The Howard Hughes Corporation (NYSE:HHC) Q2 2023 Earnings Call Transcript

The Howard Hughes Corporation (NYSE:HHC) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Good day, and welcome to The Howard Hughes Corporation’s Second Quarter 2023 Earnings Call. [Operator Instructions] I’d now like to turn the conference over to Eric Holcomb, Senior Vice President of Investor Relations. Please go ahead, Sir.

Eric Holcomb: Good morning, and welcome to The Howard Hughes Corporation’s second quarter 2023 earnings call. With me today are David O’Reilly, Chief Executive Officer; Jay Cross, President; Carlos Olea, Chief Financial Officer and Dave Striph, Head of Operations Before we begin, I would like to direct you to our website, howardhughes.com, where you can download both our first quarter earnings press release and our supplemental package. The earnings release and supplemental package include reconciliations of non-GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP financial measures. Certain statements made today that are not in the present tense or that discuss the company’s expectations are forward-looking statements within the meaning of the federal securities laws.

Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statement disclaimer in our first 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. With that, 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’ll begin with a recap of the quarter and cover the segment highlights for our master plan communities and for the Seaport; Dave Striph will cover our operating assets; followed by Jay Cross, who will update our development projects in Ward Village. Finally, Carlos Olea will review our financial results and provide an update on our full year guidance. For the second quarter I am pleased to report that our company performed incredibly well and experienced improved underlying demand across our world-class portfolio of assets. Looking quickly around the segments, we delivered solid MPC EBT which was highlighted by continued strong land sales at attractive prices in our used in MPCs. We also saw a sharp increase in new home sold, a leading indicator of future land sales providing increased confidence for robust land sales activity in the coming quarters.

Our operating assets delivered exceptional financial results when continued outperformance, and office leasing and record quarterly results in multi-family. At Ward Village, buyer interest for our premier condos remained strong. In the quarter, we contracted to sell 43 units, representing 27% of all available inventory, which now stands at only 116 units. Finally, at the Seaport, the start of our summer concert series on the rooftop, which has been a tremendous success thus far in the year, yielded significant sequential increases in foot traffic across the district and improved financial results. Overall, these favorable dynamics in each of our segments have provided a solid footing at the halfway point of the year, paving the way for a robust second half outlook and increased full year guidance expectation for our MPCs and operating assets.

In our MPC segment, we experienced a 23% year-over-year decline in EBT primarily due to the timing of super pad land sales in Summerlin. Despite this reduction, we saw a significant increase in new homes sold in each of our MPCs, strong builder price participation and continued strength in price per acre. We also continued to experience strong homebuilder demand for new residential land, contracting on parcels at near record prices across our MPCs, much of which has not yet closed. All of this leads us to believe that the second half of 2023 will deliver excellent land sales. Big picture, the resurgence in new home sales that began in the first quarter continued with a total of 605 homes sold in our MPCs. This represented a 39% increase compared to the prior year and was primarily related to Bridgeland, which nearly doubled its new home sales and is currently on pace to sell a record number of homes in 2023.

In our other MPCs, our new home sales in the Woodland Hills increased by more than 50%. And Summerlin increased nearly 20% year-over-year. With these strong sales results, Summerlin and Bridgeland both moved up in the midyear RCL co top-selling MPC rankings, capturing the number five and number six spots respectively. Ultimately, this significant growth in new home sales, combined with strong underlying fundamentals, points to a strong second half of 2023. While increased mortgage rates have negatively impacted demand nationally, our MPCs have remained resilient, as evidenced by the strong uptick in our underlying home sales this year. While overall home affordability has undoubtedly been impacted by higher rates, what we’ve seen in our communities is that many homebuyers looking to purchase a home have simply adjusted the size of their purchase.

With that, the average size of the homes sold has declined, but the price per square foot has actually increased modestly, helping to keep the value of our land intact. Just as importantly, the increased rate environment has meaningfully reduced resale inventory, as homeowners with below-market mortgage rates are reluctant to sell their homes. This has forced homebuyers to gravitate to the new home market, which now represents approximately 35% of all homes sold or a significant increase from the historical norms of 10% to 15%. Ultimately, this has translated into a significant boost for homebuilders and is driving demand for our land. Put more simply, the increase in interest rates has impacted both demand and supply, deepening equilibrium in land pricing and driving favorable demand for new land.

As a result, we expect a material increase in land sales during the second half of the year. This will drive 2023 MPC EBT higher and gives us confidence to meaningfully increase our full year guidance expectations. Carlos will provide some more detail on those new expectations in a few minutes. Quickly shifting over to the Seaport, revenues declined 19% year-over-year, primarily due to nonrecurring COVID recoveries and special events in 2022. This contributed to $2 million reduction in NOI before equity investments. Compared to the first quarter, our results improved materially as we experienced a significant 89% increase in foot traffic. This growth was led in part by our summer concert series on the rooftop, which is off to its best start to date.

