The Howard Hughes Corporation
Q4 2018 Earnings Call Transcript

Published: 1 Mar 2019

[Operator:]

Good day and welcome to the Howard Hughes Corporation Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Striph, Executive Vice President, Investor Relations. Please go ahead.

[David Striph:]

Good morning and welcome to the Howard Hughes Corporation's Fourth Quarter 2018 Earnings Call. With me today are David Weinreb, Chief Executive Officer, Grant Herlitz, President, David O'Reilly, Chief Financial Officer, and Peter Riley, General Counsel. Before we begin, I would like to direct you to our website, www.howardhughes.com, where you can download both our fourth 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 fourth quarter earnings press release 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 Weinreb.

[David Weinreb:]

Thank you, Dave, and thank you all for joining us today. Welcome to our 2018 earnings call. I am pleased to report that we had an exceptional year and that our businesses have never been stronger than they were in 2018. For example, we recorded the strongest annual land sales in the company's history, selling 456 residential acres or 30.5% more than we did in 2017. And, by the way, 2017 was an excellent year. MPC EBT, or earnings before taxes, increased by $12.6 million, or 6.6%, to $203 million. We had substantial growth in our operating assets NOI of $20.8 million or approximately 13.1%, excluding the Seaport, driven by increases in retail, office, and multifamily. We continue the conversion of our commercial land into vibrant, income-producing assets by starting construction on several new properties, including 110 North Wacker, the Las Vegas Ballpark, Creekside Park West, and multifamily projects at Bridgeland, The Woodlands, and Columbia. As a result of these new construction starts and our acquisition of the Lakefront North office buildings in The Woodlands, we increased our annual stabilized NOI target, not including the Seaport, by approximately 25% from $255.1 million as of December 31, 2017 to $317.8 million at December 31, 2018. This furthers our goal of shifting our reliance on residential land sales, which can be much more volatile than operating NOI. In our Strategic Development segment, we contracted to sell 668 condominiums at Ward Village during 2018, including 600 homes at 'A'ali'i, which began public presales in January of 2018 and broke ground in October. Subsequent to year-end, we also launched public presales of our newest project, Ko'ula, in January, which as of February 21, 2019, had entered into hard contracts for 252 homes or 45% of the total project, an incredible pace of sales. At the Seaport District, we opened up ESPN's new broadcast studio, 10 Corso Como, Mr. C Seaport Hotel, SJP by Sarah Jessica Parker, By Chloe, Cynthia Rowley, and Robert Cavalli. We also signed an office lease with Nike and sold out 18 of 23 concerts in our summer concert series, along with opening R17, our rooftop restaurant, and our Winterland with New York's only rooftop ice skating rink. We were very proud that Pier 17 was recently named the best new concert venue in North America in 2018 at the prestigious Pollstar awards. Lastly, we are always looking for opportunities to buy back meaningful blocks of shares at an appropriate price as a part of our capital allocation strategy. Because our stock is traded meaningfully below our net asset value over the last year, we took advantage of the situation in January of last year to purchase approximately 476,000 shares of common stock in a private transaction with an unaffiliated entity at a purchase price of $120.33 per share for a total of approximately $57.3 million. We celebrate all of our team members across the company for making 2018 an excellent year for HHC. Before getting into additional details on our accomplishments throughout the year, given the reported volatility in the national housing market, I would like to start by providing a general overview of what we are seeing in our MPCs. I will then turn the call over to Grant, who will provide a deeper review of the results in our three segments

[Grant Herlitz:]

