Howard Hughes Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Howard Hughes Holding 4Q 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker, Eric Holcomb, SVP of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to Howard Hughes Holdings' 4th quarter 2023 earnings call. With me today are David O'Reilly, Chief Executive Officer Jay Cross, President Carlos Alea, Chief Financial Officer and Dave Stryfe, President of Asset Management and Operations. Before we begin, I would like to direct you to our website, howardhues.com, where you can download both our Q4 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.

Speaker 1

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 Q4 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 David O'Reilly.

Speaker 2

Thank you, Eric, and good morning, everyone. Welcome to our Q4 earnings call. On our call today, I'm going to begin with a recap of an outstanding year 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 to provide updates on our strategic development projects in Moored Village. Finally, Carlos will provide a review of our 2024 guidance and the balance sheet before we open the lines for Q and A.

Speaker 2

In short, our 4th quarter results met or exceeded our enhanced guidance expectations within each of our core businesses, closing out another exceptional year for Howard Hughes. Highlights of the year included record MPC EBT of $341,000,000 aided by significant growth in new home sales, strong land sales and record residential price per acre. Our operating assets delivered record NOI of $244,000,000 a 4% increase year over year excluding dispositions with solid growth in multifamily and office. In Ward Village, we sold out all remaining units at 'Aali'i and Kahula and ended the year with more than 96% of all condo units at our towers under construction or in pre sales under contract. Although credit markets were incredibly tight during 2023, we continue to strengthen our balance sheet and commence new developments by successfully executing over $659,000,000 of financing.

Speaker 2

This included several important refinancings for loans nearing maturity as well as $498,000,000 of construction loans for new developments. These new financings enabled the start of construction on several key projects in our pipeline, including Ulana, our 9th condo project in Hawaii 1 Riva Row, a luxury multifamily development in The Woodlands and the Whole Foods anchored grocery center in downtown Summerlin. Now, let's take a little deeper dive on the results of our MPC segment. We delivered an outstanding 4th quarter, capping off a very strong year and setting new quarterly and full year records for both EBT and residential price per acre. For the Q4, MPC EBT was $139,000,000 representing an 82% increase year over year.

Speaker 2

This robust growth was primarily driven by exceptional super pad sales in Summerlin, where we sold 130 acres at a 22% increase in the average residential price per acre to over $1,000,000 The strong results of the quarter contributed to full year record MPC EBT of $341,000,000 exceeding our most recent guidance and outpacing 20 22's strong results by 21%. This growth was largely driven by exceptional residential land sales, totaling more than 3.75 acres across our MPCs at a record average price of $944,000 per acre for the year. Strong equity earnings from the Summit, which were related to Phase 2 lot sales and the closeout of the final Clubhouse condominium units also contributed. Turning to home sales, which we believe is a leading indicator of future land sale. We had 527 new homes sold across our MPCs in the quarter.

Speaker 2

For the year, homebuilders in our MPCs sold nearly 2,300 homes, representing a 45% increase year over year. This sharp increase was primarily attributable to 985 new homes sold in Bridgeland, a new all time high for this growing community, as well as a 38% increase in Summerlin to nearly 1100 homes. These strong results propelled Summerlin and Bridgeland into the number 4 and number 5 top selling NPCs in the nation for RCL Co's 2023 rankings respectively, further solidifying the appeal of Howard Hughes award winning master plan communities and setting the stage for continued growth in 2024. Looking forward, we expect another strong year for new home construction with increased starts in sales aided by a significant lack of resale inventory. With the majority of U.

Speaker 2

S. Homeowners locked into an interest rate of 5% or less and mortgage rates expected to ease, but only to levels about 6% for the foreseeable future, we do not anticipate an increase in resale supply. As a result, home buyers will continue to be driven into the new home construction market, which not only offers the opportunity to pick the size, location and style, but also attractive incentives like mortgage rate buy downs offered by many of our homebuilder partners. With increased expectations for new home construction and a significant undersupply of vacant lots in the Las Vegas and Houston markets, we anticipate continued strong homebuilder demand for new acreage in Summerlin, Bridgeland and The Woodland Hills throughout 2024. We also expect to close on the sale of our first lots in Florio, the first village of Terra Valis near Phoenix.

