increased for the third consecutive year.

Our operating asset NOI increased substantially despite taking a few income-producing projects off-line for redevelopment.

And in our strategic development segment, we had record condominium sales of Ward Village in a year in which we did not launch any new product.

Further, we commenced construction on 5 new development opportunities across our MPC portfolio that will increase our stabilized NOI target.

In our seventh year since inception, the company is operating on all cylinders.

We had outstanding results in 2017 in our MPC segment.

Total residential land sale revenue is up for the third year in a row, increased across the board, led by Summerlin, which recorded its fifth year in a row with sales exceeding $100 million and by Bridgeland, which had another record year with over $30 million of land sales.

Bridgeland is taking off and coming into its own and we could not be more excited about its future prospects.

We were also delighted to report that we had our first residential land sales in our newest community, The Woodlands Hills, which we believe will have an exceptional future, and we are seeing encouraging signs of economic recovery at the Woodlands.

Total residential land sales closed is up for the third year in a row, driven by an improved price per acre in all our communities.

We have seen residential land sales closed increase from $157.8 million in 2015 to $163 million in 2016 and then $189 million in 2017.

Additionally, in Summerlin, we recognized $23.2 million in our share of earnings from our Summit joint venture with Discovery Land based on land sales of $55.9 million.

Moving to our Operating Asset segment, our NOI was $157 million in 2017.

As you may recall, our NOI was approximately $49 million 7 years ago, upon HHC's emergence as a public company.

$157 million compares to $139 million in 2016, an $18 million or 13% increase.

In addition, our projected stabilized NOI target has grown from $232 million at 12/31/16 to $255 million as of 12/31/17.

This represents a $23 million year-over-year increase.

Note that this targeted NOI does not include the Seaport District or 110 North Wacker.

It is important to note that 2017 NOI was meaningfully reduced by our value creation opportunities at 110 North Wacker, where we terminated GGP's lease in order to redevelop the site as well as at Ward Village, where we closed Ward Warehouse to prepare the site for redevelopment.

Excluding both 110 North Wacker and Ward Village, our NOI would have increased from 2016 to 2017 by $26.4 million or a 24% increase.

We saw an approximately $13 million improvement in office NOI, excluding the effects of 110 North Wacker, an approximately $7 million increase in our hospitality portfolio, along with approximately $3.5 million of increases in our multifamily NOI and a $3 million improvement in retail NOI, excluding Ward and the Seaport.

Turning to our strategic development segment.

We had a solid year with multiple new development commencements, furthered our vision at the Seaport, realized record sales year at Ward Village and disposed off several noncore assets.

Across the company, in 2017, we commenced construction on 5 new developments, which in aggregate, are expected to cost approximately $217 million.

These projects, when stabilized, will add an additional $17.8 million bringing our stabilized NOI target to $255.1 million.

As we continue to unlock the tremendous value within our MPCs, we were able to continuously increase our targeted stabilized NOI.

With 50 million square feet of entitlements remaining, we have an enormous opportunity to grow.

This year, the new developments were concentrated in Summerlin with our build-to-suit office buildings for Aristocrat Technologies and Two Summerlin, our newest office building and in The Woodlands, where we began construction on the build-to-suit for the University of Texas, Creekside Apartments and Lake Woodlands Crossing Retail Center.

We also placed m.flats/TEN.

M apartments in Columbia in service as residents began to move in.

Additionally, subsequent to year-end, we began demolition of 110 North Wacker in Chicago where we expect to commence construction later this year on a 1.35 million square foot Class A office building anchored by Bank of America.

We also started construction on a 312-unit multifamily project in Bridgeland.

Also within our strategic development segment during 2017, we completed construction on 2 self-storage facilities in The Woodlands, totaling 1,438 units; One Merriweather, an approximately 202,000 square-foot Class A office building; as well as Two Merriweather, 124,000 square-foot Class A office building, both located in Downtown Columbia.

Looking at our results by core asset, we made solid progress bringing our vision to life at the Seaport District, highlighted by the announcement that ESPN will be occupying space at Pier 17 to broadcast numerous live daily shows.

They will begin broadcasting in early April.

Completing this transaction has generated significant momentum for us as we market the balance of the remaining space on the third and fourth floors of the pier, 109,000 square feet.

We've experienced strong demand from various potential tenants.

I would like to quickly recap our vision for the Seaport.

We have been focused on creating what we call a port of discovery, curating unique offerings across food, fashion, entertainment and culture.

In a world where content and dynamic customer experiences are king, we believe that by creating an environment with one-of-a-kind concepts in a unique setting, arguably the only privately-controlled district in New York, will best position the Seaport to experience long-term success.

