Howard Hughes Holdings Inc. (HHH) Q2 2024 Earnings Report, Transcript and Summary

Good day and welcome to Howard Hughes Holdings Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. It is now my pleasure to introduce Senior Vice President of Investor Relations, Eric Holcomb.

Good morning from our headquarters here in the Woodlands, Texas and welcome to Howard Hughes Holdings second quarter 2024 earnings call. With me today are David O’Reilly, Chief Executive Officer; Jay Cross, President; Carlos Olea, Chief Financial Officer; Dave Striph, President of Asset Management and Operations; and Joe Valane, General Counsel. Before we begin, I would like to direct you to our website, 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 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 statements disclaimer in our second quarter earnings press release and the risk factors in our SEC filings for factors that could cause material differences between forward-looking statements and actual results. We are not under any duty to update forward-looking statements unless required by law. I will now turn the call over to our CEO, David O’Reilly. David O’Reilly: Thank you, Eric. Good morning, everyone and welcome to our second quarter earnings call. On our call today, I am going to begin with a recap of the quarter and cover the segment highlights for our master planned communities in the Seaport. Dave Stripe will cover the performance of our operating assets, followed by remarks from Jay Cross, who will provide updates on our strategic development projects. Finally, Carlos Olea will review our latest full year guidance and the balance sheet before we open up the lines for Q&A. For the second quarter, I am pleased to report that Howard Hughes delivered exceptional results across our core business segments, highlighting the strong demand we continue to see in our master planned communities and further solidifying our strong 2024 outlook. Looking quickly around the segments, in MPCs, we continue to see heightened demand for new acreage from homebuilders, which contributed to a significant increase in residential land sales across our communities. These land sales achieved a new record average price per acre, leading to robust MPC EBT that puts us well on our path to meet our full year guidance. Our operating assets delivered solid NOI led by strong performance in office as well as meaningful year-over-year growth in retail and multifamily. In strategic development buyer interest for our premier condos and Ward Village in the Woodlands remained at elevated levels. In the quarter, we contracted to sell 94 units, which equates to future revenue of $207 million. We are still on track for a fourth quarter delivery of Victoria Place, which we now expect will see more condo units closed in 2024. With these outstanding results, we have reiterated our full year guidance for MPC EBT and raised our guidance for operating asset NOI and condo sales. Carlos will discuss more later in the call. Diving into our MPC segment results, we delivered outstanding MPC EBT of $123 million in the second quarter, underscored by the sale of 164 acres of residential land across our communities in a new record high average price per acre of $1 million. Land sales were led by Summerlin, where we closed on the sale of 87 acres of super pads at an impressive $1.5 million per acre. Land sales in Texas were also strong with 77 acres sold in Bridgeland and the Woodland Hills, representing a 55% increase year-over-year. Overall, land sales revenue totaled $155 million in the quarter or a 266% increase year-over-year. New home sales, which we believe are a leading indicator of future land sales, maintained the strong momentum seen in recent quarters, with a total of 579 homes sold in our MPCs. Although down a modest 4% from the prior year, when home sales experienced a significant resurgence, year-to-date home sales are pacing 7% higher. Looking forward, we remain confident in the strength of the new home market despite recent national headlines reporting rising new home inventories and reduced new home sales. New home inventories, which were recently reported to have risen to over 9 months nationally can be a misleading metric because this metric includes homes that have not become construction, homes under construction and the homes that are actually completed. Looking at only the completed inventory, you’ll find that there are actually less than 2 months of completed inventory available in the overall market, far fewer than the headline data suggests. In our communities, completed new home inventories have been in decline since year-end and are currently 1 month or less in Bridgeland and Summerlin. With respect to new home sales, which were recently reported to have softened, we have found that reported data has been consistently adjusted higher in subsequent periods, questioning the accuracy of the initial reports. Our company’s favorable view is further supported by our homebuilder partners who continue to report strong results, healthy homebuyer interest, significant increases in new orders and low cancellation rates. Overall, the new home market remains incredibly resilient and mortgage applications for new homes continue to rise despite high interest rates. We expect this to continue for several reasons. First and foremost is affordability for the first time in several decades, home pricing has slipped with new home pricing now cheaper than resale pricing together with attractive builder incentives, including mortgage rate buy-downs monthly payments on new homes are simply more attractive to homebuyers. New homes offer superior build quality require less upkeep, have lower insurance costs and provide higher building efficiency, all keeping costs lower. Availability and move-in ready inventory are also important factors. New homes now represent nearly one-third of total inventory, more than double historic averages as homeowners remain reluctant to trade in their historically low mortgages. This trend is not likely to reverse without significant rate cuts as the average homeowner has a mortgage rate of 4% or less. As a result, existing home sales have slowed to their lowest level since the great financial crisis when new home market share has risen to its highest percentage. With elevated demand for new homes as well as a significant undersupply of vacant developed lots which remain well below equilibrium in our communities and their surrounding MSAs. We anticipate continued strong homebuilder demand for our land going forward. For that reason, we expect a strong second half of 2024, which will contribute to record residential land sales and robust MPC EBT of approximately $300 million for the full year. Turning to the Seaport. As we announced last week, our Board of Directors approved the spin-off and the distribution of Seaport Entertainment shares to HHH holders of record at the close of business on this coming Monday, July 29. The distribution is expected after market close on Wednesday, July 31, with HHH shareholders receiving 1 share of Seaport Entertainment common stock for every 9 shares of HHH common stock. Seaport Entertainment will begin trading under the ticker SEG on the NYSE American Stock Exchange on Thursday, August 1. Looking at their financials, the Seaport generated net operating losses of $9.4 million in the second quarter. This reflected a $6.9 million year-over-year incremental loss primarily due to costs associated with the standup of Seaport Entertainment and reduced revenues as a result of poor weather, including equity losses of $5.6 million, primarily from the Tin Building, total Seaport NOI was a loss of $15 million. With that, I’ll turn the call over to Dave Striph for a review of our operating assets.