Speaker 2

During the Q4, we contracted to sell more than 500 lots in this new MPC and we recently contracted more than an additional 300 lots in January. All of these lots are expected to close in the first half of the year. Overall, we expect another strong year of MPCEBT in 2024. Carlos will provide more details on our full year guidance in a few moments. Turning to the Seaport, operating results remain challenged in the 4th quarter with a modest 3% year over year revenue reduction and a net operating loss of $6,600,000 Including equity losses of $11,600,000 primarily from the Tin Building, total Seaport NOI was a loss of $18,200,000 in the quarter.

Speaker 2

Although improved $2,400,000 year over year, primarily due to reduced equity losses at the Tin Building, performance from our wholly owned businesses declined as a result of poor weather conditions and lower restaurant revenues. Despite these disappointing results, there were several bright spots during the quarter, including our successful Winterland Venture, which transformed the rooftop into an immersive holiday activation and attracted more than 50,000 guests to the Seaport. At the Tin Building, we successfully launched our e commerce platform and we closed the year in December with our strongest month of sales since the venue opened in 2022. And finally, at the Fulton Market Building, we officially opened the Lawn Club in November and the Alexander Wang lease commenced in mid December. With that, this building is now 100% occupied and we expect improved profitability going forward.

Speaker 2

During the quarter, we announced our intent to spin off the Seaport, including our 25% minority interest in Jean Georges Restaurants, together with the Las Vegas Aviators, the Las Vegas Ballpark and our 80% ownership of air rights over Fashion Show Mall into its own publicly traded company called Seaport Entertainment. In January, Anton Nicodemus joined HHH as the CEO of Seaport Entertainment. And together, we are working hard to complete the spin transaction later this year. We'll have more details to share in the coming months, but we remain positive and confident about the opportunities that the spin off will create, both for Howard Hughes and Seaport Entertainment in the years ahead. I'll now turn the call over to Dave Stripe.

Speaker 2

Dave? Thank you, David.

Speaker 3

In the Q4, our operating assets continued their solid performance delivering $54,000,000 of NOI including the contribution from unconsolidated ventures. For the full year, we generated a record NOI of $244,000,000 which represented a 2% increase relative to 2022. Excluding our divested retail, self storage and medical office assets, NOI increased 4% year over year. The most significant increase was seen in our multifamily portfolio, which generated 4th quarter NOI of $13,000,000 and full year NOI of $53,000,000 For the year, this represented a strong 16% increase, primarily driven by the rapid lease up of new properties at Bridgeland and Downtown Columbia and a very healthy 9% blended in place rent growth across the portfolio. Our assets continued to command some of the highest rents in their markets and at year end our stabilized properties were 95% leased, which is a testament to the quality of our multifamily assets and our teams operating them.

Speaker 3

With strong demand in our markets, we continue to develop best in class assets including Starling at Bridgeland and Marlo in Downtown Columbia. These assets were placed into service late in 2022 and were already 94% 57% leased as of year end. Similarly, in 2023, we completed and began leasing units at Tananger Echo in Summerlin and Wingspan in Bridgeland, the first single family built to rent property in our portfolio, which began welcoming residents in the 4th quarter. With our consistent leasing, strong rent growth and development of future assets like One River Row in The Woodlands, we expect continued incremental NOI growth in the coming years. In office, we produced 4th quarter NOI of $27,000,000 and full year NOI of $118,000,000 NOI was relatively unchanged for the quarter, but increased 6% for the year.

Speaker 3

The full year increase was due to strong lease up activity as well as free rent expirations and one time lease terminations in The Woodlands. These increases were partially offset by some tenant vacancies at various properties in The Woodlands and Downtown Columbia as well as initial operating loss at 1700 Pavilion in Summerlin. In 2023, the company executed an impressive 581,000 square feet of new or expanded office leases, including 357,000 square feet in The Woodlands, 113,000 square feet in Summerlin and 111,000 Square Feet in Downtown Columbia, driving home the demand for highly amenitized Class A assets. With our stabilized office portfolio of more than 88% leased, we expect to benefit from this leasing momentum later in 2024 with incremental improvements in 2025 as office build outs are completed and free rent periods burrow. In retail, NOI was $12,000,000 in the 4th quarter, which reflected an 11% reduction compared to the prior year.