As David said, we made excellent progress in 2018 and I would like to talk about the details driving the results in our MPC, Operating Assets, and Strategic Development segments and then turn it over to David O'Reilly to discuss our earnings and financial activities for the quarter. First, within our MPC segment, residential land sales closed in the fourth quarter decreased to $32 million from $57 million in the fourth quarter of 2017, a decrease of $25 million. This decrease was due to the timing of land sales at Summerlin, which had an incredible fourth quarter in 2017 and an exceptional third quarter in 2018 that may have affected the past quarter. As David mentioned, for the year, residential land sales closed with $235 million, an increase of almost $46 million, a 24% improvement from 2017's $189 million of sales. While our overall price per residential acre was down slightly from $541,000 to $515,000, this is largely because of the increase in lots sold in The Woodlands Hills, which had a lower price point than our other communities and only began selling land in the fourth quarter of 2017, making the periods not comparable. Both Bridgeland and Summerlin had increases, while The Woodlands was down slightly but essentially flat. At Summerlin, we continue to experience robust demand for residential land. The economy is in great shape and the improvements and amenities that we have brought and will continue to bring to downtown Summerlin are truly adding value to our land and further distinguishing the community. Summerlin is now, more than ever, the premier place to live, work, and play in the Las Vegas valley. The community had 1,276 new home sales during the year, an increase of approximately 25% over 2017's 1,022 homes, which is indicative of Summerlin's dominance and appeal. The median home price was $575,090 versus $563,748 in 2017. Total residential land sales revenue increased from $120.7 million in 2017 to $144.7 million in 2018. The price per acre, excluding custom home lots that sell for over $2 million per acre, was up from $547,000 in 2017 to $566,000 in 2018. For the fourth quarter, new home sales declined approximately 25% from 305 in 2017 to 230 in 2018. Even if we were to annualize this number, it is still 920 homes per year, a very healthy new home market and very close to the number sold in all of 2017. Subsequent to year end, there have been 105 net new home sales through February 3, 2019. This is quite strong for a traditionally slow time of the year and is consistent with 2017. In addition, we had traffic of over 4,750 visitors to our builders' model homes. According to Credit Suisse's U.S. homebuilding report from February 22, 2019, Las Vegas has seen improving traffic and sales over the last six weeks, with early February off to a good start in inventories. The Summit, our joint venture with Discovery Land Company in Summerlin, includes 260 units made up of 146 custom lots and 114 plain dwelling units. Since the joint venture started closing lots in the second quarter of 2016, 109 lots have closed for a total of $345 million through year-end 2018. For 2018, we had 32 lot closings for $104.8 million in proceeds. This compares with 17 lots closed for $55.9 million in 2017. We recorded equity and earnings from this joint venture of $36.3 million in 2018 as compared to $23.2 million in 2017. At year end, there were another 18 lots or dwelling units under contract, representing approximately $72.3 million of revenue. We are very pleased with this venture. Moving on to Texas, in general, Houston continues to experience population and job growth, which has resulted in increased demand in our master plan communities. Job growth increased by 3.7% over the year according to recent data released by the U.S. Bureau of Labor Statistics. The Houston MSA created 114,400 jobs between November 2017 and November 2018, growing faster than the U.S. overall. Unemployment is now more in line with the national rate of 3.5%, dropping from 4.4% to 3.8% during the past 12 months. Employment sectors with the most growth were mining related, construction, and durable goods manufacturing. The improvements in the manufacturing and construction sectors drive home sales. In Bridgeland, residential land sales closed totaled $48.2 million for the year, which is approximately $17.8 million higher than the $30.4 million achieved in 2017. This represents a 58% increase. The increase was due to our development of additional lot sizes to meet homebuilder demand and the opening of Park Village, our newest phase. Year-over-year, the price per acre increased from $377,000 to $385,000, an increase of a little more than 2%. For the quarter, Bridgeland sold $17.7 million of residential land versus $7.3 million in the same quarter of 2017. We believe that Bridgeland has clearly hit its stride and will continue to become a more significant cash flow generator each year. The trend is very promising, with residential land sales of approximately $20 million in 2016, growing to $30 million in 2017 and then $48 million in 2018. The median home price increased to $383,000 for the year compared to $346,700 in 2017. Continuing in Houston, sales of new homes in The Woodlands were essentially flat, with 343 homes sold in 2018 versus 340 in 2017. The median new home price decreased from $533,000 in 2017 to $464,760 in 2018. This is the result of our sales mix and reflects the higher absorption of mid-priced homes in 2018. The price per acre year-over-year decreased from $628,000 to $618,000 or approximately 1.6%. The decrease is attributable to the mix of lots sold. For the year, The Woodlands residential land sales closed totaled $33.2 million versus $36.6 million in 2017, a slight decrease. According to our in-house research, as of January 28, 2019, we estimate that there were 84 spec homes available for all builders in The Woodlands, which is approximately a 2.7 month supply based on current estimated 