Good morning, and welcome to the Howard Hughes Corporation First Quarter 2022 Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to John Saxon, Chief of Staff. Please go ahead.

Good morning, and welcome to the Howard Hughes Corporation's First Quarter 2022 Earnings Call. With me today are David O'Reilly, Chief Executive Officer; Jay Cross, President; Carlos Olea, Chief Financial Officer; Dave Striph, Head of Operations; and Peter Riley, General Counsel. Before we begin, I would like to direct you to our website, www.howardhughes.com, or 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. I will now turn the call over to our CEO, David O'Reilly.

Thank you, John. Good morning, everyone, and thank you for joining us on our first quarter earnings call for 2022. To start off today's call, I will provide a brief overview of our first quarter segment performance and highlight the results of our master planned communities in the Seaport. Our Head of Operations, Dave Striph, will cover the performance of our operating assets, followed by remarks from our President, Jay Cross, who will provide updates on our development projects and Ward Village. Our CFO, Carlos Olea, will conclude with a review of our financial results before we open up the lines for Q&A. Looking at the results for the quarter, each of our operating segments performed well as demand for both residential housing and commercial amenities continues to remain plentiful. MPC land sales revenue rose 64%. Operating asset NOI increased 19%, and condo units contracted at Ward Village were 33% higher, all compared to the first quarter of 2021. These strong results are impressive, especially considering the challenging macro backdrop that was present for much of the first quarter and is a testament to our business model that has time and again proven its ability to outperform during periods of volatility and uncertainty. In March, we sold our equity stake in 110 North Wacker, generating $169 million in net proceeds. The sale of this 1.5 million square foot office tower marks one of the final non-core asset dispositions from our portfolio and adds a considerable amount of cash to our already robust balance sheet. To date, we have generated $570 million in net proceeds from non-core asset dispositions with only a few select retail assets remaining to be sold. During the first quarter, we repurchased 1.8 million shares of stock for $171 million. These shares were repurchased at an average…

Thank you, David. Following the record year in 2021, our operating assets continued their strong momentum with the delivery of $57 million in net operating income during the first quarter. This reflected a 19% increase over the same period last year and a 12% increase on a same-store basis. Majority of this increase was seen in our multifamily assets, which produced quarterly NOI of $11 million, a very strong 94% increase versus the prior year. This is largely due to the rapid lease-up of our 4 recently built multifamily assets in the Woodlands and Downtown Columbia. For several quarters now, we have seen an accelerated pace of lease-up at these newer developments, which continue to drive positive results. The most recent project, Creekside Park, The Grove in the Woodlands began leasing 9 months ago and stabilized during the first quarter. To stabilize a 360-unit asset in this amount of time is unprecedented and speaks volumes about the robust demand we are experiencing. Retail NOI of $13 million rose 12% over the prior year period, with Ward Village making up a considerable portion of the quarter-over-quarter increase. Travel to the island of Oahu has been largely restricted over the last 2 years due to statewide COVID-19 mandates. With these restrictions beginning to ease, traffic to our retailers has greatly improved and we have seen a quarter funding improvement in our results with first quarter retail NOI Ward Village, rising 53% compared to the same period last year. Another component of our strong operating performance was attributed to our share of NOI from JV-owned assets. Quarterly NOI of $6.8 million was up 63% over the first quarter of 2021 driven by 2 factors. First was related to a larger distribution from our share in Summerlin Hospital, which has paid out during the…

Thank you, Dave, and good morning, everyone. We continue to make great headway in our development pipeline with over 1,100 multifamily units under construction, the 267,000 square foot building -- office building underway and 53,000 square feet of medical office buildings that recently commenced construction. All of these projects remain on track for delivery according to their respective completion schedules. And while we have seen incremental increases in construction costs over the last few quarters, yields are projected to remain around the 7% to 8% range. As we highlighted at our recent Investor Day in April, we have several more projects in our near-term pipeline that we expect to commence construction over the next 12 months. Of these new projects, we expect to break ground in the next few months on our 86,000 square foot medical office building in Columbia's Lakefront District. This development is already 20% pre-leased and kickstarts our major development efforts in the Lakefront District. Over at the Seaport, our latest project, the Tin Building, is now, as Dave mentioned, in its last phase fit out as we complete the interior and remain on target for a grand opening this summer. We anticipate the Tin Building will draw a substantial crowd of the Seaport, along with our summer concert series, which will be in full swing, coupled with our diverse array of numerous restaurant and retail offerings at Pier 17 and in the historic district. Also at the Seaport, we have begun early foundation work at 250 Water Street following our recent approval from the city of New York. We expect to wrap up vertical construction later this year and look forward to providing more details then. Turning next to Ward Village in Hawaii. We contracted on 61 condo units during the first quarter, a 33% increase…

