Howard Hughes Holdings Inc (HHH) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Howard Hughes Corporation First Quarter 2018 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, Investor Relations.

Please go ahead.

Good morning, and welcome to the Howard Hughes Corporation's First Quarter 2018 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 at www.howardhughes.com, where you can download both our first quarter earnings press release and our supplemental package.

The earnings release and supplemental package include reconciliations of non-GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP financial measures.

Certain statements made today that are not in the present tense or that discuss the company's expectations are forward-looking statements within the meaning of the federal securities laws.

Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved.

Please see the forward-looking statement disclaimer in our third quarter (sic) [first 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 Q1 2018 earnings call.

Before we begin, I wanted to mention that our 2017 shareholder letter was released last week.

You can find it on our website, and I encourage all of you to read it.

I am pleased to report that we had a strong start to the year and another productive quarter in unlocking long-term value across the portfolio.

We have previously said that the best way to measure how we are increasing the net asset value of the company on a per-share basis is through the following metrics.

In our MPC segment, we focus on the number of acres sold, the price per acre and the overall MPC earnings before taxes or EBT.

Land sales are often volatile from quarter-to-quarter, 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 land into vibrant operating assets that increase our projected stabilized NOI target.

In addition, we are always mindful of the pace of condominium sales at Ward Village.

I will discuss our first quarter results with these metrics in mind.

At our MPCs, we have strong demand for our residential land driven by robust fundamentals in the residential home sales market.

We have good visibility into the balance of the year and remain confident that 2018 will be another year with excellent performance from this segment.

For the quarter, EBT decreased from $44.2 million in the first quarter of 2017 to $36.8 million in the first quarter of 2018, a decrease of $7.3 million or 16.6%, largely due to the timing and the mix of land sales at Summerlin and Bridgeland, partially offset by The Woodland Hills.

We continually say that this is not the kind of business that should be evaluated on a quarterly basis and remain confident in our long-term plan.

In our Operating Asset segment, NOI increased $2.2 million or 5% from $44.5 million in the first quarter of 2017 to $46.8 million this quarter.

This is largely the result of improvements in our hospitality segment.

If you exclude 110 North Wacker and Ward Warehouse, which were vacated for redevelopment, NOI would have increased by approximately $5.2 million or 11.7%.

Further, when looking sequentially, we grew NOI from fourth quarter 2017 by $10.5 million or approximately 29%.

In our Strategic Development segment, we completed demolition and began construction on 110 North Wacker in Chicago and broke ground on the Las Vegas ballpark, our baseball stadium located in the heart of Downtown Summerlin, next to the practice facility for the NHL's Vegas Golden Knights that opened last year.

The ballpark will be the new home of the Las Vegas 51's AAA baseball team, which we wholly-own, where we have a 20-year $80 million naming rights agreement for the future stadium with the Las Vegas Convention and Visitors Authority.

We will also host concerts, civic and community events at the ballpark.

In addition to generating significant traffic for our retail and restaurants, we expect the ballpark to be a catalyst for additional commercial development in Downtown Summerlin and continue its momentum.

Further, we anticipate beginning construction on our 382 unit multifamily project in Downtown Columbia in the second quarter.

These 3 newly announced developments are expected to contribute approximately $35.9 million of NOI at stabilization and have increased our projected stabilized NOI target to $291 million, a 14.1% increase from our previous disclosure of $255 million.

Moving west to Ward Village in Honolulu.

During the quarter, we sold or contracted to sell 39 homes at our 4 buildings that are either delivered or under construction.

This translates to 13 homes per month.

By comparison, during the first quarter of last year, we sold 34 homes or 11 per month.

Keep in mind that the pace we achieve in this quarter is especially impressive when you realize that we have very little inventory remaining in these 4 projects, which were approximately 96% sold.

At the end of April, we had sold 95% of the residences at Waiea, our first building to be delivered and 98% of the residences at Anaha, our second building.

Ae`o, our third building and the home of the states flagship Whole Foods, now has total sales of 460 units or 99% of the available residences.

The project is approximately 80% complete, and we anticipate delivering the building in early 2019.