We’ve sold over 170,000 tickets, representing over 85% of available ticket inventory. Overall, revenue increased 92% compared to the first quarter, which contributed to a $3 million sequential improvement in total Seaport NOI. At the Tin Building, customer demand and click traffic increased. We continue to implement operational improvements as we refine the marketplace’s overall operating model, which resulted in elevated operating costs during the quarter. The full-service signing has performed strong, but the retail fast-casual dining and e-commerce have lagged expectations. We remain intently focused on driving this one-of-a-kind venue towards stabilization, and we are confident that we are on the right path to deliver meaningful financial improvements in the coming quarters.

However, it now appears unlikely that we will be able to stabilize the Tin building in 2023 and do not expect it to be profitable this calendar year. I’d now like to hand the call over to Dave Striph to review the performance of our operating assets.

Dave Striph: Thank you, David. And 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 in net operating income, a 3% increase from the same quarter last year. On a same-store basis, NOI increased 4% year-over-year with meaningful growth in our office and multifamily portfolios. We also experienced strong leasing activity across the stabilized portfolio with year-over-year and sequential improvement in lease percentages in each of our three core property types. Most significant improvement was seen in our office portfolio, which generated second quarter NOI of $34 million. This reflected a $4 million or 13% year-over-year improvement and was primarily the result of a onetime lease termination fee, strong lease-up activity and rent abatement expirations in the Woodlands.

These increases were partially offset by some lease expirations at some of our older assets in Downtown Columbia. Similar to recent quarters, our premier Class A office assets continued to outperform the market as companies continue to prioritize highly amenitized workspaces in desirable locations. In the quarter, we executed new or expanded office leases totaling nearly 200,000 square feet, including 167,000 square feet just in the Woodlands. We also renewed over 180,000 square feet of office space during the quarter. This strong leasing performance brought our stabilized office portfolio to 89% leased at quarter end, substantially higher than market when compared to the surrounding metro regions of Houston, Las Vegas and Baltimore-Washington.

Multifamily portfolio delivered record quarterly NOI of $13 million, representing a 10% year-over-year improvement. This growth was primarily driven by 6% average in-place rent growth and favorable contributions from Starling at Bridgeland and Marlow, our newest multifamily developments. Both of these properties, which were fully completed less than one quarter ago, are exceeding expectations with Starling already 80% leased and Marlow 47% leased. Overall, our stabilized multifamily properties finished the quarter at 98% leased with Downtown Columbia at 99%, Houston at 97% and Summerlin at 96%. In retail second quarter NOI was just under $13 million reflecting an 11% reduction compared to the prior year. This decline was primarily related to one-time COVID related recoveries at Ward Village in the prior year, as well as the closure of two Ward Village retail centers to make way for The Park and Ulana condominium projects.

Despite this reduction, our retail portfolio performed well; it was 96% leased at quarter end representing a 3% year-over-year improvement. With that, I will now turn the call over to our President, Jay Cross.

Jay Cross: Thanks David, and good morning everyone. I’ll start this morning with an update on Ward Village in Hawaii where we continue to see strong demand for our premium condos during the quarter. In the quarter, we contracted to sell 43 condos leaving us with only 116 units remaining to sell at our current projects. First, looking at ‘A’ali’i and Ko’ula recent price reductions implemented to close out remaining inventory, which represent approximately 3% of the total units in these buildings have been very successful. While our sales initiatives have resulted in slightly reduced revenue and gross margins on units sold, overall gross margins achieved and the two projects have been minimally impacted. For the quarter, we contracted 22 units and sold 15 units, and as of June 30th, ‘A’ali’i was 99% sold and Ko’ula was 98% sold.

At our towers in development construction of Victoria Place continues to progress nicely. This tower, which is already a 100% pre-sold is expected to be completed next year. At the Park Ward Village and Ulana which are underway and expected to be completed in 2025, we contracted a total of 10 units bringing these towers to 93% and 99% pre-sold respectively. And finally at Kalae we contracted 11 condos making this tower 83% pre-sold. We expect to commence construction on this project later in the year. Incredibly, these four towers combined were 92% pre-sold before construction had even begun. This is a strong testament to the strength of our Ward sales and marketing team. Upon completion, these towers will represent more than $2.5 billion in future revenue, which will be recognized between 2024 and 2026.