Speaker 3

This decline was primarily related to lower sales revenue and the impact of 2 nationwide tenant bankruptcies in downtown Summerlin as well as increased reserves in Ward Village. Despite these negative impacts to the quarter, we have seen success in releasing the vacated spaces in Summerlin as we have already backfilled one space and are in promising negotiations for the other. At Ward Village, a considerable portion of the reserves taken were subsequently collected earlier this year. Full year retail NOI was $52,000,000 or flat compared to the prior year. With our stabilized retail portfolio 96% leased at quarter end and a number of tenant upgrades in progress, we are excited about the opportunities for 2024.

Speaker 3

Finally,

Speaker 4

given some

Speaker 3

of the challenges that commercial and multifamily real estate have been facing regarding changing user requirements and higher operating costs, we recently performed an in-depth analysis of our stabilized NOI projections, leading to modest changes across the portfolio. In office, our updated stabilized NOI represents a 2% or $3,700,000 decline due to increased levels of vacancy and higher operating costs driven mostly by taxes and insurance. Our projected stabilized NOI for retail declined by $5,900,000 or 9%, driven primarily by reduced expectations at Ward Village associated with the current status of its redevelopment. We expect that our stabilized NOI will increase over time as we add new retail at the base of our new developments. And finally, multifamily's projected stabilized NOI declined $4,300,000 or 5% due to increased property taxes and operating costs primarily in our Houston market.

Speaker 3

Despite a modest 4% reduction to our overall projected stabilized NOI, we remain extremely confident about the long term success of the Howard Hughes portfolio. With that, I will now turn the call over to our President, Jay Cross.

Speaker 5

Thanks, Dave, and good morning, everyone. In the Q4, we continued to make solid progress on our commercial construction projects, which represent future stabilized NOI of more than $24,000,000 for our operating asset segment. 1st, in Nevada, we are nearing completion of the South Summerlin office, which was recently named Meridian. This 147,000 Square Foot 3 story office building in Village 15 is expected to be completed later this quarter. A few miles away, construction of the Summerlin Grocery Anchorage Center, a 67,000 square foot retail development, which will be anchored by a new Whole Foods market is advancing nicely.

Speaker 5

We expect this retail adjacent to our Tanager and Tanager Echo multifamily properties in the heart of downtown Summerlin will be completed in the Q3. In Maryland, we are in the final stages of construction and are now watertight at our 86,000 square foot medical office building in downtown Columbia. This new development, which has achieved a fit well 1 star rating has experienced high demand and is now 34% pre leased with another 60% in lease negotiation. We expect to complete construction in the Q2. In Houston, we are nearing completion of Wingspan, our 263 home single family for rent development located in Bridgeland.

Speaker 5

During the Q4, we celebrated its grand opening and began transferring completed units to operating assets. At year end, 28% of Wingspan's units were completed and a total of 15% released. We anticipate Wingspan will be fully completed in the Q2. Across town in The Woodlands, construction at 1 Rima Row, our 268 unit lead silver multifamily tower is also going very well. This luxury development on The Woodlands Waterway is expected to be completed in the second half of twenty twenty five with a strong NOI contribution of nearly $10,000,000 upon stabilization.

Speaker 5

Looking at our future development pipeline, we have 3 new Houston projects on the horizon. First, in Bridgeland, we recently secured financing for Village Green at Bridgeland Central, a new mixed use development featuring in line retail, stand alone restaurants and an office building anchored by an HEB grocery store. We are seeing high demand from potential tenants with 86% of the in line retail space already pre leased or in advanced negotiations. In The Woodlands, we recently kicked off the redevelopment of the Grogan's Mill Village Center. This property, which was the first retail center in The Woodlands back in the 1970s, was reacquired during 2023.

Speaker 5

This asset, which is an important part of The Woodlands history, will be completely revitalized with a new community center and public library in addition to redeveloped restaurant and retail space. Just a couple of miles away, we are approaching the launch of presales for our 1st condominium project on the U. S. Mainland, the Ritz Carlton Residences, The Woodlands. This ultra luxury 111 unit condo project on the shores of Lake Woodlands will be our first of its kind in this MPC.