In line with this vision, we are pleased to share the two-time James Beard award-winning chef, Andrew Carmellini with NoHo Hospitality Group, will be opening a new restaurant in the Pier Village that will total approximately 11,000 square feet and open next year.

This will complement restaurants by acclaimed chefs, John George and David Chang in the Pier Village, which will both open later this year.

The new restaurant will be structured as a long-term partnership agreement similar to others we have done at Pier 17.

Additionally, we remain on track to open the rooftop this summer.

On the sponsorship side, we entered into a third party agency agreement with Heineken as a founding sponsor of the Seaport District and Pier 17.

Heineken will receive year-round branding and hospitality throughout the district and activate the Seaport with unique consumer experiences.

Additionally, we recently entered into a multiyear strategic sponsorship partnership that positions Ticketmaster as the exclusive ticketing partner and a sponsor of the Pier 17 rooftop.

As part of our agreement, Ticketmaster will provide ticketing services for concerts, sporting events and entertainment on the rooftop.

We continue to have discussions with other potential sponsors and plan to share an update with additional announcements later this year.

In the Uplands, iPic had a successful year.

Its Seaport location is already the highest grossing in its portfolio, and 10 Corso Como remains on track for a grand opening during fashion week this September.

Overall, we continue to stay true to our vision.

And while it has taken us more time than we would have liked, particularly, had we filled it with traditional retailers, we are confident in the end result and that it best positions us for long-term sustainable success, given the changing retail and entertainment landscape.

Moving West all the way to Honolulu, we had an especially robust year of sales at Ward Village, selling 177 homes, including one of our largest penthouses at Waiea, which brought our total closed or under contract to 1,286 or 93% of the 1,381 available-for-sale at our 4 residential projects that are either open or under construction.

This pace equates to close to 15 homes sold per month, which is a testament to the vibrant neighborhood we have created, the strong demand for homes in Honolulu and the excellent work of our local team.

Keep in mind, this incredible sales space was without the launch of a new building.

Our first building, Waiea, which began closing homes in November 2016, is 95% sold with only 9 residences remaining.

The retail is 100% leased to world-renowned restaurant, Nobu, which relocated from Waikiki to Ward Village in late 2016.

Our second building, Anaha, which began closing homes in the fourth quarter of 2017, is 98% sold with only 8 homes remaining and the retail is approximately 60% leased, with the highly regarded Merriman's restaurant anchoring the ground floor.

Ae`o and Ke Kilohana, both under construction, are 91% and 92% sold and have only 44 and 34 homes remaining.

We anticipate completion of both of these projects in 2019.

Ae`o is anchored by Whole Foods, which anticipates opening their Hawaii flagship location in the second quarter of this year and Ke Kilohana is anchored by CVS/Longs Drugs store, which is expected to open in 2019.

Both of these offerings are excellent amenities for our neighborhood and will continue to help drive Ward Village's long-term value.

You will see that we have changed Ae`o's completion date from December of 2018 to January of 2019.

We still expect construction to be substantially complete in 2018, but have chosen to take a conservative approach given the magnitude of the number of closings, and therefore, intend to start closings in early 2019.

Our next residential building, 'A'ali'i launched public sales earlier this year.

This building represents the culmination of several years spent studying the most innovative residential product around the world in order to create a luxurious turnkey solution for our customers that does not exist in Hawaii.

Homes are designed to maximize space and efficiency with furniture, accessories and more, all provided for residents.

The building will contain approximately 751 homes and will fill a niche where we believe strong demand exists in the market.

As of today, we have contracted to sell 157 units with hard deposits, representing approximately 21% of the building.

As I stated last quarter, Ward Village is becoming the new center of Honolulu.

We are now at a point where we have reached critical mass with both Waiea and Anaha delivered, Nobu open, Whole Foods opening later this year and Consolidated Theatres completing a major renovation, and we are only about 1/4 of the way through our entitlements.

Ward Village has clearly differentiated itself as the place where people want to live and play in Honolulu, and I believe that our continued sales progress is validation of that.

As we recently reported, last month, Ward Village was named master planned community of the year by the National Association of Home Builders.

This follows Ward Village being recognized as the best planned community in the United States by Architectural Digest last year.

These awards affirm our vision for this incredible asset and the exceptional work the local team has done in bringing it to life.

Over the year, we took advantage of opportunities to dispose off 6 of our noncore assets for proceeds of approximately $88.6 million, which provides us with the ability to recycle the capital into our core markets where we have distinct competitive advantages.

These sales generated book gains of $55.3 million and $88.5 million of tax losses.

We also acquired our joint venture partner's interest in the Las Vegas 51's minor league baseball team, which serves as an amenity for the Summerlin community.

