HOward Hughes

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HHC - The Howard Hughes Corporation at JMP Securities Research
Conference
EVENT DATE/TIME: MAY 13, 2013 / 4:00PM GMT
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C O R P O R A T E P A R T I C I P A N T S
Grant Herlitz The Howard Hughes Corporation - President
C O N F E R E N C E C A L L P A R T I C I P A N T S
Peter Martin JMP Securities - Analyst
P R E S E N T A T I O N
Peter Martin - JMP Securities - Analyst
We have Howard Hughes this morning -- HHC -- President Grant Herlitz and CFO Andrew Richardson. I will let Grant run into the presentation and
not waste any more of the time here. Thanks, Grant.
Grant Herlitz - The Howard Hughes Corporation - President
Thank you. Again, I'm Grant Herlitz, President of the Howard Hughes Corporation. I am joined today by Andy and Drew Davis, one of our analysts.
Thanks, Peter, for having us.
The Howard Hughes Corporation initiative (technical difficulty) United States. We create timeless places and memorable experiences. Can you hear
me over there?
Grab the mic.
That's okay, I can continue. We emerged as a tax-free spinoff from General Growth Properties in 2010 and raised $250 million from our sponsors,
Brookfield, Pershing Square, Fairholme, and Blackstone. We operate in three business segments, Master Planned Communities, Operating Properties
and Strategic Developments spanning 18 states. What is interesting about the Company is we emerged in 2010 at just under a $2 billion market
cap and today trade at just above $4 billion. So we have done a lot in 28 short months.
The Company has a long history originating in the '50s with the Howard Hughes Corporation. Rouse Corporation bought the Howard Hughes
Corporation in the '90s, General Growth in the 2000s and in 2010, we emerged.
We span 18 states from Hawaii to New York to Texas. What that means is we benefit from geography, diversity in geography and different economies.
We have world-class trophy assets with significant upside potential, irreplaceable mixed use office resorts and residential properties.
Our balance sheet is strong. We have 21.7% net debt against book. That allows us the flexibility to make decisions without being burdened by
extreme debt. Our C-Corp. structure allows us to take advantage of $410 million of deferred tax assets. We have a highly sophisticated Board of
Directors led by Bill Ackman, Chairman and CEO of Pershing Square.
And during the recession and postrecession, we were able to attract a deeply seasoned team of real estate professionals from companies such as
Brookfield, Forest City, Taubman, Westfield, Related, and NorthStar Realty Finance.
So why is HHC such a compelling investment? We are well very well-capitalized with strong liquidity and no debt maturities, or very little debt
maturities. Most importantly, our operating income has been increasing rapidly over the last two years. We have generated over $240 million of
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MAY 13, 2013 / 4:00PM, HHC - The Howard Hughes Corporation at JMP Securities Research Conference
free cash flow over the last two years, which has allowed us the opportunity to invest in our developments as we move forward through their
process.
And if you look to the bottom right corner of this slide, you will see that Summerlin land sales revenues have dramatically recovered over the last
two years; and just in the first quarter we almost matched both 2011 and 2012 revenues at $28 million. Needless to say, Vegas is back.
We have made significant progress over the last two years, most notably two accomplishments. We acquired our partners' remaining interest in
The Woodlands -- I'll speak about that more later -- and, secondly, we retired our sponsors' warrants in the fourth quarter of 2012. This resulted in
our shareholders owning 10.1% more of the Company than they did previously.
The purchase assumed our stock price would be greater than $80 at the time of warrant expiration. We are now trading at over $100 a share.
Obviously, we believed in this and still believe we are significantly undervalued.
The majority of our value lies in a handful of assets. Peter called them the big six. They are actually interesting, I'm from South Africa and South
Africa, in the game parks, you chase the big five, so he added one more. They are Ward, Summerlin, Seaport, The Woodlands, Bridgeland, Columbia.
And I will speak about each one of these in detail.
We currently have about $800 million of construction in progress at the end of the first quarter. What is interesting -- we will be at over $2 billion
by the end of the year.
The first asset we will discuss is ONE Ala Moana. This is located in Honolulu, Hawaii. It is a precursor to the development of our 60-acre community,
Ward Village. If you look to the screen to the right is Diamond Head. In the middle, Waikiki. And then, Ala Moana sits -- ONE Ala Moana sits above
the Ala Moana Shopping Center which is owned by General Growth Properties. Ala Moana is the 206 unit condo development currently under
construction.
We've partnered with two local Hawaiian developers -- the McNorton Group and the Kobayashi Group. And ONE Ala Moana is important because
it illustrated how deep the market is and how much demand there is for condo development on this island. Local economists have illustrated there
will be about 20,000 units shortfall of residential over the next six years and there should be about a 40% price appreciation in residential by 2015.
We went out to market in December of last year and sold all 206 units in 30 days, just under 30 days. In addition, what's interesting is we had people
camped out to buy these condos. So people were paying $1.5 million as if they were buying an iPhone.
In addition, I went to Japan and we partnered with Sotheby's to sell 30 units in Tokyo. We had people driving 2.5 hours to buy these units. So 170
of the units were sold -- 175 of the units were sold to local Hawaiians and mainland US buyers and 30 units were sold to Japanese buyers, average
sale price of $1,170 a foot.