Speaker 5

And the 1st standalone Ritz Carlton branded residence in the state of Texas. We expect pre sales to commence in March. Shifting to Ward Village, we continue to see solid demand for our residential condos during the Q4, closing on the sale of the final unit at Co'ula and contracting to sell a total of 9 units at the Park Ward Village and Klay. For 2023, we had another successful year despite a challenging housing backdrop, closing on 47 condo units for a total revenue of $48,000,000 These units represented all of the reining inventory at 'aali'i and kolula as we officially closed out these projects. We also contracted to sell 78 condos in presales representing incremental future revenue of $160,000,000 At year end, Victoria Place, our next tower expected to deliver in late 2024 and Eulana, our final workforce housing tower were both 100 percent pre sold.

Speaker 5

The Park Ward Village also under construction and slated for completion in early 2026 is 94% pre sold. Subsequent to year end in January, we broke ground on Kalai currently 87 percent pre sold and we currently anticipate a completion date in 2027. And finally, earlier in the year, we announced the Llanuz, our 11th condo project in War Village. This development will offer sweeping crews of Diamond Head and includes 4 85 premium residences. Free sales on this new tower commenced earlier this month and is progressing well.

Speaker 5

I would now like to hand the call over to our CFO, Carlos Olalla, who will review our guidance and the balance sheet.

Speaker 4

Thank you, Jay, and good morning, everyone. With the record setting 2023 in the history books, we now turn our attention to 2024 and what we expect to be another strong year for Howard Hughes. In our MPC segment, EBT is projected to remain robust during 2024 aided by modest anticipated reductions in mortgage rates and continued tight supply of existing homes on the market. We expect this will drive strong land sales in Bridgeland and The Woodlands Hills throughout the year. In Summerlin, we anticipate increased super pad sales, which are expected to primarily occur in the 2nd and third quarters.

Speaker 4

We also expect to see increased equity earnings from the first log sales in our Florio joint venture in Taravalis during the first half of the year. This year over year gains are expected to be more than offset by reduced DBT associated with heightened performance in 2023, which included significant commercial line sales and builder price participation as well as a near sellout of custom lots at Aria Isle in The Woodlands and Clubhouse Condominiums at the Summit in Summerlin. As a result, we expect MPC EBT will modestly decline 10% to 15% year over year, but remain at exceptional levels with a midpoint of approximately $300,000,000 In operating assets, we anticipate increased occupancy in our new multifamily developments and improved retail leasing to drive NOI growth going forward. The office portfolio is also expected to benefit from strong leasing momentum experienced since mid-twenty 22, but free rent periods on many of the new leases, the impact of some tenant vacancies and new office developments expected to be completed in 2024 will likely result in office NOI being relatively flat year over year. Overall, 2024 operating asset NOI is expected to be in a range of up 1% to 4% with a midpoint of approximately $250,000,000 This includes projected NOI from the Las Vegas Aviators and the Las Vegas ballpark of $5,400,000 which are expected to be included in the spin off of Seaport Entertainment.

Speaker 4

Condo sales are expected to materially increase next year with Victoria Place closing late in Q4 of 2024. Victoria Place is 100 percent pre sold and condo sale revenues are projected to range between $675,000,000 $725,000,000 with strong gross margins between 28% 30%. This guidance contemplates approximately $75,000,000 of condo sales revenues for Victoria Place being delayed to the Q1 of 2025 due to the timing of condo closings. And finally, in 2024, we expect cash G and A to range between $80,000,000 $90,000,000 excluding approximately $20,000,000 of cash expenses associated with the spin off of Seaport Entertainment and $5,000,000 of anticipated non cash stock compensation. Looking at asset dispositions.

Speaker 4

During the Q4, we sold the Memorial Hermann Medical Office Building in The Woodlands for $9,600,000 resulting in a gain of $3,200,000 Subsequent to year end, we also negotiated and closed on the sale of the Creekside Park Medical Plaza for $14,000,000 The sale of these 2 medical office buildings resulted in a combined gain of approximately $9,000,000 For the full year, we recorded gains of $24,000,000 from non core asset dispositions, including the sale of 2 land parcels on a building in Ward Village, as well as our 2 self storage facilities in The Woodlands. Turning to our balance sheet. We ended the year with $632,000,000 of cash, which leaves us well positioned to deploy capital into our development pipeline. At the end of the Q4, the remaining equity contribution needed to fund our current projects was $240,000,000 From a debt perspective, we had $5,300,000,000 outstanding at the end of the year with only $215,000,000 of maturities in 2024. Approximately $200,000,000 of this are related to the construction loan on Victoria Place, which will be repaid as units close in the Q4, which leaves us with only $14,000,000 of principal amortization payments due in 2024.