In conjunction with the purchase of the baseball team, we announced the development of a new ballpark in Downtown Summerlin and an $80 million naming rights agreement with the Las Vegas Convention and Visitors Authority, the highest sponsorship agreement in the history of minor league sports.

The ballpark will further distinguish Downtown Summerlin as a vibrant destination and give residents of the Las Vegas Valley a unique amenity for family-friendly entertainment, all while increasing the value of our remaining 4,600 acres in Summerlin.

On a corporate level, we started the year with the company's first earnings call, which was very well-received by the market.

We also began publishing a quarterly supplemental package of financial information and held a very well attended first Investor Day at the Seaport.

It is our hope that by providing greater transparency into our business, we not only assist our stakeholders in understanding our earnings releases in a much deeper way but also provide a road map that simplifies calculating the value of the company.

We hope that this ultimately helps to bridge the delta between our stock price and what we believe is the net asset value of the company.

2018 looks to be a strong year for the company as well.

We are seeing good economic indicators in our core markets, with Houston seeming to be poised for a recovery.

The 'A'ali'i launch has been well received and we anticipate healthy sales.

We have started and will continue to design the next 2 potential towers for Ward Village.

In addition, in 2018, we will begin construction on 110 North Wacker in Chicago and just last Friday, broke ground on the baseball stadium in Summerlin.

We are excited about the grand opening of the Pier 17 rooftop this summer, continuing construction on our office buildings in Summerlin and The Woodlands, multifamily and retail projects in the Woodlands and our boutique hotel joint venture in the Seaport District that will open later this year.

Most importantly, we remain relentlessly focused on continuing to unlock shareholder value across the company.

There is no better example of this than our recent purchase of Howard Hughes stock from an unaffiliated financial institution that David will provide detail on later in the call.

With that, I would like to turn the call over to Grant.

Thank you, David.

As David said, we made great progress with the company in 2017, and I would like to talk about the details driving the results in our MPC operating assets and strategic development segments and then turn it over to David O'Reilly to discuss our earnings and financial activities for the quarter.

First, within our MPC segment.

Residential land sales closed in the fourth quarter grew to $55.8 million, an increase of $6.8 million compared to the closings in the fourth quarter of 2016.

For the year, residential land sales closed to $189 million, an increase of almost $26 million, a 16% improvement from 2016.

At Summerlin, we continue to experience solid demand for residential land.

The economy is in great shape and the improvements and amenities that we have brought and will continue to bring to Downtown Summerlin are truly adding value to our land.

Summerlin is now more than ever, the premier place to live, work and play in the Las Vegas Valley.

The community had 1,022 new home sales during the year, an increase of approximately 50% over 2016, which is indicative of Summerlin's dominance and appeal.

The median home price was $564,000 versus $540,000 in 2016.

Total residential land sales revenue increased from $110.7 million in 2016 to $120.7 million in 2017, driven by an increase in price per acre to $547,000 in 2017.

The Summit, our joint venture with Discovery Land company in Summerlin includes 260 units made up of 146 custom lots and 114 planned dwelling units.

Since the joint venture started closing lots in the second quarter of 2016, 77 lots have closed for a total of $240.8 million through December 31, 2017.

For 2017, we had 17 lots closed for $55.9 million.

This compares with 60 lots for $184.9 million during the same period in 2016.

The significant number of lot closings in 2016 was due to a backlog of sales contracts executed between the second quarter of 2015 and the second quarter of 2016 when land development activities were complete on the first phase of the project.

We are pleased with the fact that we have closed almost 1.5 custom lots per month during 2017.

This provided us with $23.2 million and $43.5 million recorded equity in earnings for the 2 years respectively.

Moving on to Houston.

In general, Houston continues to experience population and job growth, which has resulted in increased demand in our master plan communities.

Residential sales are up in both The Woodlands and Bridgeland, and we are seeing improvements in the manufacturing and service sectors, which drives home sales.

According to Colliers' fourth quarter Houston office market report, after 6 straight quarters of negative absorption, the office market posted 673,000 square feet of positive net absorption in the fourth quarter.

While the office market still struggles with vacancy, this is a positive note, and we are hopeful that it will continue improving throughout 2018.

We are starting to see hints of large tenants looking for space, and this is very encouraging.

Because we are insulated from market downturns in our MPCs as a result of our control of the submarket, The Woodlands office market has held on much better than the general Houston market during the downturn.

In just our unstabilized office buildings in The Woodlands, we absorbed approximately 45,000 square feet in the fourth quarter.

In Bridgeland, residential land sales revenue totaled $30.4 million for the year, which was approximately $10 million or 49% higher than the previous year.

The increase was due to our development of additional lot sizes to meet homebuilder demand and the opening of Park Village (sic) [Parkland Village], our newest space.