I'm excited to share with you that Whole Foods is expected to open next week on May 9. Ke Kilohana is made up of 375 workforce housing residences, which are 100% sold out and 49 market rate homes.

We had sold 20 of the 49 market rate homes as of April 30, which is in line with our expectations, given that the building will not be delivered until late 2019.

In total, the building is 93% sold.

Our newest building, 'A'ali'i, which began public sales in January, 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 were designed to maximize space and efficiency with furniture, accessories and more, all provided for the residents.

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

As of April 30, we have contracted to sell 293 homes with hard deposits, representing approximately 39% of the building.

Having sold 293 homes in just 4 months, we were extremely pleased with the enthusiasm that our customers are showing for this new innovative product type.

We plan to begin construction later this year.

At the Seaport District, I am pleased to announce that ESPN began broadcasting on April 1. They have already increased the amount of programming that will originate from their new studios.

Now they are set to broadcast at least 8 shows per day and we could not be more pleased.

In addition to strong lease economics, one of the requirements to the agreement is for ESPN to mention that they are hosting the show live from the Seaport District and show an aerial of the property.

This will increase the profile of the Seaport and make it an even more valuable sponsorship platform.

We are seeing very strong demand for the balance of the office space on levels 3 and 4 on the Pier, and are working to ensure that we are not only achieving the highest rents possible, but that we also fill this space with synergistic tenants.

I am pleased to announce that Malibu Farm, the renowned Malibu California waterfront restaurant will be joining Andrew Carmellini, David Chang and Jean-Georges and our incredible restaurant line up in the Pier Village on Pier 17.

Acclaimed Chef Helene Henderson's restaurant is one of the most popular dining destinations in Southern California, and we are very pleased to have her join us at the Seaport, taking her farm-to-table concept from Pier to Pier, the Pier in Malibu on the West Coast to the iconic Pier 17 on the East Coast.

We have also made meaningful progress on our sponsorship agreement having finalized deals with Lincoln Motor Company, Heineken and Ticketmaster, that in aggregate, total more than $2.5 million annually.

This still leaves the largest sponsorship opportunities available such as the rooftop naming rights, which we expect to become a meaningful income stream for the property.

We continue to see strong demand among companies to use the Seaport's event space.

Last month, we welcomed Royal Caribbean Cruise Lines event for travel, media and social media influencers.

In addition, we have hosted a variety of high-profile events, including the Fendi fashion show and the after party for Louis Vuitton's recent exhibition.

Next week, Live Nation will announce the first artist in the lineup for this summer's rooftop concert series.

We have a summer of vibrant activations plan, which we expect will attract tens of thousands of people to the district every day.

Later this summer, the rooftop restaurant will open followed by Jean-Georges' seafood restaurant and 10 Corso Como in September.

As mentioned last call, we continue to stay the course and stay true to our vision, which we are confident best positions the property for long-term sustainable success.

With that, I will now turn the call over to Grant to discuss the details of our operational results.

Thank you, David.

I'd like to move on to the details driving the recent results in our MPCs, Operating Assets and Strategic Development segment, and then turn it over to David O'Reilly to discuss our earnings and financial activities for the quarter.

First, within our MPC segment.

Total revenues decreased to $55.8 million in this quarter from $68.7 million, a decrease of $12.9 million compared to the first quarter of 2017.

The decrease was largely driven by a $6.6 million easement sale at Bridgeland that occurred in the first quarter of 2017 that did not recur in 2018.

In addition, both Summerlin and Bridgeland had lower land sales revenues for the quarter, which were partially offset by higher revenues in the Woodlands and The Woodlands Hills.

As we have mentioned many times, the MPC business is not a quarterly business, and we are very confident in the demand we are seeing across all of our communities and expect to have an excellent year of landfills.

The volatility that we experience between quarters is generally a result of timing of sales and a function of the type and location of the lot sold in any particular quarter.

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

Residential land sales for the quarter totaled 45 acres compared to 38 acres for the first quarter of 2017, an 18.6% increase.

The price per acre decreased from $697,000 to $647,000 quarter-over-quarter.

New home prices continue to increase at a year-over-year rate of 8%, with a median price at $357,000.