In the mainland in Nevada we completed the finishing touches at Tanager Echo, our new 294-unit luxury multi-family development in downtown Summerlin. This project was substantially completed in early July and we recently welcomed our first residence. We also continue construction efforts at the Summerlin South Office, a 147,000 square foot three story office complex. Pre-leasing efforts recently began and we expect to complete the building early next year. In Bridgeland, we are making exceptional progress with the development of Wingspan, our single-family for rent development. This project is slated to welcome its first residence later this year. And finally in Downtown Columbia, construction of South Lake medical is moving along nicely. This 86,000 square foot medical office building is seeing strong demand and is currently 21% leased with the balance of the building either in letter of intent or act of negotiation.

We expect to complete the project in early 2024. Overall, these four strategic development projects are expected to generate stabilized NOI of more than $18 million for our operating assets with a combined yield on cost of approximately 7%. While these new developments will be meaningful contributors to our recurring NOI and value creation for our shareholders, the market has shifted meaningfully over the past few quarters. Increased construction costs and operating expenses have outpaced growth in rental rates, meaningfully impacted anticipated returns on new developments, combined with higher interest rates and a more challenging lending environment it’s possible that announcements of new developments could slow down in the near term. That’s not to say we are pencils down.

In fact, we are the exact opposite. Our development teams in each region are actively engaged in pre-development so that once the market returns to a more normalized environment, we’ll be ready to go. And with that, I would like to now turn the call over to our CFO, Carlos Olea.

Carlos Olea: Thank you, Jay, and good morning. I’d like to start off today with a written announcement regarding our holding company reorganization. This new structure is expected to promote the growth of our business, provide the company with additional financial flexibility to fund future opportunities and segregate our real estate and non-real estate assets and related liabilities in separate subsidiaries. Effective this Friday, August 11th Howard Hughes Holdings Incorporated will become the new parent company and our stock will trade under the ticker symbol HHH on The New York Stock Exchange beginning next Monday, August 14th. Each outstanding share of HHC common stock will automatically convert into one share of HHH common stock.

However, our strategic plan, our Board and Management Team and our focus on long-term value creation remain the same. Turning to our full year guidance because of our robust year-to-date results as well as our favorable outlook for the second half of the year we have increased our expectations for MPC EBT and operating assets NOI. In MPC, anticipated increases in residential land sales particularly in the fourth quarter are expected to drive significant improvement in EBT for the full year. As a result, we now expect EBT to be flat to down 10% year-on-year. This compares favorably to our prior guidance of down 25% to 35% and represents an increase at the midpoint of approximately $70 million. In operating assets exceptional financial and leasing performance across our entire portfolio has resulted in increased NOI expectations for 2023.

Excluding the prior contribution from divested retail assets, operating assets NOI is now expected to be in a range of up 1% to 4% year-over-year. This is an improvement from our prior guidance of down 2% to up 2%. In Ward Village as Jay mentioned, sales initiatives to close out the remaining condo inventory at ‘A’ali’i and Ko’ula have been very successful. As a result of the reduced pricing we now expect 2023 condo sales range between $40 million and $45 million with gross margins of 10% to 13%. This reduced margin have only impacted 3% of all units in this tower and overall margins for the two projects remain aligned with our historical 25% to 30%. And finally, our cash G&A guidance remains unchanged at $80 million to $85 million.

With respect to divestitures, subsequent to quarter end we sold our two self-storage facilities in the Woodlands, for a combined price of approximately $30 million. This resulted in a sizable gain on sale totaling $16 million, which will be included in our third quarter results. Shifting to the balance sheet; we ended the quarter with $389 million of cash. Together with anticipated cash inflows for MPC landfills in the second half of the year, as well as the proceeds from the sale of our two self-storage facilities in the third quarter, we are well positioned to put capital into our development pipeline. At the end of the second quarter, the remaining equity contribution needed to fund our current projects was $223 million. From a debt perspective, we have $4.9 billion outstanding at the end of the quarter with only $273 million of maturities through 2024 and approximately 86% due in 2026 or later.

Additionally, 98% of our debt remains fixed, capped or swapped to a fixed rate. As Dave mentioned, that those markets for new developments are challenging, and in some cases are delay in the start of certain development projects as we wait for loans to close before breaking ground. Despite these issues, we are having success closing new loans, including a $28 million construction loan for the development of the South Summerlin Office. This loan bears interest at sulfur plus 2.35% and has an initial four-year maturity. Additionally, we are currently documenting a new multifamily construction loan for a project in our pipeline as well as some refinancing on existing properties, which we expect will close later this year. With that, I would like to turn the call over back to David for closing remarks.