As David said earlier, we feel that Bridgeland has hit its stride and will continue to become more significant as a cash flow generator each year.

The trend is very promising with residential land sales of approximately $11 million in 2015, growing to $20 million in 2016 and then $30 million in 2017 while increasing our price per acre modestly to $377,000 per acre.

Continuing in Houston, we also saw a strong uptick at The Woodlands in the sale of new homes, an indicator of future demand for our land.

There were 340 new home sales during the year compared to 248 in 2016, a 37% increase.

The median new home price decreased from $557,000 in 2016 to $533,000 in 2017.

This is a sales mix issue and reflects the higher absorption of mid-priced homes in 2017.

According to our in-house research, as of January 21, 2018, we estimate that there were 93 spec homes available for all builders in The Woodlands, which is approximately a 3-month supply based on current estimated 2017 absorption levels.

We are cautiously optimistic that the return to more normalized supply levels could be an early indication of potential return in demand by residential land in The Woodlands at acceptable valuations.

For 2017, The Woodlands residential land sales closed totaled $36.6 million versus $32 million in 2016, a slight uptick.

The price per acre increased from $560,000 to $628,000 per acre.

Here, again, the increase is attributable to the mix of lots sold.

In this case, we sold more lots for single family attached homes in the upscale East shore neighborhood.

I am delighted to report that we delivered our first phase of lots in December at The Woodlands Hills.

18 lots totaling 4.1 acres were sold for $1.3 million or $313,000 per acre.

As of year-end, there were 85 additional lots under contract, which are all scheduled to close in 2018 for a total of $5.2 million.

The first model home has broken ground and several more will start shortly.

We anticipate a median home price of $350,000, which will be very competitive in the market.

We are very pleased to be progressing with this new neighborhood.

Turning to our strategic development segment, you will notice that this segment EBT decreased in 2017 compared to 2016 despite a great year of condo sales at Ward Village.

This is largely the result of 2 factors.

First, in 2016, we had a onetime $140 million gain from the sale of our 80 South Street Assemblage in New York, while in 2017, we had gains of $55.3 million from the sale of a portion of our land at Elk Grove, the Kendall Town Center, [Lulu Land] and Century Plaza.

These gains will obviously fluctuate from year to year as we find opportunities to dispose our noncore assets.

More importantly, we generated $88.6 million in net cash proceeds and $88.5 million in taxable losses, which will be used to offset future income.

The second factor is that our condominium [rights in] unit sales was lower in 2017 and the cost of those sales was higher than they were in 2016.

As we have mentioned previously, you will see these margins vary from time to time, depending on the various attributes of the product selling during any given period such as building location, distance from the ocean, views, amenities, finished levels, et cetera.

For example, workforce housing development such as Ke Kilohana will most -- always have the lowest return, while homes nearest to ocean with the highest level finishes like Waiea will generally have the highest margins.

In this case, we sold less of the higher-margin Waiea and Anaha homes as we are essentially out of that product and sold more of the relatively lower margin homes in Ae`o and Ke Kilohana.

Our Operating Asset segment NOI increased to $157 million as compared to $139 million in 2016, an increase of 13%.

The assets that we have developed over the last few years are all moving towards stabilization.

The impressive fact is that the increase was across the board on all product types and in all markets.

In our unstabilized operating assets alone, we signed approximately 86,000 square feet of office and 2,500 square feet of retail leases during the quarter, bringing the percent leased from 64% to 71% and 81% to 83%, respectively, as of year-end.

We also saw improvement in leasing in both our multifamily and self-storage assets during the quarter.

Importantly, effective rents in multifamily have begun to increase, and we are hopeful that these assets are on their way to stabilizing at their pro forma income levels.

We have commenced construction on a 260-unit multifamily project in Downtown Summerlin.

The project is estimated to cost approximately $59 million and is being built to generate a yielding cost of more than 7%, excluding land.

We will also begin construction on a new office building in Downtown Columbia named three Merriweather.

The building will be a 12-story Class A office that as of the beginning of this month, is 50% preleased to Tenable.

This development will continue the transformation of Downtown Columbia into a truly unique live, work, play neighborhood.

In summary, we are very pleased with the performance of all of our segments.

With that, I will turn the call over to David O'Reilly for our financial results and outlook.

Thank you, Grant.

I like to start with a quick overview of our earnings before summarizing our recent financing activity and then turn to our current leverage and liquidity metrics.

I hope that you've been able to review our supplemental package filed yesterday, which contained details of our financial and operational results.

We completed the year with GAAP earnings of $168 million or $3.91 per diluted share as compared to $202 million or $4.73 per diluted share in 2016.

The $34 million decrease was largely due to a decline in gains on sales of properties, a loss from redemption on our senior notes, increased warrant liability loss and decreased equity and earnings from real estate and other affiliates.