Speaker 4

During the year, we closed on $659,000,000 of financings, including $498,000,000 construction loans for our latest developments and $161,000,000 of refinancings for debt maturity in 2023 2024. With $85,000,000 of loans closed in the 4th quarter alone, our weighted average debt maturity at year end was 5 years with 86% maturing in 2026 or later. With that, I would now like to turn the call back over to David for closing remarks.

Speaker 2

Thank you, Carlos. Before we open up the lines for Q and A, I just want to reiterate the exceptional performance of our company in 2023 and commend our employees for their incredible efforts throughout the year. Looking into 2024, we expect another strong year across our core segments with robust MPCEBT, continued growth in operating asset NOI and the delivery of Victoria Place condo project in Hawaii. During the year, we will be intently focused on the successful anticipated spin off of Seaport Entertainment, which we believe will provide HHH more flexibility to advance our extensive pipeline of development projects and seek new attractive growth opportunities within our core portfolio of master planned communities. At the same time, Anton and the team at Seaport Entertainment will be better positioned to focus on improving the performance of these unique assets, while seeking complementary expansion opportunities in the entertainment and hospitality industries.

Speaker 2

Overall, we're excited about the future of Howard Hughes. Demand for our award winning MPCs and world class portfolio of assets is high, and we are undoubtedly well positioned to grow our net asset value in the years ahead. With that, let's start the Q and A portion of the call. Operator, can you please open the line for the first question?

Operator

And our first question will be coming from Alexander Goldfarb of Piper Sandler. Your line is open.

Speaker 6

Hey, morning down there. So just a few questions. First off, David, on the construction lending front, can you just give us an update on how banks are looking at construction across the different projects that you have outlined and how your experience has been given relative to a lot of the stories that we read about the challenges in the development market. Just as we think about this year, you guys are busy, a lot underway. I'm just trying to understand to what degree the construction lending market is limiting your ability to put projects into the ground?

Speaker 2

Great question, Alex. Excuse me. And it's something that we're dealing with real time all the time. Having been in the lending market for a long, long time, I would say that I've never seen a construction loan market like this in my experience. It's almost slipped on its head.

Speaker 2

Right now, the easiest construction loans we can get, Alex, are on the condos in Hawaii. And condo construction loans used to be the hardest ones to get. But construction lenders, I've spoken to a number of them over the past several quarters are saying, if I make a construction loan on a multifamily asset or an XYZ asset, I don't know what the value of that asset is at completion and I don't know what my takeout is. But with a pre sold condo tower in Hawaii, I know exactly how I'm going to get repaid. So we've still seen a very constructive market as it relates to financing our condo towers in Hawaii.

Speaker 2

Flipping the kind of script there is even on a run of the mill multifamily asset like 1 Riva Row on the waterway in The Woodlands, which is a tremendous project in a market where we have a dominant market share. That was one of the hardest construction loans I've seen us try to get in my time at Howard Hughes. It's been a shortage of lenders that have decided that in a challenging market environment like we're in, we're not going to lend on certain products that we're not lending on office. We're not lending on construction. We're not lending on fill in the blank.

Speaker 2

So the bids that we used to get would have over 20. We were down to 2 or 3 on that project. We still think we got a great execution and we're still able to secure loans on our projects given the incredible dynamics and returns that we're seeing on them. But it's definitely much harder today than it has been in almost any other time in my career.

Speaker 6

So do you find David, are you do you find that you're there are more projects that you'd like to do if you could get the lending or you feel that the lending and

Speaker 2

your the

Speaker 6

projects at pencil are sort of in equilibrium?

Speaker 2

We're still getting all the projects done that we want to. It's just taking a little bit longer and it's a lot harder to find that construction financing.

Speaker 6

Okay. Second question is, and forgive me, I'm going to botch the name. I'll say Phoenix because I've terravalis I think is how you say it. You announced that you're going to do a bunch of initial lot sales this year, first half. Previously, you had hoped for last year.

Speaker 6

We all understand it's a tough endeavor. I guess how confident are you on the initial sales? Are they all spoken for and the builders that have spoken for them have an ability to perform? Or is this a project that we should still think of as a moving target just because of the challenges associated with launching a new MPC?

