Howard Hughes Holdings Inc (HHH) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Howard Hughes Corporation's Second Quarter 2018 Financial Results Conference Call.

(Operator Instructions) Please note, today's event is being recorded.

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

Please go ahead, sir.

Good morning, and welcome to the Howard Hughes Corporation's Second 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, www.howardhughes.com, where you can download both our second 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 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 assurances that these expectations will be achieved.

Please see the forward-looking statement disclaimer in our second 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 2018 second quarter earnings call.

Our investor base has been expanding over the past year, and as such, we thought that this would be a good opportunity to touch on and review the unique competitive advantages we have as a result of our self-funded, fully integrated business model and the virtuous cycle that is created by our 3 complementary business segments.

One can think of our business as an ecosystem.

As the master developer of each of our communities, we control the vast majority of the land and development rights in our small cities, allowing us to limit competition, which in turn, gives us pricing power, protects against recessionary environments and allows us to benefit greatly by accelerating development in growing markets.

The combination of our 3 complementary business segments: Master Planned Communities, Operating Assets and Strategic Developments creates a virtuous cycle.

We sell land to homebuilders and the new homeowners require amenities such as retail, office, apartments and hotels.

When we build these amenities, it creates additional demand for homes, and in turn, makes the remaining residential land more valuable.

The new residents create more demand for other commercial amenities and the virtuous cycle continues.

Once the operating assets that we have developed stabilize, their cash flow produces funding for additional developments.

With the cash flow from our operating assets and our residential land sales, along with condo sales in Hawaii, we generate enough cash to self-fund our business on a leverage-neutral basis without ever having to raise equity and dilute our shareholders.

The best way to track the progress of this strategy and 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 can be volatile from quarter-to-quarter, so we feel these metrics are most accurate when viewed on an annual basis.

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

Within our Strategic Developments segment, we track new construction starts as we transform our raw land into 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 second quarter results with these metrics in mind.

During the second quarter, we continued to make substantial progress, unlocking value throughout our portfolio.

At our MPCs, we've continued to see strong demand for our residential land driven by robust fundamentals in the residential home sales market.

But as I've just mentioned, this is a long-term business that can be volatile quarter-to-quarter.

We believe that it is best to evaluate it on an annual basis.

MPC EBT decreased from $53.1 million in the second quarter of 2017 to $46.6 million in the current quarter, a decrease of $6.5 million or 12.3%, largely due to the timing of land sales at The Woodlands and Bridgeland, partially offset by the Woodland Hills and The Summit.

Indicative of the volatility of this business on a quarterly basis, on July 10, shortly after the quarter ended, we closed on a 123-acre land sale in Summerlin for a total sales price of $69 million, which got the third quarter off to an excellent start.

Summerlin was ranked by Robert Charles Lesser Company as the third-highest selling master planned community, and both Bridgeland and The Woodlands ranked in the top 40 in the country through the first half of the year.

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

In our Operating Assets segment, total NOI increased $7.6 million or 19.6% from $38.9 million in the second quarter of 2017 to $46.5 million this quarter.

In our Strategic Developments segment, we have increased our stabilized operating asset NOI target from $291 million at the end of the first quarter to approximately $308.6 million, not including the Seaport District, as of June 30.

This $17.6 million increase represents a 5.8% increase and is the result of a continued transformation of our raw land into income-producing assets, that upon stabilization, will deliver outsized risk-adjusted returns.

Keep in mind that we started at $49 million of NOI in 2010.

Our new development starts this quarter are consistent with our strategy of building to meet market demand in our MPCs, where we have unique control with little to no competition.

For example, in The Woodlands, where we are starting construction on the Two Lakes Edge multifamily project, our existing multifamily portfolio is approximately 98% leased.

In addition, we are entirely self-funding our equity requirements on construction projects using free cash flow from our operating assets, MPC EBT and condo sales on a leverage-neutral basis.

Moving to Ward Village in Honolulu.

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

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

As of June 30, 'A'ali'i was 46.3% presold and increased to 67% presold as of July 31.

We could not be more pleased with the enthusiasm that our customers are showing for this new innovative product type.

We plan to begin construction later this year.

We feel that the success and rapid absorption of this product type is evidence of our opportunity to increase the pace of development of the entire neighborhood.

We are pleased to share that Ae`o is completely sold out, our third building and the home of the state's flagship Whole Foods, Ae`o is approximately 90% complete.

We anticipate delivering the building in early 2019.