These were offset by $164.3 million decrease in our tax provision due to $101.7 million benefit provided by the tax act.

NAREIT-defined FFO was $168 million or $3.90 per diluted share for the fourth quarter as compared to $69 million or $1.60 per diluted share for the fourth quarter of 2016.

The $100 million increase was also due to the items I just mentioned, including the tax benefit recorded in the fourth quarter of 2017.

For the full year, FFO was $260.3 million or $6.04 per diluted share compared with $244.6 million or $5.72 per diluted share in 2016.

This $15.7 million increase was primarily due to the $125.4 million total reduction in our tax provision offset by a $19 million increase in warrant liability losses, a $46.4 million loss in the redemption of our senior notes and a $38.2 million decrease in segment earnings, primarily due to a decrease in condominium rights and unit sales.

Core FFO for the 3 months ending December 31, 2017, decreased $23.2 million or $0.56 per diluted share to $75.4 million as compared to $98.6 million in the same period in 2016.

For the year, core FFO decreased $35.7 million or $0.89 per diluted share to $298 million from $333.7 million.

The decreases were primarily due to a reduction in condominium rights and unit sales as well as a decline in equity and earnings in real estate and other affiliates due to the timing of sale at The Summit joint venture and the sale in 2016 at our Circle T Ranch and Power Center joint venture, which did not recur.

These decreases were offset by increases in our core MPC and operating assets segment earnings.

I would like to note that we believe that the new tax act with this reduction in the corporate tax rate would be very beneficial to us especially in our residential land sales, and condominium sales businesses will regenerate the bulk of our taxable income.

This has also diminished the attractiveness of the REIT structure especially for companies such as ours with all the benefits that our current self-funding structure provide.

Moving on to our capital markets activity.

We had a very productive year in the capital markets during 2017.

We issued $1 billion of 5.375% senior notes due in March 2025, which was used to retire the then-outstanding $750 million notes at 6.875%.

This was a great execution for us as it provided additional liquidity, reduced our current coupon by 150 basis points and meaningfully extended the maturity date of our notes.

In addition, we repaid the $195.3 million outstanding balance on the construction loan for Waiea and Anaha with sales proceeds of those 2 towers.

During the year, we closed $882 million in financing transactions, including $177 million in new debt facilities, $69 million in refinanced construction loans and modifications of existing facilities, totaling $636 million.

The transactions further our goal of effectively managing the company's balance sheet and capital structure, and mitigating rising interest rates and refinancing risk by replacing floating rate construction debt with long-term fixed rate nonrecourse financing on stabilized assets.

During the fourth quarter, we closed a $65 million nonrecourse construction loan with the development of 2 office buildings in Summerlin.

The 180,000 square-foot U.S. headquarters for Aristocrat Technologies and the 150,000 square-foot multitenant building located in downtown, Summerlin, which will be called Two Summerlin.

Bank of Nevada, our new relationship for HHC is providing the financing at an interest rate of prime plus 40 basis points with a floor of 4.65%.

The loan matures in October of 2022.

Fannie Mae provided a $24.2 million 15-year nonrecourse permanent loan at 4.1%, secured by the 124-unit Constellation apartment development in Downtown Summerlin.

The loan is interest-only for the entire term.

The financing allowed us to complete an $8 million buyout of our joint venture partners' 50% ownership interest in the asset without investing any additional cash equity.

Our joint venture agreement allowed us to purchase our partner's interest at a valuation using a 7% cap rate in a market that is currently trading at much tighter cap rate.

As a result of the change of control of this asset, we recognized a $17.8 million gain on acquisition relating to the step-up to fair value of the asset.

Also during the fourth quarter, the construction financing secured by Three Hughes Landing in The Woodlands, was modified and extended for an additional 3 years.

The $65.5 million Texas Capital Bank facility was set to mature in December 2017.

The extension provides the bridge necessary to stabilize the assets with additional leases.

The modification calls for a rate increase from LIBOR plus 235 basis points to LIBOR plus 260 basis points and matures in December 2019.

In addition, we received our reimbursement of $1.6 million from the first tranche of $48.2 million in tax increment financing bonds issued by Howard County for the Merriweather District in Columbia.

As of the end of the year, our total consolidated debt to total assets was approximately 42.5%, and our net debt to enterprise value was approximately 23%.

From a liquidity perspective, we finished the year with approximately $861 million of cash on hand.

As of December 31, we had 18 projects under construction with anticipated total cost of $3 billion.

Of that amount, we previously funded $1.9 billion, leaving just over $1 billion in estimated remaining cost.