David O’Reilly: Thank you, Carlos. Before we open up the call for Q&A just a couple of closing thoughts. First, the new home market is back and we significantly increased our full year MPC EBT guidance to a level that is closely aligned within 2022s near-record results. The exceptional financial results and leasing performance of our operating assets are a testament to the quality of our world-class portfolio of mixed-use assets, which continued to outperform in their markets. This has resulted in increased 2023 NOI guidance and our strong lease-up, particularly in office will help to drive this segment closer to stabilization in the years ahead. And finally, we have several construction projects nearing completion as well as a robust development pipeline that will inevitably grow our stream of cash flow in the years ahead, continuing the perpetual cycle of value creation that differentiates Howard use.

Overall, we see a very positive future, and we are excited for the growth and value creation opportunities that lie ahead. With that, let’s start the Q&A portion of the call. Operator, can you please open the line for our first question?

Q&A Session

Operator: [Operator Instructions] First question will be from Alexander Goldfarb, Piper Sandler. Please go ahead.

Alexander Goldfarb: Hey. Good morning down there. Just a few questions, David. The first is out in Hawaii, you guys discounted a few condo units, I think, sort of to clean-up the remaining inventory. If you could just provide a bit more color on that. Usually, those condos sell like hot cakes and I think except for the original Waiea, some of those Uber priced units that sort of languished, I think all your other product out there has sold fairly quickly. So maybe you could give just a bit more insight into the rationale to discount and then the impact to economics. And also, you guys raised price along the way, so just curious when you look at the whole sellout, given where you originally pro formed versus where you ended up, net of the cleanup units, what the math looks like?

David O’Reilly: Yes. No problem, Alex. It’s a great question and your memory serves you very well in that for the overwhelming majority of the towers we’ve delivered, we’ve delivered them almost entirely sold out when we’ve closed and completed construction. For ‘A’ali’i and Ko’ula, which were incredibly successful for us, we had some standing inventory at the beginning of this year, and we really wanted to move it by the end of the year as we’re getting to launch our next tower. And the inventory that we had represented less than 3% of the units in those entire buildings. And once they’re completed and up there and kind of standing inventory, we have continuing expenses in terms of HOA and real estate taxes, so from an NPV perspective and from a competition perspective when we launch a new tower, we thought it would be best to sell that standing inventory quickly.

To do so, we put together a modest pricing discount relative to where they were previously. And those previous pricing, as you noted had been increased multiple times along the way. And we thought it was prudent to move them and get it done. From an overall economic standpoint, it really doesn’t move the needle. When you sell 97% of your units to 25% to 30% margins and the last 3% at half of that you’re still generating 25% to 30% margins for the entire building, and you’re not sitting on any standing inventory. So for us we thought it was a prudent decision and one that we moved on quickly, so that we could get those buildings completely closed out and turned over to unit owners and residents that are continuing to dine, shop and experience all the benefits that Ward Village has to offer.

Alexander Goldfarb: Okay. Next question is down at the Seaport. I appreciate your comments that taking a little longer. I don’t think that really surprises. But my question is more on ESPN. You guys have a big studio there. Obviously, ESPN has been in the news for downsizing. I’m not – I think their lease comes up soon. I think, maybe I’m wrong, but maybe you could just give some comments and color around that. And then if you did have to backfill them where you think rents would be today versus what you’re getting from them?

David O’Reilly: And so the lease with ESPN goes through December of 2025. And we’ve been in ongoing discussions with them on potential extension shorter term in nature as they figure out their long-term plans, which I don’t think they have a full grasp on sitting here today. With that said we think studio space and completely built out studio space is highly valuable. And we don’t worry about backfilling that space given the incredible views, its location and the energy and dynamic environment that we’re seeing every day down at Pier 17. From a mark-to-market rent perspective, it’s kind of early for me to opine on that, considering we wouldn’t be thinking about it until the earliest of December 2025; but given that it’s fully built out studio space in its location, we’re not open to taking a discount.

Alexander Goldfarb: Okay. And then just finally, on the re-org, sorry to see the HHC ticker go away, we got used to it. But can you just give a bit more color? I mean, you guys have been public for well over a decade. Just sort of curious what drove this. And certainly, David, you’ve done a lot to simplify the company from what it was. So was this rating agencies? Was this the debt markets? Like what sort of drove this? Because usually, like debt documents are pretty specific on the cash flows that are tied to it or if it’s a corporate entity, it’s from the whole – so just a bit more color. And then is there any additional cost to G&A that we should be modeling as a result of this re-org?

David O’Reilly: I’ll take that in reverse order because it’s much easier. There’s no incremental G&A. Everything that you know about Howard Hughes yesterday will be the same as with Howard Hughes tomorrow, next week and next month. The Board Management strategy, nothing is changing. This is really just a structural change in the company that allows us to segregate real estate assets from non-real estate assets and keep the results of non-real estate assets away from the covenants of our debt. And it’s something that I’ve been thinking about personally since about 18 months ago when we made the investment in Jean-Georges and the 25% passive investment in his restaurant business and the results of that are impacting our bond covenants and some of our debt covenants.