Builders pulled more than 3,000 permits in the first quarter, a year-over-year change of 35%, with March being the best month in the decade.

Summerlin had 408 new home sales during the quarter.

This compares with 207 during the same quarter of 2017.

This equates to a 97% increase.

In addition, the median new home price increased 4% to $573,000 from $550,000.

Demand is extremely strong in this market.

The Summit, our joint venture with Discovery Land 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, 88 lots have closed for a total of $278 million.

For the quarter, we recognized $11.1 million equity in earnings compared to $5.3 million in the first quarter of 2017.

For the first 3 months of 2018, the Summit had 11 custom home lots closed for $37 million.

This compares with 3 lots for $11 million during the same period in 2017.

As of March 31, we have an additional 24 units for $19 million in escrow.

We are pleased with this partnership.

In Bridgeland, we continue to see robust demand for new home sales, which is translated into continued demand for our land from homebuilders.

In the first quarter of 2018, there were 109 new home sales compared to 118 in the first quarter last year.

For the 3-month period ending March 31, 2018, Bridgeland sold 15 residential acres compared to 19 acres for the same time period in 2017, representing a 21% decrease.

We averaged $369,000 per acre for the first quarter compared to $390,000 per acre during the quarter -- first quarter of 2017, a 5% decrease.

The decrease was primarily due to the mix of lots sold during these periods.

During the first quarter, the median new home price in Bridgeland increased 15% from $321,000 to $369,000.

The increase in median home price is also largely due to the mix of homes that sold during the period.

According to our surveys, there are 72 spec homes in the market as of April 15, 2018, which is approximately a 2-month supply based on current absorption rates.

Continuing in Houston, we also saw strength at The Woodlands in the sale of new homes.

There were 87 new home sales during the first quarter of 2018 compared to 92 in the same period of 2017.

The median new home price decreased from $608,000 to $497,000 for the quarter compared to last year.

Once again, this is a result of sales mix and reflects the sale of numerous higher priced homes during the first quarter of 2017 and more of the moderately priced homes in the same period in 2018.

According to our in-house research, as of April 15, 2018, we estimate that there were 86 spec homes available for all builders in The Woodlands, which is approximately a 3-month supply based on current estimated 2018 absorption levels.

This is an excellent sign for the market.

For the 3-month period ending March 31, The Woodlands sold 8 residential acres compared to 5 during the same period last year.

The average price per residential acre increased to $697,000 for the quarter compared to $525,000 in 2017.

This represented a 33% increase.

The increase is attributable to the mix of lots sold.

Turning to our Operating Asset segment.

We increased our first quarter total NOI $2.2 million from $44.5 million in 2017 to $46.8 million in 2018.

This was a 5% increase.

This is largely due to an approximately $2 million increase in our hospitality portfolio led by The Woodlands Resort & Conference Center.

In addition, we saw $1.2 million improvement in our multifamily portfolio led by the Constellation, One Lakes Edge and Millennium Six Pines, along with an approximately $1 million improvement in our retail portfolio led by Downtown Summerlin and the Seaport District.

These were offset by an approximately $2 million decrease due to the redevelopment of 110 North Wacker, which was still earning income in 2017, but incurred expenses in 2018 and an approximately $1.1 million decrease at Ward Village due to the planned redevelopment of Ward Warehouse.

As David said, excluding 110 North Wacker and Ward Warehouse, our operating asset NOI would have increased $5.1 million or 11.7% compared to Q1 2017.

As you can see, this portfolio is performing well.

On December 31, 2017, we signed a 31,000 square foot lease with wireless infrastructure company, Crown Castle International at One Merriweather in Downtown Columbia, bringing the building to 82% leased.

We expect the tenant to move in this summer.

In addition, we broke ground on Monday on the construction of a new office building named, Three Merriweather.

The building will be a 12-story Class A office building that is 50% preleased to Tenable, one of the fastest-growing cybersecurity software companies in the nation.

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

In our Strategic Development segment, we've completed demolition and started construction on 110 North Wacker in Chicago.

This 1.5 million square foot Class A office building is anchored by Bank of America and is 38% preleased.

It's being built in a joint venture with local Chicago real estate developer, Riverside Investment & Development.