The Hawaii flagship Whole Foods, which occupies 59,000 square feet or 84% of the retail space at Ae`o, opened in May.

As of the end of June, we had sold 96% of the residences at Waiea, our first building to be delivered, and 99% of the residences at Anaha, our second building.

Merriman's restaurant, which occupies 6,075 square feet or 38% of the retail space at Anaha, opened in June.

Ke Kilohana, our fourth building to break ground, consists of 375 workforce housing residences, which are 100% sold out and 49 market-rate homes, of which we have sold 20.

In total, we are 93% sold as of June 30, which is in line with our expectations, given that the building will not be delivered until 2019.

It is approximately 70% complete.

The retail is 100% leased to CVS/Longs Drugs.

At the Seaport District, we continue to experience significant demand for the balance of the office space on levels 3 and 4 of the Pier, and are working to ensure that we not only achieve the highest rents possible, but also fill the space with synergistic tenants.

On June 8, we acquired 250 Water Street, a 1-acre parking lot in the Seaport District, adjacent to our other holdings in the district.

We continue to see our ongoing transformation of the Seaport District increase the value of the entire neighborhood.

250 Water Street sits at the gateway to the district, and we believe we can unlock tremendous value here as our vision for this development unfolds.

We paid $180 million plus closing costs and simultaneously closed on $129.7 million of financing that David will provide more detail on in a few minutes.

In May, in partnership with Live Nation, we announced this summer's Pier 17 Rooftop Concert Series with an outstanding and diverse list of entertainers, including Amy Schumer, Kings of Leon, Diana Ross, Gladys Knight, Trevor Noah, Sting and deadmau5.

The concert series introduces New Yorkers and tourists alike to the one-of-a-kind venue on the rooftop of Pier 17, which has New York City as its backdrop, surrounded by the Brooklyn Bridge, Empire State Building, Statue of Liberty and One World Trade.

Our summer activations, including the vibrant Heineken Riverdeck and Chase Lounge, have been attracting tens of thousands of locals to the district, further bringing to life our vision for transforming the seaport into a port of discovery, with unique offerings that cannot be found anywhere else in New York.

We kicked off the Pier 17 Rooftop Concert Series on August 1, with a sold-out performance by Amy Schumer & Friends, followed by 2 sold-out performances by Kings of Leon.

In advance to the Rooftop Concert Series, country superstar Carrie Underwood performed in Spotify's Inaugural Hot Country Live concert at The Rooftop at Pier 17 on July 4. Chart-topping country music duo Dan + Shay opened the event.

Additionally, Kelly Clarkson pre-taped a performance on the rooftop that was viewed by approximately 7.5 million people as a part of Macy's Fourth of July Fireworks Spectacular on NBC.

Finally, I am pleased to share that 10 Corso Como was set to open next month in time for New York Fashion Week.

We expect the 28,000-square-foot store to quickly become a leading destination in the New York Fashion world.

10 Corso Como will be followed by the openings of Roberto Cavalli and Cynthia Rowley, both of whom we signed earlier this month as well as Sarah Jessica Parker in the historic district.

Roberto Cavalli will be opening a unique format pop-up store with a focus on experiential marketing.

As mentioned last call, we continue to stay the course and stay true to our vision, which we are confident best positions the Seaport District 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 Developments 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.

Total revenues decreased to $62.8 million this quarter from $78.1 million, a decrease of $15.3 million compared to the second quarter of 2017.

The lower land sales revenues and a decrease in deferred revenues at Bridgeland, Summerlin and The Woodlands, partially offset by revenues of the Woodland Hills, primarily drove the decrease.

As David said earlier, we had a $69 million land sale at Summerlin that closed 10 days after the quarter ended.

This is an excellent example of why we often reiterate that the MPC business should not be measured on a quarterly basis.

We are very confident in the demand we are seeing across all of our communities and expect to have an excellent year of land sales.

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

While we have seen some press reports of a slowdown in the growth rate of new home sales, we have not seen any evidence of it in our communities.

New home sales in our MPCs increased compared to 2017 by 62% in April; 29% in May; and 32% in June; in total of 601 homes sold in the second quarter of 2018 versus 425 in the same period of 2017 in our MPCs, excluding the Woodland Hills, which had not started selling in 2017.

This was a 41% increase for the quarter.

At Summerlin, we continue to experience great demand for residential land sales, as evidenced by this recent sale.