Speaker 2

Look, I think that as we discussed in the prepared remarks, Alex, we still remain incredibly excited about TerraBallis. In the Q4, we contracted over 500 lots and in January an additional 300. We got to close those contracts and there's always risk associated with that, especially in a new development like Terravalis. But we think we have great momentum and we're moving forward on that horizontal development, preparing those lots and look forward to hopefully getting these contracts closed and getting those homebuilders in their building model homes.

Speaker 6

Okay. And then just finally, Seaport Entertainment update, is it still on track for later this fall? Where do we stand in the filings that you guys have to do? Just want to get an update on how that is progressing. And then also, David, and then, is 250 Water going to be part of that or that's still TBD?

Speaker 2

So, I'll answer your second question first. 250 Water, our expectation is that that would be included as part of Seaport Entertainment in the spin. As far as timing goes, look, I am optimistic that we can complete this spin in the Q3 of this year. But that optimism is dependent on a number of third parties that are way out of my control. We have a lot of work to do with the SEC.

Speaker 2

We have a number of consents to get on different loans and different assets to be part of the spin. We have to set up a board. We have to fill out the entire management team for Anton. There's an incredible amount of work that needs to get done to get into the spin. Of the things that I can control, I feel very good about them and I feel like we've made an incredible amount of progress in a short period of time.

Speaker 2

And it's really just those areas that are out of our control that gives me a hesitancy to promise anything sooner than Q3 of this year.

Speaker 6

Thank you.

Operator

And one moment for our next question. Our next question will be coming from Anthony Paolone of JPMorgan. Your line is open.

Speaker 7

Great. Thank you. First question is on the couple of projects that you outlined to start this year, I think the Bridgeland and Woodlands and even the Ritz Carlton condos, can you talk about expected yields or returns on those?

Speaker 2

I'd say it's a little bit premature, Tony. We tend to make sure that we have that GMP contract in place, get some pre leasing done, especially on some of those retail projects in Bridgeland, so that we have a good expectation when we put shovel in dirt, we communicate to the world in terms of what those returns are. Today, we feel like those are still going to drive great risk adjusted returns and meaningful value creation for our shareholders. But until we're ready to put the shovel in the dirt, I don't want to get too far over my skis and promise something that I don't know that I can deliver on until we finalize the planning, finalize the GMP and get some leasing done.

Speaker 7

Okay. And I mean, I guess just following up on Alex questions around construction financing and the discussion there, like do you think these returns will clear sort of construction loan costs these days like something in the 8%, 9% plus range or will you look at them a bit differently?

Speaker 2

Well, look, each project is going to be have its own return dynamics for Ritz Carlton condominium project that's going to deliver an exceptional margin, perhaps not as strong as Ward, but close. Regardless of the cost of the construction debt, it's positive leverage, right? We're going to do really well there. There are some other projects where you're building multifamily at a still a meaningful premium to underlying cap rates, but that could be at a lower yield than the cost of financing. And back to where I was when I started my career, which is in the world of negative leverage, but that still doesn't mean there's not value creation for our shareholders.

Speaker 2

It's just incrementally reduced by the cost of that financing. But the construction financing as an overall part of your P and L or an overall part of your budget for building the project is relatively small given that your equity goes in first and then you draw down that construction financing over the following 18, 24 months. So if it's a couple of points higher than what I would have liked a couple of years ago, it's still going to generate a lot of value creation for our shareholders.

Speaker 7

Okay, thanks. And then just on the super pads, can you maybe walk through a little bit how those work? How much visibility you have into those deals happening? It sounds like you've got some more teed up for this year. And is this and when those happen, is it just you're doing your normal lot development and builder comes along and says, we'll just take a lot of it and it becomes a super pad or do you have to actually plan for it?

Speaker 7

Just maybe walk us through a little bit more how that works.

Speaker 2

Yes, absolutely. So super pads are something that is unique to Summerlin. And I think we've been able to pursue a Super Pad sales strategy in Summerlin given our kind of dominant land position there. In Houston, where there's a bit more competition, we're selling finished lots and we're selling those lots to builders. So that methodology won't change.