Thank you, David. Good morning. In the second quarter, the strong momentum that has been building in our operating asset segment continued with the delivery of $68 million of NOI, including the contribution from unconsolidated ventures. This represented a 1% year-over-year reduction driven in part by $4 million of office lease termination fees received in the prior year, excluding this benefit in the prior year, operating asset NOI was up 5%. Our strong performance was led by Office, which reported $33 million of NOI this quarter. Excluding those lease termination fees of $4 million in the prior year, Office NOI increased $3 million, representing a 12% year-over-year increase, a strong improvement given the backdrop of a difficult office market nationwide. During the quarter, we continued our leasing success with the execution of 145,000 square feet of new or expanded office leases. With our stabilized office portfolio now 89% leased we expect to benefit from this leasing momentum in 2025 as office build-outs are completed and free rent periods burn off. During the quarter, we acquired Waterway Plaza II – a 142,000-square-foot Class A office building located in the Woodlands Town Center for approximately $19 million. This reflected a purchase price of approximately $135 per square foot for the office space, not considering the value of the associated land and the adjacent parking garage. With our Woodlands Town Center office portfolio essentially fully leased, this asset adds much needed inventory and is expected to achieve a double-digit return upon stabilization. In addition, with over 3 prime acres in the heart of the Woodlands, this acquisition creates an unparalleled covered land play with a low-cost basis and exceptional long-term opportunities for future redevelopment. The multifamily portfolio also performed very well in the quarter, delivering NOI of $14 million or an 8% year-over-year increase. This growth was primarily driven by increased rental revenue associated with the lease-up of our newest properties, including Starling at Bridgeland, Marlow in Downtown Columbia and Tanager Echo in Summerlin. These properties have seen impressive leasing success during the last year. We’re starting now 94% leased, Marlow at 74% and Tanager Echo 67% leased. During the time when multifamily rents have seen pressure in many markets across the country, our rents remain stable with 1% growth across the portfolio further demonstrating the strength and quality of our assets and our highly desirable Master Planned communities. Overall, we are pleased with these results, and we expect further multifamily NOI growth as the year progresses. In retail, NOI was $15 million in the second quarter, which increased 19% year-over-year. This improvement was primarily driven by the collection of prior period reserves at Ward Village. With our retail portfolio, 94% leased, we expect full year NOI growth in 2024. With that, I’ll turn the call over to our President, Jay Cross.