We expect to meet this obligation with a combination of construction loans, which at year-end had approximately $547 million of committed but undrawn capacity, with condo [fire] deposits of approximately $1.5 million and with a $15.5 million of construction financing for Lake Woodlands Crossing that we closed on last month.

This leaves a net remaining equity commitment of $467 million.

The majority of this amount is tied to the Seaport District, for which we have not yet obtained construction financing.

We expect to fund our remaining equity commitments through a combination of new construction financing, our free cash flow from our operating assets in MPC segment, net proceeds from noncore asset sales, and lastly, our existing cash balance.

As David mentioned, we announced a share repurchase last Friday.

The opportunity presented itself for us to purchase approximately 476,000 shares of our stock at a price of $120.33, a price that we believe is materially below the net asset value of the company.

The seller was an unaffiliated third party.

This acquisition provided a unique opportunity for us to acquire a block of our shares at a meaningful discount to our underlying net asset value.

We used cash on hand to fund the repurchase.

In addition, during 2017, all remaining legacy sponsor and management warrants were exercised.

Prior to this, the fair value for these legacy warrants was over $332 million, which created both a balance sheet liability as well as quarterly mark-to-market earnings volatility.

Now that these legacy warrants have been exercised, our new warrants no longer have any mark-to-market volatility and the $332 million liability associated with those warrants has been removed from our balance sheet.

I now want to take just a minute and make you aware of a change in accounting for condominium closings beginning in January of 2018, and how it will impact our financial statements moving forward.

In accordance with a newly effective accounting standard around revenue recognition, we will change from recognizing revenue on a percentage of completion basis to a method where revenue is recognized only when a sale closes.

Accordingly, we will recognize revenue and cost of sales for condominiums only after construction is complete and the sale to the buyers have closed.

Because we have 2 buildings that are not complete but have revenue previously recognized under the percentage of completion method at a point when we adopted this new policy, when we make this change, we will have to report an adjustment to our cumulative retained earnings.

We estimate a $70 million to $90 million reduction in retained earnings and we'll be required to account for those homes that are under contract but not complete, and where closings and transfers of the home to the buyer has not occurred as of December 31, 2017.

We will recognize this revenue in earnings of those contracts as they close in the future.

This is purely a timing issue.

There will also be in effect on the timing of recognition and classification of certain real estate selling cost, such as the cost related to our model unit.

Under the new guidance, some of these costs may need to be expensed immediately or be capitalized and depreciated over their useful lives.

Lastly, as many of you know, both David and Grant entered into new 10-year employment agreements and have once again invested substantial portions of their personal assets into new warrants in the company.

We received $52 million in cash from David and Grant as consideration for the warrants that were issued to them during the year.

Senior management is extremely bullish on the long-term prospects for the Howard Hughes Corporation.

And I believe it is clear that our interests are completely aligned with our shareholders.

With that, I would now like to turn the call back over to David for closing remarks.

Thank you, David.

As you can see, we had another quarter and full year of excellent results.

Having said that, we are never satisfied and we'll continue our quest to unlock value across our portfolio and create long-term value for our shareholders.

Thank you again for joining us today.

With that, I will open up the call to Q&A.

(Operator Instructions) The first question comes from Craig Bibb with CJS Securities.

David, you have my attention because you guys not only had great condo sales in Q4, but if I understood you right, you sold 157 units at 'A'ali'i in the first 8 weeks of sales?

Or was that a backlog?

No, that is absolutely correct, that we have 157 units of sales at 'A'ali'i that have passed kind of the first period under which those deposits are hard.

Obviously, it's a much bigger building and things tend to come out of the gate very quickly, and we're cautiously optimistic that momentum will continue.

But, obviously, no guarantees, Craig.

Okay.

But I mean, you guys could be at 50% sold before the end of the year?

That's our goal, Craig.

At the end of the day, the one thing we haven't done is open ourselves to both the reserved housing, which we expect will be the reserved housing portion of the building, which will be a catalyst to further sales, so we absolutely expect to be at 50% by the end of the year.

Okay.

And then David started the call talking about sticking to the vision.

And as that relates to the seaport, it seems that you're really focused on getting the right tenants.

Could -- it is easy for investors and me to imagine what a grand opening is like when everything's there.

You guys it seems like it's going to be more of a staggered opening, maybe David, if you could talk about how this plays out?

This is David Weinreb.

So as we have said all along, our first opening, if you will, will be this summer, the rooftop summer concert series.

And we see a rolling opening, as we call it, over the next 2 years basically, which we think is going to be a very positive thing for the Seaport because as we continue to unveil new tenants, we want people to continue to rediscover the seaport.

And, quite frankly, there are so many unique offerings, if we did it all one setting, it wouldn't have the same magnitude in our opinion.

Okay.

And then last one.