Residential land sales for the quarter totaled 38.6 acres compared to 51.8 acres for the second quarter of 2017, a 25.5% decrease.

The price per acre increased from $559,000 to $592,000 quarter-over-quarter, a 5.9% increase.

Summerlin had 336 new home sales during the quarter.

This compares with 237 during the same quarter of 2017.

This equates to a 42% increase.

In addition, the median new home price increased 3.4% to $582,000 from $563,000.

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, 100 lots have closed for a total of $315.6 million.

For the quarter, we recognized $14.1 million equity and earnings compared to $9.8 million in the second quarter of 2017.

For the second quarter of 2018, The Summit had 12 custom lots closed for $38.9 million.

This compares with 6 lots for $17.9 million during the same period in 2017.

As of June 30, we have additional 16 units for $61.7 million in escrow.

We are pleased with this partnership.

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

In the second quarter of 2018, there were 150 new home sales compared to 106 in the second quarter last year, a 42% increase.

For the 3-month period ended June 30, 2018, Bridgeland sold 22.6 residential acres compared to 24.3 acres for the same time period in 2017, representing a 7% decrease.

We averaged $399,000 per acre during the second quarter compared to $386,000 per acre during the second quarter of 2017, a 3.4% increase.

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

During the second quarter, the median new home price in Bridgeland increased 16% from $355,000 to $411,000.

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 63 spec homes on the market as of June 30, 2018, which is approximately a 1-month supply based on current absorption rate.

Continuing in Houston.

We also saw strength at The Woodlands in the sale of new homes.

There were 115 new home sales during the second quarter of 2018 compared to 82 in the same period of 2017.

The median new home price decreased from $577,000 to $444,500 for the quarter compared to last year.

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

According to our in-house research, as of June 30, we estimate that there were 97 spec homes available for all builders in The Woodlands, which is approximately a 3-month supply based on current estimated 2018 absorption levels.

This remains a strong indicator for this market.

For the 3-month period ending June 30, The Woodlands sold 13.7 residential acres compared to 24 during the same period last year.

The average price per residential acre increased to $798,000 for the quarter compared to $567,000 in 2017.

This represented a 40.7% increase.

The increase is attributable to the mix of lots sold.

Turning to our Operating Assets segment.

NOI increased $7.6 million, or 19.6% from $38.9 million in the second quarter of 2017, to $46.5 million this quarter.

This is largely the result of increases in NOI of approximately $4 million from retail, $2.4 million from office, $2 million from hospitality as this portfolio continues to stabilize.

In our retail assets, we had an increase in NOI of approximately $4 million.

This was largely due to the improvement at the Seaport District of approximately $1.7 million, along with increases of approximately $1.2 million at Ward Village and an improvement at One Lakes Edge retail, Downtown Summerlin and Riverwalk.

Our office portfolio NOI increased by approximately $2.4 million, led by increases in Downtown Columbia, ONE Summerlin and at Hughes Landing.

These increases were offset by 110 North Wacker, which is being redeveloped and is now in our Strategic Developments segment.

Our hospitality portfolio NOI increased by approximately $2 million, led by The Woodlands Resort And Conference Center, which has increased occupancy, conference bookings and food and beverage revenue.

We're very pleased with the progress made in our Operating Assets portfolio.

In our Strategic Developments segment, this quarter, we increased our stabilized operating asset NOI target $17.6 million, from $291 million at the end of the first quarter to $308.6 million, a 5.8% increase.

The increase is mainly attributable to our new developments.

The Two Lakes Edge multifamily project in Hughes Landing at The Woodlands will cost approximately $108 million and provide approximately $8.5 million of stabilized NOI for an 8% return on costs.

We expect it to stabilize in 2024.

Bridgeland Apartments, which will cost approximately $48 million, is expected to generate $3.9 million of stabilized NOI when it stabilizes in 2021 for an 8.125% yield.

The daycare center in Hughes Landing will cost approximately $2.7 million, and we expect it to yield 8% and NOI of approximately $217,000.

We have also increased the stabilized projections for some of our existing assets based on their recent performance.

This quarter was another excellent example of how we continue to create value for our shareholders by transforming our existing lands into dynamic operating assets that generate additional NOI and shareholder value.

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 method that had a material impact on our quarterly 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 10-Q, earnings release and supplemental package filed yesterday, which contains details of our financial and operational results.

First, I'd like to begin with the change in accounting methods.