And it’s just cleaner if we could figure out a way to put it separate in a size, and this structure allows us to do that and potentially think about other non-real estate assets like the baseball team and thinking of whether or not that would fit in HHH away from the traditional real estate assets of HHC. So it’s really – it’s formal for substance, I wouldn’t read into this. Please don’t take the comment of us thinking about major acquisitions or things away from what we traditionally do. We have simplified the company. We take great pride in the simplification that we’ve done and the focus that we have, and that is not changing one bit.

Alexander Goldfarb: Thank you.

Operator: Thank you. Our next question will be Anthony Paolone from J.P. Morgan. Please go ahead.

Anthony Paolone: I guess follow-up on Alex’s last question there on the homecare structure, is there anything imminent that prompted the decision to do this now? I know you guys have been in the press a bit with regards to potential studios in the Las Vegas market. I just didn’t know if it’s tied to that at all?

David O’Reilly: No. No, I think the press that’s been out there and the work that we’ve done on trying to create studios in the Las Vegas market is very consistent with what we do. Its built real estate to meet the demand, increase the population in jobs within our community, and we think film production is an incredible way to do that in Summerlin. Our role in that would be owner of the real estate landlord. We are not getting into the production business. So this really had nothing to do with that, Anthony. And it’s really just kind of as I answered it with Alex. It’s just a structuring nuance where we can keep non-real estate assets away from real estate assets; I don’t anticipate us bringing in any more non-real estate assets in the production business.

Anthony Paolone: Okay. Got it. And then second question, with regards to the builder price participation, is that coming from the super pad site largely that was done a little while ago in Summerlin? Or is it from other areas? And is just is there like sort of a backlog of builder price participation income that you’re seeing that’s helping drive the guidance here?

David O’Reilly: I would say, so to answer your first question the builder price participation is largely coming from Summerlin. But there is some builder price participation in the Woodlands – Bridgeland and Woodland Hills but the majority of it comes from Summerlin. And that, as you noted comes from super pads that were sold in some instances, 12 to 18 months ago. Our increased guidance is not necessarily the result of our expectation for future builder price participation because we tend not to model continued increases in home prices that would drive that in today’s rate environment. That increase in guidance is largely driven by incremental land sales, more acres at higher price per acre than we expected a quarter ago.

And that’s driven by the incredible velocity of home sales that we’ve experienced throughout the first six months of this year that has candidly defied our expectations. And I think it’s pointed to how incredible, the environment that we’ve created within these master planned communities are that we’re continuing to see elevated new home sales in a more difficult market for buyers.

Anthony Paolone: Okay. And just I can sneak one last one in. Just in office you mentioned the termination fee there. Just can you tell us what the dollars were in square footage? And just trying to understand how much that helped on the guide?

David O’Reilly: Yes. That – the termination fee was less than $3 million. It wasn’t huge. It was for a tenant that signed a lease, a 10-year lease that never moved in. It was about 27,000 square feet, great space in used landing, and we’re already negotiating a lease for the backfill.

Anthony Paolone: Yes. Great. Thank you.

Operator: Thank you. Next question from John Kim, BMO Capital Markets. Please go ahead.

John Kim: Thank you. I’m a big fan of the HHH ticker. I had a question on the condo sales and in I would say in particular the window of remediation costs that you had during the quarter. I know you’re looking to realize – recover some of these costs, but is this a onetime expense this quarter or is this something that could be recurring?

David O’Reilly: No, this is it. So we had a meaningful expense two years ago when we initially undertook these repairs. And these repairs were led by the homeowners of Waiea that we’re funding. And we are jointly pursuing recovery of those funds. This last bit of it was the overages that came in as the result of over a year of remediation and repairs and the inflationary environment that drove costs higher than our original expectation. Those repairs have been closed out, and I’m knocking on wood. I do not expect any more, definitely no more from Waiea and hopefully no more from many of the other towers as we’ve haven’t seen any recurrence of these type of problems.

John Kim: Okay. At Seaport, what surprised you at Tin Building this year? I know up to this point, it’s been mostly on the expense side, but I was wondering on the revenue side, that’s disappointing as well?

David O’Reilly: No. I’d say that on the revenue side consistent with our prepared remarks, we’ve seen remarkable success in the sit-down restaurants and the full service restaurants, Rosary, House of the Red Pearl that have met and exceeded our expectations. I’d say where our expectations have not fully been met has been really associated with the quick service dining, the retail and the e-commerce that has been slow to be adopted. We are working real time with our partners and with Jean-George and his team to implement changes to bring those back to our expectations. It takes time, and sometimes those changes create some short-term costs that we saw flow through the P&L right now. And as those changes get fully implemented, we expect those operating expenses to come back down at the line and hopefully realize the revenue that we expected going in.