Thank you, Jay. During the first quarter, we were able to deliver strong results across all of our segments signifying a great start to the year following a record-breaking performance in 2021. In summary, during the first quarter, our MPCs generated land sales revenue of $61 million, a 64% increase over the first quarter of 2021 and $60 million of EBT, a 6% decrease compared to the prior year period. Our operating assets delivered $57 million of NOI a 19% increase compared to the prior year period. At Ward Village, we closed from 24 condo units at 'A'ali'i, resulting in $5.4 million of condo profit, a 102% increase compared to the prior year period. At the Seaport, we recorded an $8.3 million net operating loss, a $3.9 million decline compared to the prior year period. Despite this decline, quarterly revenue of $10 million rose 44% over the same period last year. Given the strength of our business segments in the quarter, we reiterate our full year guidance outlook for 2022 as outlined in our first quarter earnings release. Shifting over to our balance sheet. We ended the quarter with $688 million of cash on hand, leaving us with plenty of capital to continue executing on our development pipeline and repurchasing shares. Even with an extensive runway of projects currently underway, the remaining equity contribution needed to fund this development is $181 million. In other words, we are still left with plenty of runway to launch additional developments throughout the year. During the quarter, we closed on $129 million in financing for 5 assets at favorable rates and terms. Of this amount, $116 million was related to 3 nonrecourse loans for office assets in Summerlin and Downtown Columbia. The remaining $13 million was for our construction loan to fund the development of our 2 medical office buildings under construction in the Woodlands. Looking at our $4.7 billion of debt balance as a whole, we have limited near-term maturities with only $63 million maturing in 2022 and a substantial portion of the remaining balance maturing in 2026 or later. During this rising rate environment, it's important to note that 82% of our debt is either fixed or swapped to a fixed rate, which significantly mitigates our interest rate risk. And with that, I would like to turn the call back over to David for closing remarks.

Thank you, Carlos. To wrap up today's call, I just want to touch on a few key points. First, the results of the quarter demonstrate that our strength from last year has carried forward its momentum into 2022. And we are confident of a similarly strong year ahead. Our full year guidance remains intact, and our segments are all operating at an optimal level despite the headwinds we're seeing today; second, the uniqueness of our business makes HHC an attractive investment opportunity, especially during periods of market volatility as we've recently seen. In today's inflationary environment, we are benefiting from rent growth that is outpacing inflation at our multifamily properties and the majority of our retail and office leases allow us to pass on at least a portion of increased costs to our tenants. When it comes to single-family housing and condos, we are positioned in markets that are undersupplied, but have high demand resulting in outsized price appreciation. Couple these fundamentals with the strength of our balance sheet, and it's clear to see that we are well positioned to outperform as we navigate through the remainder of the year; third, we are flushed with capital and expect our operating segments to continue to generate meaningful cash flow throughout the year. We remain laser-focused on allocating this capital appropriately to achieve the highest risk-adjusted returns through new developments and share buybacks, both of which unlock considerable value for our shareholders and drive NAV higher on a per share basis. With that, we'll now open the call up for Q&A. We'll start by answering the first few questions that have been generated by Say Technology and will be read by John Saxon. John, can you read the first question?

Sure, David. Our first question asked, what kind of tenants do you foresee for the second level of the Tin Building? Jay, would you like to take that question?

Sure. Thanks, John. All 3 floors of the Tin Building have been fully programmed by Jean-Georges. So, it's 21 different concepts throughout the building. The ground floor is a more traditional market with a raw bar, cheese shop, bakery, candy shop, cafe, et cetera, and the ability for customers to come and shop and do e-commerce and get delivery as well. As one proceeds to the second floor, it's more of a sit-down dining environment with a vegan and Asian restaurants, cocktail bar, Craft Beer Bar, at the head of the escalator and a cooking studio. And then finally, the third floor is 100% occupied by kitchen, storage and staff facilities. So at this point, we're burning in kitchens, finishing the final FF&E touches, and we're looking forward to a summer opening of this extremely exciting marketplace.