Total project cost of $761 million and the project is expected to generate a 7.9% unlevered yield on cost.

We have a senior construction loan of $494 million in place and our preferred equity partner with a commitment of $170 million.

Our codeveloper, Riverside Investment & Development, will invest $9.7 million in cash equity.

Our equity basis in the venture is $87 million, comprised of $49 million of cash and $38 million of implied equity based on the mark-to-market of our land.

If you exclude the $38 million of additional land basis from our contribution, the NOI yield would be 8.3%.

The preferred equity partner will own a 63.7% interest in the project and our co-general partner will have a 3.6% interest.

Howard Hughes will own approximately 33% of the development.

The waterfall will work as follows: First, the preferred equity partner receives their capital in a 9% return; second, Howard Hughes and Riverside will seize a return of capital and a 9% return; third, the preferred equity receives a distribution until an 11% return is achieved; and finally, the remaining cash flow is split 90% to Howard Hughes and Riverside and 10% to the preferred equity.

As a result of this capital structure and our ability to maximize land value, Howard Hughes share of the stabilized NOI based on our 33% ownership is estimated to be $19.6 million.

The senior construction loan bid interest at LIBOR plus 3.25% and steps down to as low as LIBOR plus 2.65% based on certain leasing thresholds.

This project is a great example of how we are constantly looking to find creative ways to generate the most value on a risk-adjusted basis from our non-strategic holdings.

As you have seen over the years, sometimes this means an asset sale to a third-party, while sometimes it means that we believe that developing the asset ourselves or with partners provides the best risk-adjusted return as is the case here.

In Summerlin, we are constructing a AAA ballpark.

We anticipate total cost of $115 million, an estimate stabilized NOI of $7.2 million for an unlevered yield on cost of 6.3%.

Historically speaking, the team itself has broken even.

If we were to include the cost of the team, the yield on the team and the stadium would be approximately 5.1%.

Of course, this would exclude any assumption of appreciation of the team, which has not been the case for AAA teams in baseball.

Most importantly, as with the opening of the retail in Downtown Summerlin, in addition to this direct return, we believe that the ballpark will increase the value of the entire community, including our remaining residential land.

We believe that it will have a positive effect as a catalyst, both in accelerating the demand for new development in Downtown Summerlin and on the rents that we will be able to achieve in the building surrounding the ballpark.

We also believe that our retailers and restaurants in Downtown Summerlin will see increased sales, which will translate into higher rents.

Overall, we believe that bringing baseball to Summerlin is a great win for both the community and for Howard Hughes.

We increased our stabilized NOI target by approximately $35.9 million from $255.1 million in the previous quarter to $291 million today, not including the Seaport District, approximately $19.6 million of the increase is due to the 110 North Wacker development, approximately $9 million is due to the new Columbia multifamily project and $7 million is attributable to the ballpark.

This quarter is an excellent example of how we continuously create value for our shareholders by transforming our existing land into dynamic operating asset that create additional NOI and shareholder value.

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

Thank you, Grant.

I'd like to start with a quick overview of our earnings, including a discussion of a change in accounting methods that had a material impact in our quarterly earnings, before summarizing our recent financing activity and then turn to our current leverage and liquidity metrics.

Finally, I'd like to spend a few minutes discussing our recent stock repurchase.

I hope that you've been able to review our 10-Q earnings release and supplemental package filed yesterday, which contains details of our financial and operational results.

I'd like to begin with a change in accounting methods.

Beginning in January of 2018, following the Financial Accounting Standard Board's new guidance for public companies, we have changed from recognizing condominium sales revenue on a percentage of completion basis for units under contract to recognizing revenue only when a unit sale closes.

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

This change relates solely to the timing of recognizing revenue on these sales.

It means that revenue will be recognized later than it previously had been and that the revenue will be more volatile as it will only be recognized as unit sales close, which tend to be in large numbers just after a building is delivered to buyers.

Because we have 2 condominium projects, Ae`o and Ke Kilohana that are not complete, but had revenue previously recognized under the percentage of completion method at a point where we adopted this new policy, we've made a downward adjustment to our cumulative retained earnings of $69.7 million.