Thanks, Dave, and good morning, everyone. In strategic developments, we had another great quarter, achieving several important milestones. First, in Nevada, we completed Meridian, our 148,000 square foot office building adjacent to the proposed movie studio site in Summerlin. Since its completion tenant interest has been steady, with half of the complex currently under advanced LOI or in lease negotiations. In Maryland, we also completed 10285 Lakefront, our first medical office building in Downtown Columbia. This 85,000 square foot project is currently 48% leased and another 28% under LOI or in negotiations. In this quarter, we celebrated the start of construction on 2 new projects including One Bridgeland Green, the first mass timber office building in the Houston area and in our entire portfolio. This innovative 49,000 square foot project, which we expect will be completed next year has seen high demand. As of this week, it was already 80% pre-leased with another 7% under LOI. In Hawaii, we commenced construction on Kalae, a 329-unit front row condo tower across from Kewalo Harbor in Ward Village. This project, which is expected to be completed in 2027, is impressively 92% pre-sold with only 26 units remaining in inventory. With Kalae, we now have 4 condo projects under construction in Hawaii, together with Victoria Place, Gilana and the Park Ward Village, which are scheduled to be completed in late 2024, late 2025 and mid-2026, respectively. These 4 towers are collectively 97% pre-sold and represent meaningful future revenue of $2.6 billion, which will be recognized as these projects are delivered. Looking at condo sales, as David mentioned, we had an outstanding second quarter. In Ward Village, we contracted 78 condos, representing incremental future revenue of approximately $140 million. The majority of these pre-sales related to the Launiu our 11th condo project in Ward Village. Since its launch in the first quarter, demand for this 485 unit project has been solid, with pre-sales eclipsing 50% of total units by quarter end. And finally, in Texas, following the extremely successful launch of the Ritz-Carlton Residences, the Woodlands in the last week of March, we sold an additional 16 condos in the second quarter. This 111-unit luxury project is now 65% free sold with contracted future revenues of $313 million. We expect to start construction on this exciting development later this year. I would now like to hand the call over to our CFO, Carlos Olea, who will review our guidance and the balance sheet.

Thank you, Jay, and good morning, everyone. With an incredibly successful second quarter, we look to continue the momentum that we have experienced across our core segments, and we remain confident that 2024 will be a strong year. Today, we reiterate our MPC EBT and G&A guidance, and we increased our operating asset and condo sales guidance for the year. As David mentioned earlier, in our MPC segment, we continue to project robust EBT of $300 million at the midpoint. This guidance contemplates record residential land sales with significant superpad sales in Summerlin during the third quarter and steady residential lot sales in Bridgeland and the Woodland sales throughout the second half of the year. As previously highlighted, the year-over-year growth in residential land sales will be offset by reduced commercial line sales and builder price participation as well as limited inventory of custom lot cells due to a significant past success of Aria Isle in The Woodlands and the Summit in Summerlin. Because of the strong performance of our operating assets in the first half of 2024, most notably in office, we are increasing our outlook for the full year. Our previous range, which was expected to increase 1% to 4% year-over-year with a midpoint of approximately $250 million, is now expected to be in a range of up 3% to 6% year-over-year with a midpoint of approximately $255 million. This new guidance also contemplates the removal of approximately $1 million of NOI in the second half of 2024 related to the Las Vegas Ballpark, which is being spun off with Seaport Entertainment. Going to sales revenues, which were previously expected to range between $675 million and $725 million, with gross margins between 28% to 30% are now expected to range between $730 million and $750 million with gross margins of approximately 28%. Our guidance is almost driven entirely by the completion of Victoria Place in the fourth quarter which we now expect will see more residences close in 2024. Our new guidance contemplates approximately $30 million to $50 million of condo sales revenues delaying into the first quarter of 2025 due to the timing of closing compared to approximately $75 million in our previous guidance. And finally, we expect cash G&A to continue to range between $80 million and $90 million for the full year. It is important to note that this guidance excludes approximately $30 million of cash expenses to complete the spin-off of super entertainment as well as approximately $8 million of anticipated non-cash stock compensation. Turning to our balance sheet. We have $437 million of cash at the end of the quarter. Together with our strong guidance expectations for the full year, we are well positioned to further strengthen our balance sheet and deploy capital appropriately. At the end of June, the remaining equity contribution needed to fund our current project was approximately $277 million. From a debt perspective, we had $55 million outstanding with only $278 million of maturities in 2024. Approximately $271 of this $228 million total is related to the construction loan on Victoria Place which will be repaid as units closed in the fourth quarter, leaving us in a strong position with only $7 million of principal amortization payments due in 2024. For 2025, we have approximately $441 million maturity after the successful $130 million refinancing of 9950 Woodloch Forest Drive with a 5-year non-recourse loan at a fixed rate of approximately 7%. This loan previously represented 24% of our 2025 maturities and the closing of this refinancing, particularly in today’s challenging market, truly speaks to the strong demand we are seeing for office and the quality of our assets in the Woodlands. And finally, we also closed on a $420 million construction loan for Kalae. The non-recourse loan bears interest at Sofa plus 5% with a maturity in 2027. We – this tower, Michel already has contracts representing $761 million of future revenue, further demonstrates our ability to create value with our condo projects in Ward Village with minimal cash equity. With that, I would now like to turn the call back over to David for closing remarks. David O’Reilly: Thank you, Carlos. Before we open up the lines for Q&A, I just want to remind everyone about our next Investor Day, which will be held in Summerlin at 1:00 p.m. Pacific Time on Monday, November 18 in conjunction with NAREIT investor conference in Las Vegas. Invitations with registration information will be coming up soon, but please mark your calendars to join us. If you have specific questions in the meantime, please reach out to Eric Holcomb. In closing, our second quarter results were nothing short of outstanding across our core businesses, further solidifying what we expect will be another remarkable and record-breaking year for Howard Hughes. With this strong performance, we foresee record residential land sales and robust MPC EBT, record operating asset NOI and over $200 million of gross profit from condo sales for the full year. With the spin-off of Seaport Entertainment nearly completed, I want to take a minute and thank all of our many employees who have worked tirelessly to make the spin-off of success. Into the Seaport Entertainment team, we wish you all the best in your journey ahead. For Howard Hughes, we embarked on an exciting new chapter in our history with a refined identity as a pure-play real estate company solely focused on what we do best, building world-class master plan communities. With nearly 35,000 acres of unmasked land remaining in our portfolio, we have decades of opportunities for thoughtful growth and value creation ahead of us. With that, let’s start the Q&A portion of the call. operator, can you open the lines for questions please.