With all that said, the foot traffic has never been higher at the peer. The bodies coming through the Tin Building have been nothing short of exceptional in terms of the number of people and the overall excitement around the building. Given that – given the excitement of the concert series, given how many people are coming to the Seaport every day, we know there’s an incredibly successful outcome here. And it’s just about modifying and maximizing the product mix and offering to drive the revenue and get to profitability.

John Kim: On the content care, I know it’s not a huge dollar amount, but last year second and third quarter, it was profitable on an NOI basis this quarter was slightly negative. Do you expect that to turn around in the third quarter this year?

David O’Reilly: Yes. I mean last year, in the second quarter, we had ABEST [ph], which was a four-day buyout by the [indiscernible] that was incredibly profitable for us. That didn’t happen again this year, maybe that’s a result of the slowdown in the NFT market, I don’t know. We’ve had some – a lot of other events and a lot of other buyouts, but we haven’t been able to recreate the amount of money that we made in those four days. I expect in the third quarter, we’ll see similar results to this quarter and perhaps slightly higher as the number of events pick up in 3Q compared to 2Q.

John Kim: Okay. And just one final question on Teravalis; just wanted to get an update on whether or not you expect any settlements this year?

David O’Reilly: Yes. We do. We do think that we’ll see probably 500-ish lots by the end of this year. It’s slightly down from our initial projections, but that’s really the delay of a quarter or two, which has really been driven by supply chain delays and delivering the infrastructure. The buyer appetite is strong. We have a lot of the same builders that we’ve talked to in Summerlin every day that want to buy lots from us in Teravalis, and those negotiations are ongoing. As soon as we can get the infrastructure in place to deliver those lots, we expect to announce those contracts.

John Kim: Great. Thank you.

David O’Reilly: Thanks John.

Operator: Thank you. Next question will be from Peter Abramowitz of Jefferies. Please go ahead.

Peter Abramowitz: Yes, thank you. I was wondering, could you just dive in a little bit more on kind of the breakout between your expectations for pricing and volume associated with the guidance raise in MPCs. It seems like the pricing has been pretty strong. So, just kind of wondering how you would quantify the pickup in volume that you’re expecting in the second half?

David O’Reilly: I would say that our expectations in terms of pricing per acre would be largely consistent with what we’ve experienced in the first half of the year. And that the delta and the increase in midpoint of guidance of about $70 million is going to be driven by increased the number of acres at a similar price to what we’ve experienced.

Peter Abramowitz: Got it. That’s helpful. And then could you just touch on – you called out in the earnings release or reduction in sponsorship revenues at the ballpark in Vegas. Can you just touch on what drove that?

David O’Reilly: Yes. I think that when we first opened the ballpark in about 2019, we were the only professional sports team in Las Vegas. And now we have the Golden Knights, the Aces, the Liberator [ph] and soon to be the Oakland days. And I think that increased competition has created some temporary headwinds. I do see that business coming back strong, and we’ve seen some increased activity there over the past 60 days. So I think we can close that gap pretty quickly. We are still leading Minor League Baseball in attendance and ticket pricing and we couldn’t be more happy with the performance of the Aviators and what they’ve done, not just within the stadium, but what they’ve done to the overall community, what they do to the Downtown Summerlin shopping, dining and experience for the 70-plus nights that they’re there.

So we think they’re performing very well. They continue to drive great outcomes across the entire community of Summerlin. And as a result, I think that we’ll be able to pick up that gap and hopefully see that revenue come back on the sponsorship side.

Peter Abramowitz: Got it. And then one last one, any large expirations coming up in either office or retail? And could you give an update on where you stand with those and expected move-outs, or where do you stand in the renewal process?

David O’Reilly: Well, I think the exploration chart that we have in the supplemental shows pretty modest expirations across both office and retail. I would say the one area of focus for us, and it’s honestly an area of opportunity more than anything else is Downtown Summerlin. In Downtown Summerlin, which as you know, is about one million square feet of retail, we’re coming up on our ten-year anniversary of developing that asset. And as a result, in 2024, but more so in 2025, we’re seeing some meaningful expirations there, and it’s allowed us to think very strategically about which tenants we want to renew and which tenants we’re going to pursue better performing retailers. And with every time we’ve had a vacancy in that property, and I think we’re still 98% or 99%, eased right now, we’ve been able to backfill it with better credit, better quality, higher traffic, higher sales per foot, and we don’t think the expirations in 2024 and 2025 will be any different than what we’ve done over the past two years.