2018 absorption levels. We continue to be cautiously optimistic that the return to more normalized supply levels could be an early indication of a potential return in demand for our residential land in The Woodlands at acceptable valuation. I'm pleased to report that land sales totaled $9 million at The Woodlands Hills, our first full year of sales. Thirty-five new homes sold during the year. The median home price is $350,725, which will be very competitive in the market. We are very pleased to be progressing with this new neighborhood. Turning to our Strategic Development segment, you will notice that the segment EBT decreased substantially in 2018 compared to 2017, despite the robust year of condominium sales at Ward Village. EBT was down by $94.7 million from $186.5 million to $91.8 million. This is the result of a change in accounting methods regarding revenue recognition for condominium sales that began on January 1, 2018. This change has made a comparison between the two years not meaningful. David O'Reilly will talk more about this in a few minutes. Despite the accounting change, we could not be more pleased with the progress we are making in Honolulu. Across the company in 2018, we commenced construction on nine new developments which, in aggregate, when stabilized, will add an additional $67 million to our NOI. Total cost of these developments, including just our share of cash equity required for our partnership in 110 North Wacker, is approximately $670 million. As we work to unlock the tremendous value within our MPC and start construction on new projects, we are able to increase our targeted stabilized NOI on a continuous basis. With 50 million square feet of entitlements remaining, we have an enormous opportunity to grow from within. In 2018, these new developments were spread across our entire portfolio, from 110 North Wacker in Chicago to retail in Houston, the new ballpark in Summerlin, and multifamily projects in Columbia, Summerlin, and Houston. Speaking of 100 North Wacker, we are very pleased with our leasing progress on the building. As of this week, we are 45% leased, having signed 86,614 square feet of leases in the last three months. The construction has progressed to our first typical floor, which in the world of high rise construction is a key milestone, a sign that a significant portion of the construction risk is behind us. As David said, our Operating Asset segment NOI increased to $173 million as compared to $157 million in 2017, an increase of $16.3 million or 10.4%. The increase would have been $20.8 million, or 13.1%, if we exclude the loss at the Seaport District. The assets that we have developed over the last few years are all increasing in occupancy and moving toward stabilization. We saw improvements in our retail, office, hospitality, and multifamily businesses. In retail, we saw great improvement, especially given the overall retail environment. In downtown Summerlin, traffic was up 8.5% over 2017 and NOI increased by $2.9 million from $18 million in 2017 to approximately $20.8 million in 2018. Ward Village also saw a $1.3 million increase in NOI on higher occupancy. We believe that downtown Summerlin will continue to improve after the ballpark opens and Ward's retail will continue its upward trajectory as more residents move into the neighborhood. This is a testament to the controls and lack of competition that we have in our communities and how the virtuous cycle of our development continues to add value. In office, we had increased occupancy at Three Hughes Landing, 1725 Hughes Landing, One Merriweather, 30 Columbia Corporate Center, and One Summerlin. We also placed Two Merriweather in service. In Texas, according to Collier's Fourth Quarter 2018 Houston Office Market Report, vacancy fell slightly to 20% and absorption turned positive. The office market posted 1.9 million square feet of positive net absorption in the fourth quarter compared to a negative 400,000 square feet during the same period in 2017. While the office market still struggles with vacancy, this is a positive note and we are hopeful that it will continue improving throughout 2019. By contrast, The Woodlands submarket has a Class A direct vacancy rate of approximately 10.4%. Because we are partially insulated from market downturns in our MPCs as a result of the controls we maintain and the high quality of our small cities, The Woodlands office market has held up much better than the general Houston market during the oil downturn. Large tenants are back to leasing space and there's no better example than our Lakefront North buildings. Since purchasing the two buildings in September of last year, we have signed leases for approximately 167,103 square feet, including 87,000 square feet with Arena Energy, 54,000 square feet with Entergy, and 26,103 square feet with ExxonMobil, bringing the campus of Lakefront North to 91% leased in under six months, far exceeding our lease-up projections. As of February 11, 2019, our Office Woodlands portfolio was 93% leased and our largest available contiguous space was only 13,250 square feet. Our hospitality NOI increased by $5.5 million from 19.7 million in 2017 to 25.3 million in 2018, a 28% increase. We saw improvements in NOI at all three of our properties, led by The Woodlands Resort and Conference Center with a 3.6 million increase in NOI for the year compared to 2017. The Houston Business Journal recently ranked all three of our hospitality properties in the Top 7 in the Houston area for revenue per available room. We are very proud of our hospitality team's work in Houston. We are very proud of our hospitality team's work in Houston. In multifamily, we consolidated Constellation Apartments and increased occupancy in One Lakes Edge, which increased our NOI. In summary, we are very pleased with the performance of all our segments. With that, I will turn the call over to David O'Reilly for our financial results and outlook.