[Operator Instructions] First question comes from the line of Alexander Goldfarb with Piper Sandler.

Hey, good morning down there. David, with the Seaport finally, the spin-off finally here. Just a few, I guess, sort of math questions for you. So it’s a twofold. One, can you just – as we think about – I think you said a $15 million NOI loss, but I think there was also sort of for a book value, $9.4 million negative contribution from the Seaport. So basically, as we look forward to third quarter. Obviously, all the losses related to the Seaport go away, it sounds like all the G&A related to the spin-off are embedded in that Seaport number. So I just want to make sure as we’re thinking about you guys going forward that the Seaport is really the entity that we want to remove from earnings and make sure we’re not missing anything else in other parts of the income statement? And the second part is, can you just remind us the amount of capital, if any, that’s going from Howard Hughes to the new Seaport that’s going to come off your balance sheet? David O’Reilly: Yes, absolutely, Alex. Happy to walk you through that. In fact, I’m going to ask Carlos to give you the color and detail on all that as he’s been living this in the weeds more than I have. But I do want to just clarify one thing as part of your question before Carlos takes the details. Next quarter, we won’t be removing entirely, right, because this is going to be effective July 31. So we will have 1 of the 3 months of 3Q inclusive of the results of Seaport before the spin is effective. So there will be a little bit of noise next quarter. It will be a lot less than this. And then in the fourth quarter, we will be reporting as a pure-play MVC company for us, is incredibly exciting. Carlos?

Yes. Thank you, David. Good morning, Alex. So yes, when the Seaport goes effective August 1, the entity that you see on our financials is the Seaport segment is the part that will go away. Everything has been encapsulated there for quite some time to run as an autonomous segment, particularly in anticipation of the spin-off, although, as you know, we have been reporting in a separate segment even before. But yes, whatever – what you see on the Seaport results is what will go away past the spin-off and nothing else. In addition to the – it is in the segment, but the ballpark and the baseball team as well, as we all know are going to go with the spin-off.

And then about, yes, capital growing from.

Yes. As far as the cash infusion, there’s going to be a $23 million cash infusion that will take place at the completion of the spin-off from us to Seaport Entertainment. One-time Seaport [indiscernible] million cash infusion.

Okay. And then, David, going back to home sales. It’s been quite a topic. You’ve obviously been quoted in the press and on TV related to home sales. You referenced a 2-month inventory. I’m not sure if that was just Howard Hughes in general or nationwide. But maybe you could just talk a little bit more because this is something that we hear from the bars, which is that the housing inventory is like the biggest it’s been since the credit crisis, whatever and then you look at other data, which shows no, it’s not. And to your point, home sales remain healthy, and obviously, it’s all going to new homes. So maybe you could just parse out a bit more of some of the headline numbers that we see versus what you guys are actually seeing on the ground and then also on that inventory number, the 2 months, was that national or that’s just your communities overall? David O’Reilly: Yes. Happy to go a little deeper on that, Alex. I think it’s super important. And I think often the headlines become incredibly misleading in terms of what’s really happening. If we backed up the clock 60 days when April home sales were first reported, we saw an initial number of about 634,000 homes, which was a year-over-year decline in the headlines red dooming bloom. Roll forward the clock to about a week ago when June numbers were reported. In that report, the April number was revised to $730,000, that’s a 15% upward revision in 60 days. If that original report has shown $730,000, we would have celebrated a year-over-year increase. But that just wasn’t reported that way because the data wasn’t as clear. So I do think that we have to pay a little bit closer detail to what’s underlying the data to make an informed decision. And then on home inventory, as that number gets reported, Alex, it consists of three things: it consists of lots that have been sold and contracted, it consists of homes that are under construction, which are predominantly contracted and sold unless there’s been a cancellation where builders are building spec, which they rarely do. And it includes completed new homes that are not sold that represent truly the spec inventory. If you just look at that spec inventory, the completed new homes, the third leg of the stool that I just described, nationally, that’s at a 2-month number. In our portfolio, in Summerlin, it’s at half a month, and in Bridgeland, it’s at 1 month. So this overhang of completed spec home inventory that’s sitting there, is not nearly the negative headline that I think we see reported nationally. I think it’s very manageable. I think it’s an appropriate level. And in fact, it’s relatively tight compared to historic norms. We really see that number spike and we saw that number increase when interest rates ticked higher rapidly and the cancellations flow through the homebuilder books. That created a much higher number of completed new home inventory than anything close to what we’re seeing today.