As we mentioned last quarter, beginning in January of this year, following the FASB'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 the cost of sales for condominiums only after the sales to the buyers have closed.

This change relates solely to the timing of recognizing revenues 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 is only recognized as unit sales close, which tend to be in large numbers, just after a building is delivered to the buyers.

This change in accounting methods had a negative effect on our earnings in our Strategic Developments segment despite extremely strong condominium sales this year.

Under the former accounting rules, we would have recognized an additional $196 million of revenue in our Strategic Developments segment in the second quarter and $338 million on a year-to-date basis.

In addition, at our Waiea tower at Ward Village, we have taken a $13.4 million noncash charge for future window repairs, which further contributed to the decrease in Strategic Development EBT and turned our GAAP condo margin negative for the second quarter.

We fully expect to recover this cost in the future and believe that we will be able to reverse this when we have more certainty regarding that recovery.

Largely because of the reduction in EBT in our Strategic Developments segment of $50.5 million due to the change in revenue recognition method and the reduction in our MPC EBT of $6.5 million due to lower land sales, we completed the second quarter with a GAAP loss of $5.1 million or $0.12 per diluted share.

This compared to a $3.1 million gain or $0.07 per diluted share for the second quarter 2017, resulting in approximately $8.2 million decrease.

The decreases in Strategic Developments and MPC segments were offset by an increase in Operating Assets EBT of $13 million and a decrease in corporate and other expenses of $35 million, primarily related to the absence of a significant charge of $39 million in 2018 that were incurred in the second quarter of 2017 for expenses related to warrant liability.

NAREIT-defined FFO was $22.2 million or $0.52 per diluted share for the quarter as compared to $37 million or $0.86 for the second quarter of 2017.

The $14.8 million decrease is primarily due to a change in comparative revenues, resulting from the change in accounting methods previously discussed.

Core FFO was $36.4 million or $0.85 per diluted share, a decrease of $58.1 million compared to the $2.20 per diluted share in the second quarter 2017.

The decrease was largely due to $30.9 million of warrant loss and $15.6 million of deferred income tax expense incurred in the second quarter of 2017 that did not recur in the second quarter of 2018.

Turning to our financing.

On April 13, 2018, the company repaid the $11.8 million loan for Lakeland Village Center at Bridgeland.

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

This loan initially bears interest at LIBOR plus 3% and steps down based on various leasing thresholds.

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

The guarantee decreases over time as we achieve various metrics.

We simultaneously closed with a preferred equity partner for a $170 million of equity capital.

Our obligation at 110 North Wacker is to put $49 million of cash into the transaction.

As of the end of the first quarter, we had approximately $39 million of cash invested, and therefore, expected to fund an additional $10 million.

This was reflected in last quarter's financial statements.

At closing on April 30, we received a $52.2 million cash distribution from the venture, which decreased our cash investment in this asset.

Over the course of the project, we will invest $42.7 million of those proceeds to meet our total cash equity commitment of $49 million.

On June 8, 2018, the company closed on a $129.7 million mortgage loan for 250 Water Street, a 1-acre parking lot in the Seaport District.

The loan has an initial interest-free term of 6 months with an initial maturity date of December 8, 2018 and 3 6-month extension options at a rate of 6%.

The second and third extension options each require a $30 million paydown.

After the end of the quarter, on July 27, we closed on a $34.2 million construction loan on Bridgeland apartments.

The interest-only loan bears interest at LIBOR plus 2.25% and has an initial maturity date of July 27, 2022 and one 1-year extension option.

The loan has a 25% repayment guarantee that burns off after the property has achieved a 1.25x debt coverage ratio.

On July, 20, 2018, we closed on a $51.2 million loan for Summerlin Ballpark, bearing interest at 4.92% with a maturity date at December 15, 2039.

As of the end of the second quarter, our total consolidated debt to total assets was approximately 44%, and our net debt to enterprise value closed the quarter at 27%.

From a liquidity perspective, we finished the second quarter with approximately $607 million of cash on hand.

As of June 30, we had 25 projects in our Strategic Developments segment, with the anticipated total cost of $4.2 billion.

Of that amount, we have previously funded $2.3 billion, leaving $1.9 billion in estimated remaining costs.

We expect to meet this obligation with a combination of existing construction loans, which at quarter end, had approximately $1 billion of committed but undrawn capacity and with anticipated loans for $335 million for Three Merriweather, Columbia apartments, Bridgeland apartments, Two Lakes Edge and The Ballpark in Summerlin.