David, you mentioned that you bought back the stock at $120 per share, more or less, would you guys consider substantial discount to NAV?

What do you consider NAV to be?

Craig, I'll tell you that we're going to continue to take advantage of the excess capital that we continue to generate with incredible results in our MPC and Operating Assets segment, and use that capital to invest in the best risk-adjusted return opportunities that are out there.

We saw a great opportunity to buy back a block of stock at a meaningful discount.

Look, I'm not going to kind of tell you what we think our NAV is, but suffice it to say it's substantially higher than $120 and candidly, higher than where you have the model.

Okay.

And so this is kind of a -- you guys have excess liquidity relative to the construction projects that you have underway and this is more of a one-off?

Or we'll see more of those?

Look, yes, we finished the year with over $800 million of cash and substantially more liquidity than our in process developments today.

Even since the end of the year and between the end of the year and today, that development pipeline has grown.

We've started on 110 Wacker, which we'll talk about on our next quarter call.

We started on the stadium in Las Vegas, which we'll talk about on the next quarter call, which are all going to be users of that liquidity.

So for us, we want to take advantage of opportunities when we can buy our stock in a meaningful discount, but we always have to be mindful, not just of those projects that we have underway but those that are in the pipeline that we're very well aware of and those that we may not be aware of now that demand is continuing to generate.

As Grant said in his prepared remarks, we're starting to see some great activity as it relates to the office dynamics in The Woodlands.

So making sure that we maintain enough dry powder to jump at those great opportunities is always at the top of our mind.

Craig, just to add to what David is saying, just keep in mind that the portfolio -- within the existing portfolio is over 50 million square feet of entitlements to develop, which is a lifetime of development.

So there's no shortage of opportunity within our portfolio to grow this business and to take the excess land we have and convert it to recurring income, which is the business model that we [projected] for the last 7 years.

The next question comes from Alexander Goldfarb with Sandler O'Neill.

Maybe if we just stick on the stock comment.

David, it sounds like you're not -- you're playing close as far as if there's any more buybacks or not, but as far as Pershing Squares is concerned, they originally and certainly at the Investor Day gave the impression of being long-term owners and certainly helped conceive Howard Hughes originally.

The sale was definitely a surprise and then begs the question, if there's more.

So obviously, I'm sure that [you probably hasn't] speak for a third party but it is -- he is Chairman of the company.

So can you just comment on, if we should expect more sales or ultimately Pershing may unwind out of the stock?

Well, look, I think you said it best, Alex, and that I'm not the right person to speak on behalf of our Chairman or Pershing Squares.

What I can do is direct you Alex to the press release that Pershing Square put out when they sold their shares.

And as part of that press release, they talked about some of their motivations regarding a tender offer, some of the tax consequences of owning U.S. real estate as it relates to that offer, but that's really the best source of information to understand their motivations for sale.

It's not the management team in this room.

I would tell you that Bill is still actively engaged and still involved in the higher strategic decision-making of this company in our Board meetings, and I don't think his appetite or desire to own Howard Hughes has changed at all.

Okay.

And then as far as the tax reform goes, what would you say is the benefit ongoing to earnings in NAV from the reduction in corporate rates, in capital gains, et cetera?

Well, I think, obviously, the short-term benefit is what we saw in the P&L change this past quarter.

We picked up $100 million of what we thought was the accrued liability for taxes.

It's now $100 million less based on the timing between [GAAP] and tax payment.

Obviously, that's great.

We're still in a position here where we have NOLs to burn through, and we think that we'll burn through those during the balance of '18.

We might even get through the mall in '18.

We should be so lucky to get through the mall in '18.

And then on a go-forward basis, to address your question, from an NAV perspective, it's really easy when 1/3 of your business is in condo sales and land development.

And you were previously applying a 40% tax rate and now you're applying a tax rate in the low 20s.

That has a meaningful positive impact on our net asset value of the company, and one that I don't think has been fully appreciated by the market today.

And I want to add one other factor, which I think is important to consider and that is the macro economic factors for the states in which we operate where the majority of our land holdings are held, that's Nevada and Texas, which are free of both state and city income taxes.

So you're going to see -- and obviously, continued net migration to Texas, with jobs in Nevada where jobs are plenty and these labor markets are extremely tight.

We're looking forward to seeing a number of corporations moving out of both East Coast and West Coast into these states.

And Texas, as an example, is offering huge incentives for those companies to move.

So we're seeing huge growth both in Dallas.

Although, we don't have assets in Dallas other than AllenTowne, which we're working toward putting a massive [plan] together and Circle T but in Houston, we're seeing that as well.

So I think that's the really the big unknown as to the impact of what the tax act will have on job creation, which decreases, obviously, discount rates and increases the NAV of the company.