Okay. And just a final question on the Ritz at the Woodlands. Happy to hear more presales there. Last quarter, you talked about holding a meaningful amount of the units off market until the end which is in contrast to the way that you sold condos out in Wood Village, are you guys rethinking the Rent project and now going more towards selling the bulk of the units now rather than waiting until the end just to de risk? Or are you still looking to hold out a chunk of the unit until the end? David O’Reilly: No, our strategy hasn’t changed, Alex. We’ve taken almost all the remaining units off the market with the exception of a handful, the handful that we do have listed and available through the sales team and our sales gallery here in the Woodlands we’ve increased prices pretty dramatically in an effort to honestly slow sales until we finish the building and can show off the quality of what we’ve built is we think that the pricing will go higher at that point in time. Despite the efforts of increasing pricing and listing only a few units, the team is still sold units. Look, even sometimes the best efforts go unrewarded, I suppose. So look, I think that our strategy hasn’t shifted in Hawaii. Our strategy is a bit different and you’re 100% right because we have over 10 towers to sell there. And the ability to deliver value to shareholders is not just about squeezing the last dollar price, but about speed, and the net present value of delivering towers over time. So getting them sold out and sold quickly allows us to launch that next tower immediately. In the Woodlands, perhaps we might have another tower someday, but today we have one, and it’s the best building on the best site in one of the best master planned communities in the country. And I think that by taking a thoughtful, pragmatic approach on the sellout of that building, we’re going to deliver excess value to our shareholders rather than rifle through and sell it as fast as we can.

Okay, thank you, David. David O’Reilly: Thank you, Alex.

Thank you. [Operator Instructions] Our next question comes from the line of Anthony Paolone with JPMorgan.

Thanks. Good morning. Can you maybe talk to us about just how to think about capital allocation perhaps over the next 12 to 18 months because the cash drag from Seaport is going to be gone. You’ve got a lot of upcoming condo sales kind of locked up. The MPCs are performing well. So it just seems like you’re going to have incremental cash. And how should we think about that and perhaps the pecking order even as it relates to maybe buying back stock even? David O’Reilly: Hey, Tony, it’s a great question. It’s something that we debate all the time, not just within the C-suite, but within our board in terms of how we allocate that capital to drive our – the intrinsic value of our company on a per share basis higher every day. And today, given inflationary pressures on construction costs, rental rate growth that has not kept up with those, new development becomes harder and harder. And as a result, I think you’ve seen us take a more rifle shot approach to those new development projects, really focused on those highest return opportunities all our condos in Hawaii, the Ritz Carlton here, potentially sitting on some dry powder for if we’re able to get the law passed in Nevada to do the studios. And I think that as those development returns have gotten squeezed the opportunity to create value through share buybacks raises higher up the list. And as we see incremental capital onto our books, share buybacks become a more realistic and executable opportunity than a couple of years ago when we were knocking off multifamilies across our portfolio at an 8% return on cost and a 4% cap rate environment. right? That environment doesn’t exist today. And as a result, we have to be thoughtful, pragmatic and take a more rightful shot approach to how we unlock the value of our raw commercial land with new developments.