This leaves a net remaining equity commitment of $594 million.

We expect to fund our remaining equity requirement through a combination of our free cash flow from our Operating Assets and MPC segments, net proceeds from noncore asset sales, and lastly, our existing cash balance.

Again, as of the end of the second quarter, with approximately $607 million of cash and net equity requirements of $594 million, we have enough cash and liquidity on hand to meet all of our current funding commitments without any additional cash being generated from MPC land sales or our operating properties.

With that, I'd like to now 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) And today's first question comes from Craig Bibb of CJS Securities.

It's actually Mike Hagan for Craig.

And I had a quick question on -- given your exceptional pace of sales at 'A'ali'i, you had commented, I guess, increasing the pace.

Maybe a little more color there and thoughts on how quickly you could get to 2 towers per year.

Mike, this is Grant.

Thanks for the question.

So what we're looking at is what is the market demand.

So if we can do 2 towers a year and the pace demands it, we'll absolutely build a tower.

What we've always done is launch sales with the hope of getting to 50% by the time we get construction financing.

So ultimately, once we see the pace of sales, we know how fast we can move.

What we're trying to do now, because we're dominating the market, is to segment product type.

And we're seeing -- being able to dominate market by segmenting product type, allows us to sell products at all different price ranges.

The success of 'A'ali'i is no surprise to us given the size of the units and the sweet spot of the market.

We canceled our Gateway product last quarter.

We heard about that.

We're on track to design new product for Block C West as well as increase the pace of design so that we can reach our entitlement within our master agreement.

And if we have the pace of design well on its way and the market demands it, we'll absolutely launch construction on more than one tower.

And our next question today comes from Alexander Goldfarb of Sandler O'Neill.

So just a few questions.

Just Grant, maybe following up on that.

When you look at the Hawaiian market now in Honolulu, do you guys -- how would you break out sort of the luxury, the high end versus the affordable?

I mean, it seems certainly, for sure, anything less than, call it, $3 million and probably less than $1 million is just the absolute sweet spot.

So do you see the high end as coming back?

Or for the next few years, the product that you intend to launch at Ward Village will probably be more of the workforce or small unit-type condos?

I think, at the end of the day, we've always said the sweet spot lies between $1.5 million and under.

And we're seeing that in the market.

However, we do know that we have significant product to deliver on the front row, which is irreplaceable views that will demand a much higher price.

There's been success in the market in selling the higher-priced product, and we're looking at developing a much higher, efficient tower that will deliver a higher product price for the market.

And if we can get the traction we need at those, we'll launch the tower.

It's worth noting that there are very few units left at Waiea and Anaha to sell.

We're seeing increased demand for those products.

And there's no other product in the market at the higher end.

So it's worth launching another tower or launching sales at another tower to see if there's market demand at that higher price point.

Yes.

And, one other thing that I would note -- it's David, and that is that 'A'ali'i should not be in any way thought of as workforce housing.

This is high-quality, luxury micro units that are being very, very well received.

Okay.

I should have put the workforce in quotes, given the pricing out there and the quality.

Next question is, looking at the Seaport, can you just give us an update on timing for when the restaurants are going to open and then what your thoughts are for the parking lot at 250 Water Street?

.

Sure.

So there have been modest delays in the build-out of the restaurants boxes on Pier 17.

That's nothing new, not just for us, but just for everyone building in New York, trades are tight.

As a result, we're discussing with our restaurant partners the ideal time to open.

And as we have continuously stated, we're going to open at the right time.

We're committed to delivering the optimum long-term outcome for the Seaport and Pier 17.

If that means opening JG in the late fall, the restaurant will be completed, we will do that.

If that means opening potentially in the early part of 2019, that's what we'll do.

So we're discussing those dates with our various restaurant partners.

And we're -- couldn't be more excited about the products that we're going to be delivering long term.

And we will make those decisions accordingly.

10CC, by the way, is on track to open for Fashion Week, in September.

Very excited about that.

That's September 6. Our Rooftop restaurant will be opening later this year, and that's on track.

And of course, we've had just amazing success with our Summer Concert Series and also our pop-up Heineken Riverdeck bar.

Okay.

And then just a final question, David.

With the closing of the -- or the imminent, yes, between Brookfield/GGP, you guys have the air rights over fashion show and it doesn't cost you anything if the air rights -- if I assume, probably very little on the carry side.