Speaker 2

But in Summerlin, all of the land, all of the residential land that we sell to homebuilders for the past 6 years has been sold in super pads. Sometimes those super pads are a little bit smaller. Sometimes they're $100,000,000 super pads. It depends on the size of the pad, the surrounding infrastructure and the type of community that's going to get built by the homebuilder there. What we're able to do is we bring in all the utilities and finishes right up to the entry monuments of those super pads, sell that land to the homebuilders and they're responsible for the improvements inside of the super pad.

Speaker 2

So while we're generating a lower price per acre and selling super pads, we're selling at a much higher net profitability per acre because of the reduced infrastructure costs that becomes the burden of the homebuilder.

Speaker 7

Okay, got it. And then my last item is looking at the operating properties NOI into 2024 and maybe even a little bit beyond. Can you talk about any other like incremental known move outs perhaps in the office portfolio that risk being a drag in the next year or 2 that you could talk to? And then along the same lines on the other side, I'm trying to just understand what the offsets might be because if I look at your multifamily development NOI, it was maybe $1,000,000 I think in the quarter and the stabilized is $20,000,000 And so it just seems like that will just lease up and be a pretty strong contributor. So I'm just trying to understand what the offsets are?

Speaker 2

Yes. No, it's a great question, Tony. I do think we'll see meaningful growth as Carlos talked about in his prepared remarks in the multifamily portfolio and that can be partially offset by a couple of different things. A little bit of our hesitancy to continue to project meaningful percentage rents from our retailers. We've had the benefit of great sales per foot across our retail portfolio for the past couple of years.

Speaker 2

And while I'd like to think that that goes on into perpetuity, I don't think it's a great guidance tool to just make that assumption. So there's perhaps a little bit of headwind in the retail portfolio. And we do have both a number of leases signed across the office portfolio that will add incremental NOI and a number of tenants that moved out this year or face bankruptcy this year that will have a negative impact next year. So the positive momentum will be obfuscated by those move outs, one of which was WeWork's bankruptcy, which one of which we think will remain in place and continue to pay rent as they've had to date and one of which they've left and we backfilled it with an alternate user. But that kind of switchover is going to create some near term headwinds this year.

Speaker 7

Okay. Thank you.

Operator

And one moment for our next question. And our next question will be coming from John Kim of BMO Capital Markets. John, your line is open.

Speaker 8

Hey, good morning. It's Eric on for John. Maybe just starting with the SpinCo, I was just curious if there is any other anticipated real estate assets that you plan to transition to the new Seaport Entertainment outside of the ballpark in the announced 250 Water Street?

Speaker 2

No, I think all of the assets have been kind of discussed in the past, which would be all the assets in New York, including 250 Water Street, the ballpark, the baseball team and our minority interest in John George Restaurants.

Speaker 8

Okay. That's helpful. And then on the development front, as it relates to the condos outside of the Ritz Carlton Residence and the condos in Ward Village, is there opportunity for additional condos in other MPCs that you're thinking about?

Speaker 2

Absolutely. We think that there could be the opportunity for incremental condominiums, not just within Wort Village, which we're very much focused on, but beyond The Ritz and The Woodlands or maybe another site or 2 that could work. And we're working hard and I think Jay mentioned this at our most recent Investor Day at a site or 2 in some of them. It's still premature to talk about details and exact locations and economics, but we think we have an incredible machine that our team in Ward Village, led by Doug Johnstone and Bobby Wiedemeyer, have put together. And there's no reason why we can't use that machine and expand its presence to our other MPCs to create value for our shareholders.

Speaker 8

Okay. That's helpful. And then the last one for me is just on the office tenant demand and different tenant types. And what are your leasing expectations at 1 Hughes Landing or 1725 Hughes Boulevard?

Speaker 2

Yes, we have a number of tenants that we're talking to real time, a good pipeline. Now that 9,950, which is our headquarter building in The Woodlands is full. We're seeing the demand that what did fill that building, at least that building entirely full, almost 600,000 square feet. Given that that building is now full, that tenant demand has been shifted to used landing. 1 used 1725, 1735 are all seeing incremental velocity towards an interest and we feel like we have some great momentum in getting that leased right now.

Speaker 8

All right. Thank you very much.

Operator

I would now like to turn the call back to David O'Reilly for closing remarks.

Speaker 2

I just want to thank everyone again for participating today on our call. Look forward to seeing you at our upcoming investor events, non deal roadshows. And as always, if there's any follow-up or need for information or additional questions, we're always available. Thank you again.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Howard Hughes Q4 2023
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