Okay. Thanks for that. And then you’d mentioned the studios and that was on my list as well. So is there any update to the Nevada legislation there or then potentially holding a special session to get that moving? And also, what should we think about as sort of being the equity that HHH will need to kind of do that deal? David O’Reilly: So the studio bill, as it sits right now, is actually being grafted by one of our great senators in the state of Nevada and the intent is that we could hopefully get that bill on to the legislative session when they come back into session in February. I think given the election year dynamics and some of the local politics going on in the state, it would be unlikely to see a special session called between now and November. And then the time frame with holidays after the November election before they actually go back officially in February is so tight a special session is also unlikely then. So we’re really focused, and we’re really putting all of our efforts towards getting ready for the February legislative session, and we’re very hopeful and optimistic that we can try to get something done early on in that session. In terms of the amount of capital that we need for that project, that’s going to depend entirely on how much of the bill gets passed because that will drive the sizing of the studio, which will drive the overall cost of the studio. But if you thought about a project in the $450 million to $500 million ish range in a typical 60% ish construction loan, that remaining equity requirement would be what would be – I don’t want to say split because it implies even but shared between Sony and Howard Hughes.

Okay. Thanks. Those were helpful brackets. And then just last one, if you can. You mentioned the strong pricing in the MPC segment this quarter and the unit pricing was stronger than we expected as well. Can you talk about just maybe like how much of that might have been just mix in terms of what got sold versus real price appreciation, say, year-over-year? David O’Reilly: Look, I think that we saw a pretty dramatic year-over-year price appreciation as it relates to residential land in Summerlin and to see us get to a $1.5 million per acre across multiple super pads in 87 acres in Summerlin. Look, it’s nothing short of remarkable. And the team at Summerlin continues to surprise me every day with their execution. Across our other communities and if you look at Page 26 of the supplemental, you see some decent growth in Bridgeland from 515 acres to almost 590 acres and of 10%-plus increase in price breaker in the Woodland Hills at about $408,000 to $450,000. So, if mix helps because we sold a lot in Summerlin at $1.5 million an acre and less in Woodland Hills at $450 million. But if you dig into each one of the MPCs, you can see price per acre appreciation, which was pretty strong.

Okay. Thanks for time and nice quarter. David O’Reilly: Thank you, Tony. It was a pleasure.

Thank you. One moment please for our next question. And our next question comes from the line of John Kim with BMO Capital Markets.

Good morning. On the MPC guidance that you left unchanged, Dave, you talked a lot about the strong results and momentum, but the second half of the year is basically implying that it’s flat with the first half. And in a declining interest rate environment as well. Is the reason why you kept it unchanged based on uncertainty of super lot timing, or are there other factors that’s driving that? David O’Reilly: Well, look, maybe I am overly cautious or overly conservative, but our guidance already implies the best year ever in the history of residential land sales for Howard Hughes. And while the second half of the year, the implication for the second half of the year is very consistent with what we delivered in the first half of the year. The first half of the year was nothing short of remarkable. To stretch even beyond that for the second half of the year, in an environment that does have some question marks about it, I think that may just be a little bit overaggressive. And look, I pride myself and I know this organization price itself on under promising and over delivering. And as a result, I think that we want to take a prudent approach and hang our hat on the best year of the history of Howard Hughes on residential land sales.

And how much of an impact has interest rates had? In the last month, it’s been trending down. I know it’s been pretty volatile year-to-date. But in your conversations with homebuilders how was the last 30 days or so trended? David O’Reilly: Look, I don’t say the home sales have been strong and consistent throughout the second quarter and throughout the first quarter. I don’t – I wouldn’t tell you that home sales have picked up with a modest decrease in mortgage rates. They have been very consistent with the previous months. We are also getting into the slower summer season. So, maybe this is actually a positive relative to past years. But I don’t see an uptick. I haven’t seen an increase in demand as – given the prognosis of lower rates coming into the second half of the year or the slight downtick in underlying mortgage rates. I think it’s just been pretty consistently strong, which for us is great news.

On the Seaport, just maybe the last time you comment on it, but looking at revenue this year versus last year, it’s come down. 10 buildings and events have come down as well, which is a bit surprising. What do you think turns it around maybe under new management. But what do you think could turn that around going forward? David O’Reilly: I think that some year-over-year headwinds we have seen have been weather-related. I think there has been a drop in sponsorship in event revenue business really across the board. And I don’t think that’s Seaport specific. And as I pulled a lot of the other public company results, public companies that own restaurants for a living. There has been a lot of pressure. I think spending has been down and spending has been down on restaurants and food and beverage in New York. I think the team there has done an incredible job rightsizing the overhead, bringing in the right talent to run that organization, focused on maximizing margins, profitability, food costs, labor costs, and that takes time. It’s not a magic wand overnight. It is a month and quarter orders process to get it exactly right. And I think Anton has the skills and talent and the team is entirely focused. And I really think it’s just a matter of time before that business starts humming the way we all wanted it to today. But it will just take that – the skill set of that management team to really unlock that value.