But given Brookfield's propensity to do development, mixed use, et cetera, do you think there may be an opportunity for you guys to sort of monetize those with some transaction with Brookfield?

Or your view is that they don't really cost much to keep on hand so you'll just keep them until you find a point to develop?

Alex, it's David O'Reilly.

I would -- look, with all of the other assets that we have at the firm, whether it's air rights, whether it's Cottonwood -- with any of those assets at the back of our supplemental, I would say that until we have plans and we've announced what we're going to do, let's just continue to carry them at their book value.

They have very little carry costs.

When the time is right, and we go through that analysis constantly, whether it's sell, hold, develop, when we have an outcome and a resolution, we'll be happy to share it with you.

But until then, there's really nothing really to talk about with the air rights there or any of these other assets at this point.

And our next question comes from Scott Schrier of Citi.

This is Ken Ling on for Scott.

Sticking on Seaport for a little bit, is there a timeframe for developing that?

And I know David noted that -- in the prepared comments, that it was a gateway to the district, understanding that it's a few blocks away.

Is there a plan to connect it some way to the rest of the Seaport?

So let me answer the question on 250.

And Alex, I apologize, you did ask about 250 Water and I failed to answer that in my response.

We love the opportunity to get control of that site.

It's one of the larger development sites in the city that's clear and ready to go.

We also have, as most of you know, if not all of you on the call, hundreds of thousands of air rights floating around.

And we are in the process now of developing what our long-term plan is.

That the site is at the gateway of the Seaport, we clearly are seeing great traction with everything that we have planned.

And we believe, long term, that, that site will represent a great opportunity for us to activate some, if not all, of those excess air rights and build something dynamic that will be at the gateway, as I said, of what we're doing in lower Manhattan.

Great.

Turning to Woodland Hills, sales of $37 million in the quarter, it looks like a pretty strong start.

How does that compare to your initial planned sales cadence?

And kind of just combining that with some commentary about affordability constraints, have -- is there something you've seen around the Houston area?

So the Houston market continues to recover.

We're seeing increased demand for residential sales.

That couldn't be more apparent with the pace of home sales in those communities: both Bridgeland, Woodland and Woodland Hills.

I think we're very happy with the pace of sale.

Our goal is to maintain momentum right now because it's an infant MPC.

And we have to -- remember, the focus of acquiring Woodland Hills was obviously to have a return on our investment for the Woodland Hills.

But the focus, which drives residential growth to that area, is to spur some further commercial growth in The Woodlands itself.

We need additional residents to drive commercial opportunities.

So we're happy with residential sales, and there's an economic return associated with that.

And we're pleased with the momentum we have.

But our goal is to drive commercial opportunities.

Our next question comes from Tayo Okusanya of Jefferies.

The condo business, this $13.4 million in window repairs for Waiea, can you talk about kind of what's going on there?

It's a relatively new building, I'm just surprised that you have that much in window repairs to do.

No, without a doubt.

And this is something that -- is an issue with the curtain wall.

Some of our residents on some of the fascades have experienced some noises associated with it.

It's an impairment charge that we took this quarter, noncash, that is based on our current estimates to repair that and to make it right for our residents.

As we stated in the release in the Q file, we very much expect to recover that amount in its entirety.

The timing and the entity that we'll be providing that recovery is uncertain at this time.

So I can't record an offsetting asset.

So candidly, I think this is really just a timing issue for us as we look to make right for our residents and eliminate that sound that's occurred in a handful of the units there.

So is it that the developer of the building that may have to pay that or an insurance company or something?

Whether it's the general contractor, the general contractor's insurance company, other insurance providers or others, again, I can't say who or the timing of when that recovery will be.

But I think it's fair to say that we very much expect to recover that amount.

Okay, that's fair.

Just staying on the topic, when you do kind of remove that number though, you do end up with about $5 million in profits on $21 million of sales.

So that margin still seems a little bit lower than your historical margin in that business.

Are there any other additional expenses that hit the quarter that we should be aware of that kind of reduced the typical gross margin you get on that business?

No.

And look, it's going to depend on the units that are sold in any point in time during the quarter.

And now that we're not doing percentage of completion method accounting, Tayo, what we've said all along is that we expect as a whole, across the board, to realize about a 30% margin ex land blended across the entire development.

And if we're doing 25% one quarter, just because of the particular units that were sold that quarter in which building, we don't look at that as out of line or out of place in any way, shape or form.

There have been other quarters where we've delivered margins substantially higher than 30%.