But certainly very, very positive under any circumstance.

Okay.

But if I can go back to the NOLs, David, I think you said, you expect them to maybe be done by the end of this year.

So does that mean for '19, we should start modeling income tax for you guys payable in earnings?

Or there's something that would offset and put off paying tax?

I think that we are up to our eyeballs in tax planning as it relates to trying to make the right decisions for this company to minimize the tax burden on a go-forward basis.

And as we get further into the weeds on this new legislation and understand it much better, I think that we will be able to come back with some better guidance in terms of what our tax impact could be on a go-forward basis.

With that said, Alex, we don't provide guidance at all.

Not for '18 and even if we did for '18, certainly not for '19.

So we're a long way off from there.

The next question comes from Vahid Khorsand with BWS Financial.

First question, sticking on the tax question and specifically on the macro comment.

With regards to Hawaii and the state and local tax, has there been any changes in sales there?

Any pushback?

Any commentary you can provide on that?

I would say that sales have continued to increase.

We had a phenomenal fourth quarter.

And a lot of the buyers are coming from out of the country so they're not impacted by that.

Remember, in Hawaii, we're the dominant builder of condo builder and seller of condos, there's limited inventory available as you can tell by what we have.

And we're seeing [inc] activity in the sales of 'A'ali'i, which is a much more moderately priced building, and we're continuing to design for the future so that we have the inventory available to keep up with the demand.

We're very pleased with the outcome.

We continue to see it say, as stable, if not increasing.

Okay.

And then, David, on the supplemental on the property level that there's quite a few in there that are floating.

Any immediate plans to maybe get those to fixed?

I would say that we're looking at all of those near-term maturities every day to find the best long-term solution.

And a lot of those will move to longer-term financing with an effectively fixed rate alternative and I'd say, effectively fixed rate because it's not uncommon for us to have floating rate debt that is either hedged or derisked through the purchase of the cap.

Okay.

And then final question, I know you don't like to provide guidance, but in terms of noncore assets to sell, is there any idea on what you are anticipating to sell this year?

I'd say that, that is probably the hardest portion of the business for us to predict what the outcome will be because it's all about what's the highest and best use for the property?

Are we better off redeveloping it or selling it?

What's the tax basis?

What's the market demand?

And it's really with the culmination of when those factors come together like they did this past quarter and we saw a great success in monetizing noncore assets at book gain, but also creating a net loss from a tax perspective.

We jump at it, it's not one of those things where we sit here and plan and say we're going to sell this asset in November and this asset in July.

It's really about evaluating that market on a real-time basis and having your finger on the pulse of what's going on to make sure we're maximizing value for the company.

(Operator Instructions) The next question comes from Alex Barrón with the Housing Research center.

I was hoping you can comment on the Discovery joint venture, what's going on there?

And I guess, I didn't see any comments on that.

Alex, this is Grant.

So Discovery began selling lots in '15, and we closed on those in '16.

So there was a backlog of inventory, so we had a much higher degree close rate in '16 from both '15 and '16 sales.

For 2017, we had 17 lots closed for $55.9 million compared to $184.9 million.

So 60 lots during '16, but as I said that was both '15 and '16 sales closing in '16.

And in our earnings, we said we provided $23.2 million and $43.5 million of recorded equity and earnings for the 2 years.

I would tell you that there's been increased activity in the fourth quarter and the beginning of this year for lot sales, and we're pleased with the level of activity [as what's you see,] you should see more of that with our first quarter release.

Okay.

Got it.

And then as it pertains to the change in accounting for the condo sales, so I guess, just to understand.

So basically, anything that's already closed, it's behind us and anything going forward, you're going to take a onetime a charge to kind of reverse those earnings recognized.

And then you're going to start basically recognizing revenues and earnings as you close the units.

Is that correct?

That is correct.

Okay.

All right.

And so can you just kind of tell us I guess, at this point how many units you still have to close of the first 2 towers, Anaha and Waiea, that haven't closed yet?

I'd say the overwhelming majority of those units have closed.

And I would tell you that the vast majority of the revenue that we've recorded that will be unwound in the first quarter as a result of the accounting change has to do with Ae`o and a little bit of Ke Kilohana, where we started recognizing revenue last quarter.

It's not -- most of those units at Anaha and Waiea that have been contracted and have deposits have closed.

There are a few out there remaining, but it's not a ton by any stretch.

This concludes our question-and-answer session.

I would like to turn the conference back over to David Weinreb for any closing remarks.

Thank you, and thank you all, again, for joining us.

We hope the call has been informative.

And as always, we're available by phone to be helpful in any way possible.

Look forward to speaking to you, and if not sooner, to speaking to you on our next quarterly call.

Bye for now.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.