Okay. My final question is on your commercial portfolio, specifically office, which you had good leasing momentum this quarter. Looking out over the next 12 months to 18 months, you have a modest amount of office lease expirations, about 8% through 2025. How do you see occupancy trending during this timeframe? And if you can comment on the acquisitions you made during the quarter, what do we process [ph], why buy more inventory in office? David O’Reilly: Yes. Absolutely great questions. Look, I think that if you look back at the office portfolio performance for the quarter and you remove the $4 million of lease term fees from the prior year, we actually saw a 12% year-over-year increase in our office portfolio, which I am pretty proud and excited about. And then as you look at what’s been signed but hasn’t commenced, we had about $8 million of leases that are in abatement periods in 2024 alone. And if you go back to what’s been signed across the portfolio that will kick in over the ‘24 and ‘25. That number grows to $19 million. So, while we have expirations and I think everybody has expirations, I think ours are very manageable. I think we have a great portfolio that is in demand, as demonstrated by the increase in occupancy across the board at 89% and a lot of positive momentum in leasing that will kick in cash NOI throughout ‘24 and ‘25. I think that 89% over the course of the next 18 months, trends higher given the demand that we have seen and continue to see in the leasing momentum that we are executing on, specifically here in the Woodlands. And to that end, Waterway Plaza too is right here in the heart of downtown on the Waterway, where our portfolio here is essentially full at 96%, and we have demand. This property at 142,000 square feet, it’s a little over 50% leased provides an immediate day one incredible cash-on-cash yield on our purchase and upon stabilization, which we think we can achieve very quickly gets us into the double digits on an unlevered basis and returns that, honestly, and I can’t replicate in our development portfolio today. And if I think about where we are going to get the highest risk-adjusted returns on capital invested, share buybacks, as I mentioned earlier, is on the list. But buying a building, a Class A building in the heart of the Waterway where we have more demand than vacant space and can execute very quickly on a lease-up strategy and deliver a double-digit unlevered cash on cash return is one that we couldn’t pass up. And if you think about it long-term, over the next couple of decades, to have this 3-acre site in the heart of the Woodlands for a potential redevelopment at this basis is just a guide, I think it was mentioned in the prepared remarks by Dave Striph. It’s one of the best covered land plays I have seen in my career. And look, that doesn’t even include the value that we got for free with the adjacent dirt and the parking, right. So, we are super excited. I know this is a contrarian view, and we shouldn’t be buying office because everyone says all office is dead, but the results in our portfolio speak otherwise. And the opportunity to drive value creation for our shareholders is at the top of the list and higher than just about any other opportunity we have seen in our portfolio over the past couple of quarters. And as a result, we couldn’t pass on.

What was that initial cap rate on the acquisition? David O’Reilly: I don’t believe we have reported that due to the confidential nature of our purchase and sales agreement with the seller. I think next quarter when you actually see the NOI as we reported in the supplemental, everyone will be able to back into what we think is a cap rate at 55% that looks and smells and feels like a market cap rate for a full building.

It sounds good. Alright. Thank you. David O’Reilly: Thanks John.

Thank you. One moment please for our next question. And our next question comes from the line of Peter Abramowitz with Jefferies.

Thank you and thanks for the time. Just a question on the MPC and the full year guidance, you kept that maintaining that in the same range. And you kind of seem to be on track based on your earlier comments from earlier in the year about the super pad sales in Summerlin. I guess just taking a step back, what would make you comfortable or what would you need to see to sort of raise that guidance, particularly given how strong second quarter was? David O’Reilly: Look, I think that we would have to see an acceleration of new home sales, which would lead me to believe that builders would want to buy more dirt than what I think they currently have the appetite for it. I think there is another factor that led into us keeping guidance where it is, is the flattening or the slowing of increased home prices, right. Over the past 2 years, Peter, if you go back to our MPC EBT, a meaningful component of that MPC EBT has been increased builder price participation, largely the result of the acceleration of home pricing across our communities. As that acceleration is slowing and home prices are modestly increasing or staying flat, builder price participation is coming down. And therefore, our MPC EBT guidance is largely driven by just price per acre and number of acres sold, which is highly correlated to underlying home sales. And while home sales are strong, they are also delivering a record year for us of residential land sales across the portfolio, which is what’s implied in that guidance. Again, I think an increase in home sales and an increase in demand from builders from more dirt could give us the confidence to increase that guidance or a sharp uptick in price of the homes, which would give us confidence in builder price appreciation.