The next slide is that of Ward Centers. Today, Ward Centers is 60 acres. It is located in what is called the Kakaako redevelopment district of Honolulu.
Properties in Hawaii are generally owned by the federal government and by land trust so it's unique that we own 60 acres fee simple in this
impressive location.
We have $23 million in NOI and are currently in the process of transforming Ward Centers into Ward Village. In January 2011 we were granted 9
million feet of vertical entitlements. Our plan is to build a village within a city with over 4,000 units in approximately 22 Towers and over 1.5 million
feet of retail and other commercial uses.
To give you a sense of the math, Hokua, which is located just outside that boundary, the condo tower, so resells for the highest average price per
foot in Honolulu. If we assume a $1,300 a foot average selling price across 4,000 units with over 1,200 feet per unit it equates to over $6 billion of
gross revenue. Assuming a 30% margin, that is approximately about $2 billion for this asset over its lifetime and that excludes the commercial
development or retail development underneath it.
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Our first two market rate towers should total about 500 units and will not impact the NOI of the property that we enjoy today. It is worth noting
that we have significant value in our land, and because of this the cash equity requirement should be considerably less than in any other circumstance.
The slide you are looking at is looking forward. It is our marketing campaign for Ward Village. These are some renderings of what it might look like.
And finally our first two Towers 500 market rate units, 200 in the front and 300 in the back.
We are in the midst of constructing a world-class sales center. This is the IBM building located on Ala Moana Boulevard. It will be a mark for this
property of what we intend to build and should be done by the third or fourth quarter of this year.
On to our master planned communities. All three of our active MPCs are ranked among the top 20 in the US for single-family houses. In total, we
have over 300,000 residents and will enjoy over 0.5 million of residents at completion. We have over 12,000 acres remaining to sell amongst The
Woodlands, Summerlin and Bridgeland.
The first MPC, arguably, the preeminent MPC in the country is The Woodlands. With over 99.5% Class A occupancy, it is driven for commercial
development. We did a study last year and identified 6 million feet of additional opportunity to build commercial uses within The Woodlands,
2,000 residential units, three hotels and two condo hotels.
Notable corporate relocations and expansions within The Woodlands include Anadarko, Waste Connections, Energy Alloys, Huntsman, Lane
Christiansen, and many others.
This is a demand driver for The Woodlands. This is Exxon's corporate relocation to just south of The Woodlands. It's a 385-acre campus, $4 billion
in spend and 10,000 jobs of which 2,000 new jobs will come from Fairfax, Virginia. These people have nowhere to live and the only place to go is
The Woodlands.
With multiple demand drivers, the ExxonMobil effect resulted in a 49% increase in lot pricing revenue. So what we did last year was we had a
methodology where we increased pricing of residential lots by 2.5% to 3% per quarter. We went back to our builders, studied the market, tried to
identify where pace would drop off when we increased pricing, but it hasn't yet.
And we entered into an auction with our builders. We set a base price which was the last price set, and that base from there, the auction process
took effect and we increased pricing by 49% in our first 375 unit auction.
We did a second one earlier this year and that added another 29% to pricing. So there's no signs of pricing effect.
On the commercial front, we announced 3 Waterway, a 232,000 foot office building. In six months we were 90% leased. The building is built. Our
tenants will take occupancy in June.
We bought out our partners, The Dinerstein Companies, out at Millennium Phase I, which was a 393-unit multifamily complex, and entered into a
joint venture with them to build Phase II. The first phase, we contributed our land at $50 per foot. The second phase, at $75 a foot. Millennium is
over 95% occupied with rents increasing monthly.
This is a picture of Millennium II under construction. It should be ready for occupancy mid next year.
Finally, we announced the development of our premier signature, a 66-acre Hughes Landing development, at Lake Woodlands. 1.6 million square
feet of office, 250,000 feet of retail, a 400-unit multifamily complex, condo tower, a grocer and a couple of hotels.
This is One Hughes Landing, a 195,000 square-foot office building. We began construction in November. We are about to top off the building. We
are about 40% leased. We expect to be leased pretty quickly on this and will announce Two Hughes Landing in the next couple months.
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companies.
What we are trying to do is stay ahead of the market and that is difficult, given the amount of demand that exists at The Woodlands. Our 400-unit
hotel, the Woodlands Resort and Conference Center, has been a stellar performer with NOI growing from $4 million in 2009 to $10.3 million last
year.
But that is not enough. We are in the midst of a redevelopment. We are transforming this 1970s resort into a 21st-century Resort and Conference
Center. $75 million is being spent today to redevelop this by building a new wing and demolishing the old existing rooms. And again we are under
construction.
Our second MPC is Bridgeland, located just northwest of the city center of Houston. The 15th best-selling MPC in the country, Bridgeland is
surrounded by lakes. What is interesting here is that our predecessor spent over $325 million in developing this master planned community with
not a single dollar of revenue to their benefit. Today we are generating that revenue. It is a successful MPC and you will continue to see more growth
here.