Thanks, Jay. So our next and last Say question asked, to protect the company with the extra cash, do you think you are better off doing share buybacks or paying down higher interest rate loans? Carlos, would you like to take that one?

Sure. Thank you, John. As we stated in our opening remarks, our balance sheet exposure to interest rate risk is recovery very impressively low. We have 82% of our debt is either fixed or hedged to a fixed rate. And then last year, we were able to decrease our weighted average interest rate by about 40 basis points. So because of those facts at this point, we believe that share buybacks and new developments are a much better use of our capital.

Thanks, Carlos. So that's the end of our Say questions. So operator, I'll hand it over to you, and we can open the line to those with questions on the call.

. Our first question comes from Alexander Goldfarb with Piper Sandler.

Just a few questions from us. Carlos, just first going to your comments, appreciate that your comments on 82% of the debt being fixed or swapped, but if the remaining that is floating, how much of that relates to construction financing versus normal operations? And I know that earnings -- you guys are not earning store you're an NAV story, but just sort of curious how much of that we would see flow through the P&L versus as part of construction, whether it's the condos, et cetera, that obviously gets paid off when you close on the sale of the projects?

Right. So the majority of what is floating relates to construction loans. We do have some caps on construction loans, but the majority of the construction loans are floating. So that variability will end up capitalized from the balance sheet.

Okay. And then as far as the builders, the homebuilders taking down more land. What do you guys see in your markets or from the homebuilders as far as their appetite for land in your communities versus elsewhere in the markets in which you operate. So I'm sort of curious, when you talk about the in-migration, is it that Houston, Vegas, now Phoenix are all just growing overall from the in-migration or are your communities disproportionately seeing more of that inbound such that the builders may be dialing back their land purchases elsewhere in their markets, but continuing to a healthy pace in your MPCs.

Alex, our fingers aren't quite on the pulse of the other communities within the cities as much as they are within our MPCs. But in general, what I can tell you is that we're seeing migration into these cities broadly. I believe, and from what I've seen on the ground, I think we are disproportionately benefiting to a modest extent, and we're getting better than our fair share of home sales and therefore, sales to homebuilders for land within our MPCs because we tend to outperform the broader markets. But in general, the broader markets continue to outperform. We continue to see great in-migration to Houston, Phoenix, and Las Vegas. And recently, there was an article on CNBC just 2 days ago that highlighted those 3 cities as the 3 largest cities for new entrants over the past year.

Okay. And then the final question is maybe a flip on the e-mail question on debt versus cash paydown. As you guys look to use excess cash to fund development or buybacks, do you see a trade-off between one or the other? Or as you look at your liquidity and what you have planned in the development, you can balance both. I'm trying to figure out if buybacks make more sense now than development versus being more even keeled or maybe development is still the better use of cash versus buyback?

Yes. I don't think it's an all or -- all or one decision. It's not either or. I think it's a strategy where we're able to allocate capital into both buckets. And it's -- there are some development projects that pencil out to tremendous returns. It makes sense to do relative to a buyback all day long. And there are some due to inflationary pressures and maybe where rents haven't grown as much that will pause until the market comes back to what we think is right and use that capital for buybacks in lieu of that development project. So I think it's -- each project goes through an intense screening process here with both management and our capital allocation committee and through our Board to make sure that we're allocating our capital that's going to generate the highest NAVs per share growth over time.

The next question is from Anthony Paolone with JPMorgan.

My first question relates to the builder price participation. Can you talk a little bit more about how much of your lot sales have that sort of participation? And is there any way to think of like is there some backlog of participation in that factor that we could think about?