Okay. That’s helpful. Thank you, David. And then one other, I guess John sort of asked it, but to look at it from maybe a longer term perspective. Your 83%-ish occupied in office today and in the high-80s from a leased occupancy perspective, I guess just as you look at your office portfolio overall, kind of with the market sort of seeming to inflect maybe slowly, but at least is getting better, how should we think about kind of stabilized long-term occupancy potential in the office portfolio? David O’Reilly: Well, I think that downtown here in the Woodlands were at 96%. Overall, the Woodlands were about 90% and the vacancy is concentrated in some great buildings that one used landing that unfortunately had some bankruptcies. I can imagine our Woodlands portfolio is easily getting into the low-90s and maybe not back to the 96%, 97% that we enjoyed pre-pandemic, but absolutely it’s low-90s. Across Vegas, we are already at a really stabilized occupancy level with one, two Summerlin and 1,700 almost entirely full. And what’s not leased is in negotiation right now. I think it’s about 95%. So, I think we can say 95% forever, I hope so, but that’s a pretty fancy number. And then we have a bit of vacancy concentrated in the Columbia portfolio. And the Merriweather roll assets, the newer assets are almost entirely full. It’s really the corporate roll assets, the older assets that have some vacancy as the smaller tenants there have decided to work from home in greater numbers than what we see in the other areas of our portfolio. And I would tell you that over the past 90 days, to your point in the question that you asked, we have seen a little bit of inflection where we are seeing more new incremental demand than we are seeing downsizing in move-outs. And that’s a nice turn that we haven’t seen in that older Columbia office buildings. It’s been a minute since we have seen that. So, it’s nice over this past quarter to see some incremental demand that we think will drive that higher over the coming quarters.

Alright. That’s all for me. Thanks. David O’Reilly: Thank you.

Thank you. One moment please for our next question. Our next question comes from the line of Alex Barron with Housing Research Center.

Yes. Thank you. I wanted to ask about the timing of condo closings. Victoria Place, I believe has started – is scheduled to start in the fourth quarter, but I was wondering, do you anticipate most of the closing to happen in that quarter, or will it a lot of them spill over into 2025? David O’Reilly: So, Alex, I think it’s a good question, and it’s one that I believe Carlos tried to mention in his prepared remarks. One of the things that we did with our guidance this quarter was increase our condo sales revenue guidance. And a piece of that increase – a meaningful piece of that increase is that we expect less of the Victoria Place closings to be in 2025 than we previously did. Our previous guidance expected $75 million of condo closings from Victoria Place to fall into 2025. And today’s new guidance contemplates approximately $30 million to $50 million. So, the construction there is going very well. We have a lot of confidence in our buyers there. It’s 100% sold out that we think that we can get the vast majority of those units done in 2024 and less and less potentially slipping into 2025.

Okay. Thanks. And then on the next tower, Ulana in 2025, do you have an approximate quarter when that one is scheduled to close? And is my understanding correct that, that one will be maybe breakeven or a slight – no profit because its workforce? David O’Reilly: Correct. Your inclination Ulana, is a workforce set, and it’s not a profit driver. It’s a breakeven-ish tower. I think that when we provide guidance for 2025, we will be able to give you some better timing on when to expect those closings. But again, that will be a cash benefit, but not an earnings benefit as you highlighted, that is the workforce housing tower.

Okay. Awesome. And then if I could ask one more. On Summerlin, you guys usually sell one big chunk of super pads. Historically, I think it’s been more in the fourth quarter, but this time, you had a big sale this quarter. So, does that mean there is going to be potentially not that much more revenues coming out of Summerlin in the back half of the year or not necessarily? David O’Reilly: No. I believe that we will see a very strong third quarter in Summerlin. We have more like more super pads sold that will give us a great third quarter. I think that the fourth quarter this year, unlike as you highlighted, the past several years, the fourth quarter has kind of been a big quarter for someone, may be quiet because of the acceleration of take-downs of these super pads by our builders and are desperate for land to meet that demand that’s in the market and let them to close on these pads and want to start in their portfolio in the second quarter and third quarter.

Got it. Thanks so much. David O’Reilly: Appreciate it, Alex. Thank you.

Thank you. I will now hand the call back over to CEO, David O’Reilly, for any closing remarks. David O’Reilly: We appreciate everyone’s participation as always and hope that all of you can join us for our Investor Day is right around NAREIT this November in Summerlin. And maybe we should have all of our earnings calls on Friday morning because I think we have more questions today than we have had in a long time. Really appreciate the participation. Thanks for all of your interest. And if there is any follow-up questions, we are always available. Thank you.

Ladies and gentlemen, thank you for participating. This concludes today’s program and you may now disconnect.