We will recognize the revenue on these units as the buildings are completed and the unit sales close.

Please note that this is purely a timing issue.

Moving onto earnings.

We completed the first quarter, with GAAP earnings of $1.5 million or $0.03 per diluted share as compared to $5.7 million or $0.13 per diluted share for the first quarter 2017, a $4.2 million decrease.

Segment EBT decreased by $47.9 million, largely because of a reduction of $39.8 million in Strategic Developments due to the change in revenue recognition methods and a reduction of $7.4 million in MPC EBT due to lower land sales.

These were offset by the absence of significant charges in 2018 that were incurred in the first quarter of 2017 for expenses related to the redemption of our senior notes and warrant liabilities.

NAREIT defined FFO was $29.7 million or $0.68 per diluted share for the quarter as compared to $9.9 million or $0.23 for the first quarter of 2017.

The $19.8 million increase is primarily due to the absence of the 2017 loss on redemption of our senior notes and the warrant liability loss as well as a decrease in our income tax provision due to the new tax law.

In addition, we had a $32.2 million gain on the sale of 36 acres at the Elk Grove collection last year, and we had no sales of other noncore assets in the first quarter of 2018.

All of this was offset by a decrease in operating income due to our adoption of the new revenue recognition guidance with regard to condo sales.

Core FFO was $44.3 million or $1.02 per diluted share, a decrease of $26.7 million or $0.64 per diluted share compared to $71 million or $1.66 per diluted share in the first quarter of 2017.

The decrease was due to decreased revenue in condominium sale, a result of the change in our revenue recognition methods and decreased MPC EBT, largely driven by the timing of land sales.

Turning to our financings.

During the quarter, we closed on a $44.1 million interest-only construction loan for Downtown Summerlin apartments.

The loan matures on October 1, 2021, and includes 1 36 months extension option.

It bears interest at LIBOR plus 2.25%.

In addition, we closed on a $15.5 million construction loan on Lake Woodlands Crossing Retail in The Woodlands.

The loan matures on January 25, 2023, and bears interest at LIBOR plus 1.8%.

The loan has an initial maximum recourse of 50% of the outstanding principal balance prior to completion of construction, at which point the repayment guarantee will reduce to 15%, provided the project is 90% leased.

On April 30, we closed on a $494.5 million construction loan for 110 North Wacker.

As mentioned earlier, this loan initially bears interest at LIBOR plus 3.25% and steps down based on various leasing thresholds.

This loan has a 20% repayment guarantee, of which Howard Hughes is 90% of that guarantee.

The guarantee decreases over time as various performance metrics are achieved.

And as Grant mentioned earlier, we simultaneously closed with the preferred equity partner for $170 million commitment.

As of the end of the first quarter, our total consolidated debt to total asset was approximately 43%, and our net debt to enterprise value closed the quarter at 25%.

From a liquidity perspective, we finished the first quarter with approximately $633 million of cash on hand.

As of the end of March, we had 21 projects in our Strategic Development segment with anticipated total cost of $3.3 billion.

Of that amount, we have previously funded $2.1 billion, leaving $1.2 billion in estimated remaining cost.

We expect to meet this obligation with a combination of existing construction loans, which at quarter-end had approximately $539 million of committed, but undrawn capacity and with anticipated loans of $90 million and $53 million for Three Merriweather and the ballpark in Summerlin, respectively.

This leaves a net remaining equity requirement of $520 million.

We expect to fund our remaining equity commitments through a combination of our free cash flow, from our operating assets, MPC segments and net condo sales as well as net proceeds from noncore asset sales and lastly our existing cash balance.

Again, as of the end of the first quarter, with approximately $633 million of cash on hand and net equity requirements of $520 million, we have enough cash and liquidity on hand to meet all of our current funding commitments without any additional cash being generated for MPC land sales or our operating properties.

Finally, I'd like to speak about our recent share repurchase.

As you know, we have the unique opportunity to repurchase 475,920 shares of our stock from a non-affiliated seller at a price of $120.33, a price that we believe represented a meaningful discount to the underlying net asset value of the company.

We will continue to be opportunistic in looking for ways to unlock shareholder value and we believe that this was an excellent allocation of our capital.