Peter Abramowitz: Got it. Thank you.

Operator: And your next question will be from Alex Barron, Housing Research Center. Please go ahead.

Alex Barron: Yes, thank you. I wanted to ask on the – given the discounts and the condo tower units this quarter, is that one affect the expected gross margins for the future towers?

David O’Reilly: Absolutely not. In fact, we’ve continued to increase pricing on those towers that are in presales or under construction and the only discounting we did was in Ko’ula and ‘A’ali’i, which were buildings that we’ve completed and turned over and had standing inventory. Those new towers, we haven’t increased prices in Victoria Place that sold out, I can’t – but on the other towers, we absolutely have.

Alex Barron: So are those gross margins still expected to be in the mid- to high-20s.

David O’Reilly: 25% to 30% is what we’ve publicly said, and we don’t expect those towers to be any different.

Alex Barron: Got it. And then can you explain what’s going on in Teravalis. I saw this other Floreo. Is that a new piece of land? Or is that just a subdivision of the expected – of the existing land? And if so, is that the plan to just subdivided in – because I saw in that one, it seems like you guys own 50%, whereas I thought you owned a higher percentage of Teravalis. So can you just give us more details on that?

David O’Reilly: Yes, absolutely. So nothing has changed, first of all. So this is very consistent with when we initially bought the property, the property of Teravalis has our expectation, we’ll have multiple villages as all of our master planned communities do. And Floreo is the first 3,000 acres, the first village of the 37,000 acres of Teravalis. And that first village of 3,000 acres does have a different ownership percentage, and that’s been consistent from the day that we acquired it. And there’s really nothing new there other than that’s the first village that we’re building and we’re looking forward to contracting our first lots later this year.

Alex Barron: So to do the math, basically whatever 500 lots or whatever you guys sell there this year, those revenues we should just divide them in half, and that’s your share?

David O’Reilly: Yes.

Alex Barron: And for future villages, are they going to be going on simultaneously? Will they necessarily be at similar economics or will there just be kind of sequentially like after this one is done, then the next one starts.

David O’Reilly: Well, look, we tend to go sequentially. But as you can see, like Bridgeland is a great example where we have four villages – and our HHC quarterly Spotlight video that Jim Carmen walks through Bridgeland, we talk about the four villages that we have. We’re actively selling in three of the four right now, and the fourth one is sold out. So we don’t wait until one is completely sold out to start the next. We kind of stagger them in. So as we see the time line for one winding down, we’re ramping up the next village. And each one of those villages has slightly different characteristics, a slightly different personality, if you will, different village centers, different community centers. And it allows us to adjust home sizes, pricing and styles to maximize absorption and meets a greater number of consumers out there looking to buy a new home.

Alex Barron: Okay. Very good. I appreciate the explanation. Thanks. And good luck.

David O’Reilly: No worries.

Operator: Thank you. Next question will be from Hamed Khorsand, BWS Financial. Please go ahead.

Hamed Khorsand: So first question I had was, how are you adjusting planning and development, given the interest rate environment? And can you self-fund the big portion of this? And if so, how much does that slow down your development plans?

David O’Reilly: Yes. I would tell you that both Carlos and Jay mentioned this in their prepared remarks. And clearly, the lending environment is very challenged right now and even more so in the construction area. We’ve been lucky that we’ve been able to secure some good loans that were in the process of closing right now. And when we do, we’d be happy to talk about them and provide more detail on those. I don’t see us pushing forward a development deal or a pipeline completely unlevered and 100% of our equity into those deals. It just won’t generate the returns that we need, and it puts a little – in some instances, too many eggs in one basket. So, we’re going to be thoughtful. We’re not going to start construction on projects until we have those loans closed and done, as Carlos mentioned.

And as Jay said, would this potentially slow down or temper our development pipeline? Sure. But we are not pencils down. Our teams are working around the clock on predevelopment plans of lots of new multifamily, some office, some retail, even some studios so that we’re ready to go. The moment that we’re able to get that construction loan, the moment we’re able to see economics that provide an outsized risk-adjusted return for our shareholders. And we’re not waiting for the market to come back to start planning. We’re planning and we’re going to have those things waiting on the starting line. And as soon as that gun is pulled, we’re off. So I think right now, while the lending environment is challenged, yes. Our new development starts will slow down, but I think that just means that we’ll see a lot of activity as that market comes back.

Hamed Khorsand: And to your earlier comments about operating asset NOI going up, is that purely because you’re raising prices? Or are you seeing natural demand continue as you’ve commented in the past years?