It's a great question, Tony. And it's one of the things that I think is the hardest to predict in our P&L. The vast majority, the overwhelming majority of the lots that we sell have builder price participation. That participation can vary from 16%, 17% into the low 20s. But in general, they're around 20%. And there -- it's so dependent on what home buyers are willing to pay for view premiums, upgrades. Everything across the board that I don't know from one quarter to the next, how many homebuyers are going to lean in and pay more for that lot or upgrade their home such that our participation is going to continue to increase. In a perfect world, we would have priced a lot to perfection when we sold it, and that participation would be zero. But I think that participation at least protects us and in a market like we have today, where prices continue to escalate and escalate quickly and we know that we're getting made whole on that land that we sold to homebuilders 3, 6, 9 or even 12 months ago, given the rapidly increasing price environment of homes.

Okay. So is it a matter of if home buyers add on some of the features and do some of these different things that are pretty high margin for the builders that, that just helps accrue to your participation because that value kind of drops effectively to the land. Is that kind of what happens?

Yes. In general, and just illustratively, Tony, if we sell a lot to a homebuilder and at the time we sell that lot, we both agree that the home will be sold for $500,000. Our implied builder price participation of 20% would assume that our implied land value is $100,000 for that home. If, in fact, that home turns out to be sold for $600,000 and whether that's just the base home or whether that's including a view premium or whether that's including an upgrade, we're entitled to -- at our 20%, $20,000 of that $100,000 price increase alone. So it could be a combination of things. It could be just general price appreciation, it could be view premiums, lot premiums or it could be any upgrade that the home buyer puts into the home.

Got it. That's helpful explanation. And then I guess just as we think about MPC EBT for 2022, you'd basically given some guidance around to think about that. Are there any particular MPCs that you think are going to drive things this year? Or also, do we think about this year being maybe fewer lots, but higher prices? Or just any further details around how you're thinking about this year shaping up?

Man, there's so much underlying assumptions that go into that. It would be hard to crystallize it into 1 or 2 sentences because in some communities like the Woodland Hills, we're expecting a higher price per lot and more lots. And in Summerlin, we're expecting a higher price per acre, but perhaps fewer acres given that massive superpad sale we had in the fourth quarter of last year. So it's tough to crystallize it down into 1 or 2 bullets that are driving those assumptions. There's so many nuances to each one of our MPCs that are driving those results.

Fair enough. And then just going back to some of the earlier discussion around capital allocation, you guys have done a nice job executing on the buyback programs that you've put in place and it's occurring in a market that's been going down. How do you think about potentially putting in place further buybacks as the year progresses if you continue to see the stock price under pressure with the market here? Or is there just a limit at which you've already allocated enough to the buyback for 2022?

Well, I think it will be largely determined by the liquidity that we have, the free cash flow that we generate and the amount of new developments that we're able to still continue to drive NAV higher by. If we're able to generate some incremental liquidity because we have a great quarter or 2, some of the developments aren't ready to get launched as quickly as we had hoped, then that excess liquidity could, in fact, be used for buyback. It's tough to predict right now. I think we still have a little bit of powder left in the chamber to use on our current plan. And after we get through earnings, given the most recent performance, we expect to use it.

. The next question is from Hamed Khorsand with BWS.

I just wanted to see if there was a general update on Douglas Ranch since you didn't bring it up on the script?

No, I'd say that everything is progressing as we expect. We're hopeful that this quarter we'll contract our first set of lots as we had anticipated at the announcement. -- and we'll be continuing to move -- we're moving dirt right now, grading land, putting in roads, putting in infrastructure. So things are going as expected, but there isn't a contract or an announcement to make on this call that would provide any material changes from what we've said previously.

And is there an update as far as being able to source or purchase water rights for Douglas Ranch?

Again, I would say that everything is consistent with what we've said in the past in terms of the water rights that we already have approved for Trillium in the first 4 phases of Douglas, as well as the advantages that we have being on top of the River Basin, proximity to the Central Arizona project as well as the diversified sources we continue to see.

On that note, the last question, how about water rights for Summerlin, are you pretty much set?

We feel that we have the water that we need to finish out the remaining development in Summerlin, all the way up through Summerlin West and including the commercial developments that we anticipate over the next several years.

This concludes our question-and-answer session. I would like to turn the conference back over to David O'Reilly for any closing remarks.

Once again, we appreciate you joining us for our call this quarter. Look forward to seeing you on future calls. And if there's ever questions in the interim, we're always available to help. Thank you again.

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