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

Thank you, David.

As you can see, we had another quarter of strong results, and we continue to be thoughtful, creative and opportunistic in allocating capital in a manner that we believe best increases the value of the company for our shareholders.

We appreciate your continued support.

Thank you 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.

You must have the greatest salespeople in the world NOI given what you did in the quarter, and it looks like you're moving to the next project.

You didn't mention Koula, I think you sort of break ground there?

Or can you give us an update with your plans?

We're very excited about that new project, the Jeanne Gang is designing it, and Yabu Pushelberg is doing the interiors.

We've recently made a local announcement because we're going for approvals, which will take us till later in the year, but we're expecting that like our recently announced 'A'ali'i project to be very, very well received.

I think backing up, it's just in the very early stages of planning right now.

And if we're going to continue on our progress of trying to deliver a tower a year at Ward Village, we need to start those local approvals and get that process going early on, but that's a project that is often the distance before we start presale.

We're really focused right now on the 4 towers that we have underway as well as continuing the pace of presales that we're incredibly pleased with 'A'ali'i.

Okay.

And then viewing the 110 North Wacker, I know it's basically an 8% unlevered total return on cost.

But with the new preferred partner, you really derisked the project and I'm just -- once they're paid off, it looks like you're going to be over a 20% return on equity?

Or how should I look at the value -- equity value?

Yes, that's correct.

The purpose of the transaction was to mark up our land to market, derisk the project and mitigate it, so we'd have less cash equity in the deal, focus on obviously our 6 core assets.

110 North Wacker is the best redevelopment site in Chicago (inaudible) it's going to be a great development.

But at the end of the day, it's a big slug of equity and we felt that it wouldn't be appropriate to have an all-in-one asset.

But from an economic return, we'll be well north of 20% at the end of the day.

Okay.

And then last one, you mentioned the Malibu Farm signing.

It looks -- so you've got 2 restaurants left and then you've signed a bunch of small tenants in the Uplands area during the quarter or maybe at the end of last quarter.

Could you summarize kind of what's left on the Pier?

And what's left on the Uplands?

On the Pier, we've got the majority of 3 and 4 that's still available, although we have tenants looking at the majority of that space, and I would anticipate some time in the next several quarters that we'll have announcements there.

We've been very, very pleased with the activity, particularly the kinds of people that are looking at it and the synergistic nature of those tenants.

So more to come there.

That's really the predominant vacancy in that building.

We do have the F building still available, arguably that's our best building.

We're talking to a number of named chefs for that space, but we have not made a final decision on direction there.

Okay.

So it's 2 restaurants that are left on the Pier, and then how much of the square footage on the Uplands, I guess, this one is going to give that?

It's about 30,000 feet of space available still in the Uplands.

Yes, Mr. Goldfarb, your line is open.

Grant, maybe just following up on the 110 North Wacker.

You guys certainly have a sufficient balance sheet to carry a high-rise development project at least further.

So just sort of curious, I would think that you guys would have gotten more pre-leasing done before bringing in the partners to try and maximize more the value.

So maybe you can just walk through the decision to bring in a partner now versus waiting until you maybe had a next sort of large lease?

And then, two, just a bit more color.

Is this a foreign JV partner?

Domestic?

And is it a core fund?

Or is it more of an opportunistic?

Just trying to get a bit more color.

So the partner is a local partner domestic.

It's a life partner, if you will.

And their returns, obviously, are substantially low.

And if you look at the way the waterfall is structured, we're getting the vast majority of the upside as we increase the economics.

So to the extent that we're able to do better deals on the remaining square footage that's available, we'll participate exponentially on the upside.

I think the deal -- and I'd say I appreciate the credits you're going to give us, but this is a phenomenal deal and to get 9% money on preferred equity, on construction -- spec construction in Chicago, I think it's pretty well executed.

Okay.

So there may be a different way of asking it.

Did you seek them?

Or they were walking past the site and said, "Hey, let's call up Howard Hughes and get involved?"

So for the last 7 years, we've been receiving calls on this site because there's just so much demand for the site and monetizing site either from a local partner to developer or from economic partners who're willing to participate as tax capital.