So again, the condo sale business, like the land sale business is not a quarterly business.

It's something that we have to take a much more longer term view on.

So I feel very confident and comfortable that we are going to continue to hit our stated range of approximately 30% ex land.

That's helpful.

Then the Operating Assets business -- so just for a quick minute, again, I think a very strong NOI growth on a year-over-year basis.

But I was kind of curious, again, at what point will you start looking at that business in regards to a same-store basis like other REITs who you are (inaudible) to?

Just in fact, I really want to understand the stabilized assets, how they're doing on a same-store basis.

Tayo, look, our supplemental is relatively new, as you know.

And we are constantly looking to provide better transparency and clarity for investors.

And same-store as well as certain metrics, they're associated with different segments of the business like hospitality, office, retail, multifamily, is something that we continually look at with the supplemental.

I would say right now, our same-store pool, given the amount of development and additions to that pool over time is relatively small.

As we continue to mature and as that same-store pool continues to grow, and therefore, the result of that same-store pool become more meaningful for our investors, we'll absolutely look to add that to our supplemental in the future.

That's helpful.

Last one for me.

Seaport, again, just good color you guys gave around the restaurants' opening.

I mean, I'm just curious, how do you kind of underwrite these, again, celebrity-driven restaurants?

I think, again, they can be great.

But I think in the past 6 months or so, you've seen some of these celebrity chefs get into trouble under the #MeToo movement.

You've seen some pass away.

Like how do you kind of underwrite that risk of -- it's so tied to the celebrity chefs' name that if that brand is tarnished you could really have an issue.

Look, I think it's a good question.

At the end of the day, what we're doing at the Seaport and what we expect at the Seaport is quite frankly, all about our location, the water, the unique attributes of the site and not solely, or quite frankly, primarily driven by an executive chef or a big name of a company that we might announce.

It's an enhancement only.

I think that the people that we've chosen, from everything we know, are the highest quality people.

But we never know something that we don't know until we know it.

But we feel very good about the direction that we're going.

I always say the most important job of a leader is being a great people picker, and that includes the businesses that you choose to invest in because whether you're leasing an office floor, you're leasing to a tenant, et cetera, you're really judging the quality of the person that you're dealing with.

And the entire team couldn't be more pleased with our partners at the Seaport.

And our next question today comes from Vahid Khorsand of BWS Financial.

First question, simple question, I think, on Lakeland Village Center.

Is that one going to now move into stabilized properties for the quarter?

We have 2 criteria, which we can get back to you on in terms of when we move to stabilize.

One is occupancy and the other is when we reach our actual NOI.

But it's a GAAP methodology that determines when it gets moved.

Yes.

Again, whether we're going to hit our occupancy target or with the passage of time, 2 years after delivery, we'll move that up into the stabilized pool.

For now, we haven't hit either of those, so we're going to leave it right where it is.

Okay.

And then just looking at your property-level of debt, at what point do you hit a sense of urgency in closing more deals and moving more the Strategic Developments forward to lock in lower interest rates?

It's something that we talk about it all the time and something that we're working on real-time right now.

We very much appreciate our debt maturity schedule.

We look constantly at those loans that are coming due in the next several years.

And we're hopeful that over the next couple quarters, we'll be able to have a discussion on some of that long-term financing that will push out our maturities, hopefully reduce our rates and eliminate some of the floating rate risks that currently exist on our balance sheet.

But until those deals are closed and we're ready to talk about, I think, for now, we'll just say that it's something that we're addressing real-time.

And hopefully, we have more details in the coming months or quarters.

Okay.

And then for background, the difference between the debt you're carrying for your pre-funded projects, and then you talked about the cash balance, is that a number to look at in terms of what's the capacity?

Yes, what we try to do is to give you an understanding of what our -- both our net debt is, and then also, the fact that we're carrying large cash balances to fund our equity commitments remaining in our development.

And on one of the schedules of the Q you can see that outlined.

At the bottom of the schedule also is the financings we intend to put on the assets or are working through to get that done, so you can understand what our outstanding commitments are.

And I would echo that.

I think Grant answered it really well.

I'm just saying that our -- we view our potential development capacity and what we could potentially take on for new projects any given quarter, any given year.

It's really about maintaining that financial discipline on a self-funded, leverage-neutral basis using the free cash flow from our operating assets, our condo sales, our MPC land sales and noncore asset sales to fund the equity components of those new developments, making sure the overall company and our overall balance sheet remains, on a net-debt-to-enterprise-value basis, at that 30% or below level.