David O’Reilly: So we’re seeing a number of different factors impact the improvement in operating asset NOI. Within office, we’re seeing lease-up of vacant space, specifically in the Woodlands and a tower we bought completely vacant at 99.50 would look for us, which is now 91% leased and all the remaining vacancy under NOI. So the office has been a story of absorption and a migration of companies into our communities because they’re chasing well-educated employees that have relocated to the Woolands to Summerlin. In multifamily, it’s been the lease-up of new developments and the continued improvement in same-store results and increased lease rates across the portfolio. And in retail, while this quarter was down year-over-year as a result of COVID payments the previous year in Ward Village, the continued absorption and turnover of tenants like I talked about in Downtown Summerlin from weaker performing tenants to better performing tenants and signing more luxury brands are continuing to drive those NOIs higher.

So it’s not a one-size-fits-all. I think it’s unique to each property type within our master plan communities. The overarching theme has been that our communities have performed incredibly well coming out of the pandemic. The momentum that we saw continues. More residents are moving in, more companies want to be there, more retailers want to be there and more tenants want to be in our multifamily building, these are the quality of life that we can offer. And that’s materializing in our recurring NOI, and we expect that theme to continue.

Hamed Khorsand: So just going back to my original question, why not just harvest all this cash flow that your properties generate and pay down debt and just wait out the current cycle on the debt market.

David O’Reilly: Well, look, we very much enjoy the competitive advantage that we have by being the dominant owner of office and multifamily in our communities. And if I sold those buildings, when I go to build the next one, I have competition. I don’t like competition. I like having that dominant market share because it drives better results of our developments and better results of our owned assets. And while selling assets could provide a short-term pop, a little bit of cash, I think, it would materially impact in a negative way our competitive advantage of being that dominant landlord and controlling the environment within our communities, something that we think is paramount to their success.

Hamed Khorsand: Okay, all right. Thank you.

David O’Reilly: Thank you.

Operator: Thank you. [Operator Instructions] Next, we have a follow-up question from Alexander Goldfarb of Piper Sandler. Please go ahead.

Alexander Goldfarb: Yes, thank you.

David O’Reilly: Alex I hope you could get enough?

Alexander Goldfarb: Well, obviously, there are a lot of people on the call that I have a lot of questions for you. So just following up on [indiscernible] question on the studio in Vegas. Maybe you could just – I’m sure that you haven’t spec-ed out everything, but just big picture, it’s you and Mark Walberg, so I guess two Bostonian guys. But if you could just lay out – are you – is Howard Hughes just doing the land and Mark’s entity is doing the studio operation? Or is there a joint investment in land? I’m just trying to figure out how the economics are if you guys are just tasked with doing funding everything related to building the structure in the real estate – and then his entity is funding the operations.

Just want to figure that out. And then two, just going back to the Seaport, obviously, you guys have a good report with Hudson Pacific they’re doing the peer with Vornado on the East side, going back to your to the Seaport, does that open the plan if ESPN leaves and you still have vacant office space, does that change the calculus there that maybe you could do sort of a mini studio in Seaport. So sort of a two-parter, but again, piggybacking off of Tony’s question.

David O’Reilly: Let’s see, how do I answer this? We haven’t formalized any agreement because we are not at the point where we should be doing that in terms of studios in Las Vegas and in Summerlin. We are still working with the elected officials in the Senate and the assembly and the governor to try to find a tax bill that works for the development of studios. And we’re working very closely not just with Mark and his team, and he’s been an incredible spokesperson – unofficial spoke person for Summerlin and for moving from coastal cities into better quality of life communities, but we partner closely with Sony, and Sony Pictures in terms of trying to advance the bill that works and now working with them on designing a studio layout on our land that works.

My expectation is that we would be the real estate developer and owner of the studios, the landlord of the studios and Sony and Mark in their various production companies, among others would be the tenants within those facilities paying rent to us as a landlord. We got a long way to go. And this is highly speculative. So let’s not model anything just yet. We’ll provide all those details if and when it comes to fruition, and we’re able to talk about it in greater detail. In terms of the Seaport, again, look, it’s tough to speculate in terms of what are the opportunities for studios there beyond ESPN. We are actively looking at finding tenants for the remaining vacancy at the Seaport. And as we have something to announce, trust me, we’ll announce it soon and quickly.

We won’t wait.

Alexander Goldfarb: Thank you.

David O’Reilly: Thanks, Alex.

Operator: Thank you. This concludes our question-and-answer session. Now I’d like to turn the conference back over to Mr. David O’Reilly for closing remarks.

David O’Reilly: Thanks, everyone. Appreciate you joining our call today. Look forward to seeing you at our upcoming investor events, including our Investor Day at the Seaport in September in our next earnings call. Thank you again.

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