So they've been circling for a while.

And we went out -- we did go out to market though for the senior as well as for the preferred equity.

Okay.

And then David Weinreb, I appreciate your comments on the signage potential at the South Street Seaport and sponsorship, but as we think about the overall income, both in signage and sponsorship from Live Nation, et cetera, are all of these things still within the budget that you guys have outlined?

Or are you suggesting that the budget for yields on the project could be increased?

And the reason I ask is there's obviously the more people you get down there, over time, it makes the project itself more valuable.

But just trying to separate the overall long-term value versus the NOI yield that you guys have already outlined based on what you have the different parts of the project namely the restaurants rents, the office rents and now the signage, where I couldn't tell if you're talking about upside of that signage income and sponsorship income or if it's all part of the original underwriting.

Well, again, we remain constant on our 6% to 8% yield on cost.

We feel good about that.

The sponsorship income, it's more sponsorship than it is signage per se.

It has always been part of our model.

Although over time, we do expect there to be additional upside there, but we're not anticipating any of that out of the gate.

Okay.

And then just final, on Ward Village, the new condo tower, the micro unit, one that you guys have launched, the pace of sales is certainly breathtaking.

What does this say about how you're pricing it?

And your interest in doing more would almost seem like -- I mean, the units are priced too cheap relative to the demand, but if you would just give a bit more color just because the pace in the past month is definitely not what is expected from a typical condo project.

So Alex, you're not making my job any easier by trying to accelerate pricing.

That's what I always say that we're priced too cheap.

Well, I appreciate it.

What we're doing is, first of all we have to maintain momentum in the market and this is not too dissimilar from the launches of both Waiea, Anaha and Ae`o.

So you'll see in the first few months of launch, a good 40% of the tower being sold.

And we've raised prices along the way, so we've seen acceleration in pricing.

And we're seeing a good kind of a steady weekly sales revenue that we're pretty happy with.

And as we see various stacks in the tower start selling out, we start increasing pricing on those.

So we have a very robust dynamic kind of a pricing model, which takes that into account.

But at the end of the day, there's a barrier on kind of nominal dollar pricing for such small units.

It's not really a price per foot exercise.

It's a nominal pricing.

And just keep in mind, we have another 15 towers to sell.

Yes, it's supply and demand.

But I think that the -- the very positive thing is that we feel like we've hit a great sweet spot in the market.

We're seeing that with our sales and the next building, the Jeanne Gang building, is a step up from this building.

So we feel very good about it.

And we have the question -- our first question, I would anticipate and certainly hope that a year from now, we'd be -- if not sooner that we'd be in the market with that building.

The next question comes from Vahid Khorsand with BWS Financial.

Just a follow-up on that one.

In terms of what you're seeing in pricing, does it give you an indication of where to go in Ward Village in terms of size of units and pricing?

Yes, absolutely.

I mean, each of the towers gives us more information on where the market is, where it should be priced, what the segment of unit should look like, number of bedrooms, bathrooms we use, et cetera, amenities.

So at the end of the day, we're now the dominant condo developer on the island.

We see ourselves really as being protected from entry from competition because of the entitlements, because of the acceleration of the development we have and because of the market share that we're taking from everyone else, so we can really see into the entire market and be able to design the next tower hopefully to even meet more of the market than we previously anticipated.

Yes, I might also add that the opening of Whole Foods next week, that's when they're scheduled to open.

That could slip a week or 2, but it certainly is going to be in the next 30 days.

And Merriman's in the summer.

It really completes phase 1. And I think that one of the very positive things we're seeing is a further acceleration of interest in living in this very unique unprecedented urban setting.

It just doesn't exist anywhere else on the island.

So there's the rapid pace of the latest one in the micro units, does that guide you towards building more lower-priced projects and selling more of them?

Or just the margins on them keeping you from going down that route?

We're still targeting our 30% blended margin excluding the cost to land.

That's our kind of broad-based line.

And what we're seeing is demand for product under $2 million, with the sweet spot at about $1 million to $1.5 million, and that's where we're focused on delivering products.

As Grant said, it's more nominal based than it is price per square foot.