The Grand Parkway, which is Houston's third-most outer loop, bisects Bridgeland. What we're planning here is another 1,200-acre town center that
will mimic that of The Woodlands and be a unique driver for this fast-growing community. The Grand Parkway, as I mentioned, bisects Bridgeland,
but not only that; it curves around to head right towards the Exxon campus, shortening their commute from 45 minutes to a 20 minute drive --
25-minute drive.
Summerlin. We have given it its name, The Sleeping Giant Awakes. This community has seen a revitalization over the last two years. We did $28
million of land sales in the last quarter and we hope to do better for the rest of the year. We have over 6,000 acres remaining to be sold. Vegas had
its third best year on record in terms of residential sales last year and we expect that to be better this year.
You can see from peak to trough we did $260 million of annual revenue in 2006 and just under $5 million in 2009. Again we are under construction.
Home builders are building and they are selling.
The jewel within Summerlin is our downtown. A 400-acre community -- it's a 400-acre commercial development that will again mimic that of The
Woodlands anchored by a 1.5 million square-foot retail center, a power center and a fashion center.
Last year we announced Dillard's and Macy's as our anchors and we are in the midst of leasing that center today with over 400,000 feet already
committed. These are some great renderings. It includes a 200,000 foot office building which will be completed and will drive commercial business
to that downtown.
Downtown Columbia. The grandfather of master planned communities. Here, we are busy revitalizing this downtown. We are in three -- 13 million
feet of entitlements in 2010. We are planning out what is called the Crescent area which you see in the green and blue to include office, residential
and mixed-use. We are under construction on 380 residential units with a partner, Kettler Orchard. Again we are under construction.
We contribute this at 677% of book value. $3 million book value, a $20 million contribution.
The Rouse headquarters building which was our corporate headquarters in Columbia, we have transformed into a Whole Foods and a Columbia
Association Fitness Center. This historic building was designed by Frank Gehry and was important for us to make sure that this anchored our town
center. Whole Foods will be a great anchor for it and we are excited about this development as we begin construction on it again.
Finally, the South Street Seaport. This iconic asset sits on the East River in Lower Manhattan. In April of this year we finalized our [Ulla] process and
got full approval to redevelop the Pier 17 building. In total we have 465,000 feet of gross leasable area which includes the pier building east of the
FDR and the four historic Uplands buildings in red to the west of the FDR.
The roof will drive this historic asset, including banquets, weddings, fashion shows, dinners, music, concerts, movies -- all overlooking the East River
and the Brooklyn Bridge. It is a glass box with inter-operable garage doors that will come down during periods of inclement weather. With 40,000
feet of leasable area on the ground level, it is a streetscape scene that allows you to feel as if you were on the street when you are actually indoors.
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Finally, last week we announced our SEE/CHANGE program, an innovative new summer activation series which will launch over the Memorial Day
weekend. The series will commence in the historic cobblestone area and run through the entire summer season as part of the Seaport District's
ongoing revitalization effort to recover from Superstorm Sandy and as a precursor to the coming of the new South Street Seaport.
It will include pop-up retail containers, multi-story fleets of shipping containers located on Fulton and Front Street. A smorgasbord, a popular beer,
wine and spirits garden that debuted last summer and the Front Row Cinema series for New Yorkers to come to during the summer.
Our CEO said it best. The announcement of our SEE/CHANGE program marks the beginning of a rebirth at the South Street Seaport and the delivery
of the Howard Hughes Corporation's promise to re-energize this iconic property. Our mission to build timeless places and memorable experiences
will be indelibly imprinted on Lower Manhattan.
We will begin construction on this asset in October and in terms of the mass 400,000 feet at a minimum of $100 to $200 a foot at a conservative
cap rate will tell you how valuable this asset is to us. Today we carry it on our books for just under $11 million.
To summarize, we have trophy assets with substantial value creation potential. Our interests are aligned with yours as Andy, myself and David
invested over -- invested $19 million in leverage warrants in to the Company. We can't borrow against them, we can't pledge them and we can't
sell them. So we are here to stay.
We believe the market does not fully recognize the value of our future development; the transition from an asset-based company to a cash
flow-based company; the return of a normalized housing market; and the upside options with downside protection. Thank you.
If any of you have any questions, Andy and I will be happy to answer them.
Q U E S T I O N S A N D A N S W E R S
Unidentified Audience Member
(inaudible--microphone inaccessible).
That is a great question and we actually spend a lot of time thinking about that. When we looked at the market, the average pricing of those units
was just about where we priced them. We actually did have a price increase after the first round of pricing by 10%.
Unidentified Audience Member
(inaudible--microphone inaccessible).
Most of it is local money. In terms of the actual buyers, as I mentioned 170 of those buyers for ONE Ala Moana were either mainland US or local
Hawaiians. The other 30 were Japanese. We do believe, however, that there is a huge pent-up demand for both Chinese, South Korean and Japanese
buyers to those markets.
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companies.
We are going to have to move this to the breakout room which is right up the stairs so we can transition to the next presentation. But these guys
will be up there and have one on ones the rest of the day.
Thank you very much.
DI S C L A I ME R
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