And again, another quarter where we're in the mid-20s, we feel very confident that we're in a good spot where we're continuing to maintain that self-funded business model.

And then my final question on the condo sales with the new tax law changes.

Is there going to be a quarter where you're just going to blow out a large number?

Or will it be a gradual (inaudible) ?

Yes.

And that's really an accounting rule change, not a tax law change.

From an accounting perspective, when we close the units on our -- the next tower that will be complete, which will be Ae`o, which we've said the target towards the very end of this year or very early next year, we will have a large number of closings that will contribute a great amount of cash to the balance sheet and some substantial earnings on the gains of those units.

Because we're only going to record the revenue and expenses associated with the sale of those units when they close.

And as a result, that will be a -- create more lumpiness on a quarter-to-quarter basis within that segment of our company.

Okay.

But my specific question is, is there going to be like one big giant number and then the next quarter, it's a smaller number?

Or is it going to be something that's a little bit gradual to see?

Or do you not know that right now?

They -- we're looking through the, what we call, a bulk closing, in determining how many of the units we can close at any individual time.

There are 450 units, you should work on at least 1/3 of them being in the first closing.

And that building is 100% sold out, so I would expect it to be very lumpy in the quarter that we get through those bulk closings.

And we won't have any inventory to sell for the next several quarters, so I wouldn't expect it to be slow in those following quarters.

I would expect it to be much more lumpy.

And our next question comes from Alex Barrón with Housing Research.

A few questions on the Hawaii Towers.

So are the -- I guess there's only a few units left in Waiea and Anaha.

Are those mainly, like, penthouse?

Or -- because I looked at the dollars left to complete those 2 projects, and it looks very big.

So is it just a few regular units and one big penthouse?

Or can you kind of give us some color around that?

Yes, in Waiea, we have the 2 grand penthouses; in Anaha, the 2 penthouses.

And then there are a couple of villas that are in Waiea.

That's -- those are the number of units.

We expect to, and hopefully, have a good part of the units sold by the end of the year.

I don't think -- we haven't forecast selling the grand penthouses by the end of the year.

We don't believe -- I mean, we actually sell them.

But we haven't forecast selling them.

Got it.

So when it says those costs to complete, is that because you still need to kind of customize those to the buyer?

Or what is the gap, I guess, to finish those costs?

There's one floor of a grand penthouse at Waiea that's unfinished and one floor of a grand penthouses at Anaha that's not finished, so those would be part of the costs.

The other costs are the retention costs that may or may not be due to the contractor.

Okay.

Now as it pertains to the other 2 towers, Ae`o and Ke Kilohana, did I understand you right that you expect the margins to still be in the 30% range?

I mean, even though -- and what about this new tower, the one with the workforce units?

Do those type of units make those types of margins or are they lower?

What we're trying to do is to establish a benchmark of a blended 30% margin excluding land across all towers, as David said.

Obviously, in the higher-priced units, you would expect the margins to be higher, and in the lower priced units, a little lower.

But we've had substantial demand for the market rate housing at 'A'ali'i where we're very pleased with the margins associated with that.

So I think you should be comfortable forecasting a blended 30% across all product types.

Got it, okay.

I guess, one -- just last one on the Houston, especially The Woodlands Hills, are people -- are builders there buying essentially based on their sales?

Or are they just contracted to buy a certain rate per month kind of [thing]?

Yes.

It's a typical takedown contact, where they take down a number of lots per quarter.

The industry, unfortunately, has a earnest money deposit of very little, so even though there may be a contract to take down units over a 2-year basis with an inflator, the builder can walk away from the contract without very little damage.

So what we're seeing though is, the leading indicators clearly are home sales.

And so we know that there's been increased velocity of home sales in all of our communities: 42% quarter-over-quarter increase at Summerlin; 40% at The Woodlands; and 42% at Bridgeland.

Woodland Hills is obviously a young MPC and so there's no quarter-over-quarter growth rate.

But we're very confident in the momentum and in the price for it.

And ladies and gentlemen, this concludes your question and answer question.

I'd like to turn the conference back over to the management team for any closing remarks.

I just want to thank everyone again for listening in and joining us.

And as always, we're available on our cellphones, at the office, if we can ever answer any questions.

And look forward to being with you next quarter, if not sooner.

And thank you, sir.

Today's conference has now concluded, and we thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.