But keep in mind also, that this is a third row -- this is our third row, so we feel very, very good about the way that we're -- kind of the process that we've taken and studying what buildings we should bring to market and at what time.

We continue to preserve our best land in the front.

Okay.

And then going to the MPC land sales.

You talked a little bit about the mix and what was sold.

Could you provide some more details in terms of what it was this quarter, this year versus last year?

Well, obviously, at Summerlin, new home sales, we have -- there were 408 new home sales in the Q1 of '18 compared to 2017, so a huge increase in demand for new products.

Bridgeland and Woodlands were really flat for new home sales.

And when you think about lot sales, our lot sales are actually sold at higher prices compared to Q1 of '17, but it's really a mix of lots and the efficiency of the acreage that sold.

So I wouldn't read too much into what's happening in those communities.

There's robust demand for home sales.

We see a recovery in all prices and demand in that economy strong, and we're -- there's very few -- there's a shortage of supply both in Woodlands and Bridgeland.

So we're encouraged by that.

I think the better way to look at this is over the full year.

My question was specifically on -- I mean, if you can provide the details in terms of the mix.

Is it just that lot usage is different than layout?

Or size-wise?

Or how is it -- gets priced?

There are less lots to the acre, but higher priced lots -- higher priced lots, but less lots to the acre.

It's really inefficiency of land usage.

So this is -- this will be where the lots are situated, how they're situated, what they're tied into, et cetera.

At the end of the day, timing will drive the results.

The next question comes from Tayo Okusanya with Jefferies.

Around the MPC business, I know one of the concerns people always have is generally rising interest rates causing a slowdown in home sales and subsequently land sales.

Could you just talk a little bit about if you're seeing any of that effect in your numbers?

And what kind of gives you a lot of confidence about the strong outlook you're projecting for that part of your business?

Yes, and thank you for the question.

I would say to you that we haven't seen any of that.

In fact, in Summerlin, there's been increased demand, there's been record home sales and broad-based demand for new home product.

In fact, realtors are having more trouble selling the resales than they are the new product.

So from our perspective, our customers are easily able to put mortgages on these properties.

We're seeing the same thing in Bridgeland and Woodlands.

So we're not concerned about rising interest rates yet.

At some point, they would have an impact, but not right now.

Great.

And then the Operating Asset business, again, good performance out of that sector this quarter.

It seems like a lot of it is happening from your hospitality business.

Just curious how strong the other property types are?

Or how they performed within the Operating Asset segment?

I'll take that.

It's David O'Reilly.

I would say that on a quarter-over-quarter basis, we saw a strong increases across every segment.

The strongest, as you highlighted, was in hospitality.

But right behind it on a quarter-over-quarter basis, we saw about a 20% growth in retail with great pushes, both in Houston, in our Woodlands retail assets as well as in Downtown Summerlin, which we're really pleased with.

We also saw about a 7% increase in our office assets, really broad-based across the board with all of our office assets showing strong lease up, specifically 17 25 in Woodlands, 17 35 in Woodlands, rather.

Multifamily was flat quarter-over-quarter, but we don't see any concern there.

We saw great occupancy and no slip there at all and continued rental rate push there, given that we're almost entirely full.

So we're really pleased with the operating assets.

Yes, hospitality led the way.

And the first quarter is generally a very strong quarter in the hospitality assets in Houston, but we saw strength across retail and office as well.

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

I was hoping you can talk about your newest master plan, The Woodlands sales.

How many builders, I guess, participated in buying lots this quarter?

And is this the run rate for the year?

Or you expect it to go higher over the next coming quarters?

Thank you, Alex.

I think we're very pleased with the opening of The Woodlands Hills.

At the end of the day, there are, I think, about 4 builders now -- 4, 5 builders that have participated in the first lot sales.

Our grand opening of home sales will be in July, and we expect to see further momentum growth over the year.

But to date, we're happy with where we are.

Showing no further questions, this concludes the question-and-answer session.

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

Just a thank you for everyone for joining us, and we look forward to speaking with you after our next quarter.

We're certainly available as we always are by phone, David, myself and Grant.

So please feel free to reach out to us if you have any further questions.

Thanks, again.

The conference has now concluded.

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