[David O'Reilly:]

Thank you, Grant. I'd like to start with a quick overview of our earnings before summarizing our recent financing activity and then turn to our current leverage and liquidity metrics. I hope that you've been able to review our 10-K, earnings release, and supplemental filed yesterday, which contain details of our financial and operational results. I'd like to begin with the change in accounting methods. As we have previously mentioned, beginning in January of 2018 following the Financial Accounting Standard Board's new guidance for public companies, we have changed from recognizing condominium sales revenue on a percentage of completion basis per units under contract to recognizing revenue only when a unit's sale closes. Accordingly, we are required to recognize revenue in cost of sales for condominiums only after the sales to the buyers have closed. This change relates solely to the timing of recognizing revenue on these sales. It means that revenue will be generally recognized later than it previously had been and that the revenue is expected to be more volatile as it only is recognized as unit sales close, which tend to be in large numbers just after a building is delivered to the buyers. This change in accounting methods had a negative effect on earnings in our Strategic Development segment despite extremely strong condominium sales this year. Under the new revenue recognition accounting rules, we recognize $376 million in revenue in 2018. Under the former accounting rules, we would have recognized an additional $130.4 million of revenue in our Strategic Development segment for the year. Due to the change in accounting rules, the results are not comparable to 2017, where we reported sales of $464.3 million. We completed the year with GAAP earnings of $57 million, or $1.32 per diluted share, as compared to $168.4 million, or $3.91 per diluted share, for 2017. The $111.4 million decrease was primarily due to decreased earnings in our Strategic Development segment, which was due to the change in revenue recognition methods that I just mentioned. The reduction in revenue due to the accounting change was partially offset by higher MPC land sales and increases in minimum rents and other revenues as a result of increased occupancy in our Operating Assets. In addition, we recognized gains on sales of property totaling $51 million and a gain on the acquisition of our joint venture partner's interest of $23 million in 2017. We did not have the same gains in 2018. Offsetting these gains was a lack of losses from the redemption of senior notes and warrant liability losses of $46.4 million and $43.4 million that we had in 2017 but not in 2018. Turning to FFO, core FFO, and AFFO for the year ended December 31, 2018, all three were impacted by a decrease in condominium rights and unit sales as a result of the accounting change I just discussed, making the comparisons between years less meaningful. FFO decreased to $180.5 million for the year ended December 31, 2018 compared to $260.3 million for the year ended December 31, 2017. This decrease, again, largely attributable to the decrease in condominium rights and unit sales and an increase in demolition and development-related marketing costs, primarily related to 110 North Wacker and the Seaport District. FFO decreased to $74.8 million for the three months ended December 31, 2018 compared to $168 million for the three months ended December 31, 2017. While the fourth quarter included an increase in condominium rights and unit sales, as we close units in our Ae'o tower in the fourth quarter of 2018, the overall decrease in FFO was largely driven by several one-time items in 2017 that did not recur in 2018, including a decrease in benefit for income taxes and a decrease in gain on acquisition of joint venture partner's interest. Core FFO decreased to $251.6 million for the year compared to $298 million for the year ended 2017. This decrease was also largely attributable to the decrease in condominium rights and unit sales. As a result of closing Ae'o units in the fourth quarter, core FFO increased to $100.5 million for the three months ended December 31, 2018. AFFO decreased to $233.7 million for the year compared to $279.2 million for the year ended December 31, 2017. Again, this decrease was largely attributable to the decrease in condominium rights and unit sales. AFFO increased to $95 million for the three months ended December 31, 2018, again from the closings of Ae'o. As I just noted, our quarter-over-quarter comparison of FFO was negatively impacted by the one-time benefit we incurred in the fourth quarter of 2017 that did not recur in 2018 as a result of the tax act. While the new tax act might have caused an unfortunate comparison from an earnings perspective, it has and will continue to provide meaningful benefits to Howard Hughes on a go-forward basis. Specifically, the new tax act, with its reduction in corporate tax rate, is beneficial to us, especially in our residential land sales and condominium sales business, where we generate the bulk of our taxable income. We now do not expect to pay any meaningful federal tax in 2019 due to the following. First, our carryover NOLs and other tax assets have not been fully utilized due to both tax planning and lower taxable income in prior years compared to book income. Second, as we place large assets in service, such as Pier 17, we take advantage of extremely favorable bonus depreciation laws. From a tax perspective, one can think of our business as two distinct categories

[David Weinreb:]

Thank you, David. As you can see, we had another quarter and full year of outstanding results across the portfolio. Additionally, we had a great year of qualitative accomplishments at the Seaport, which was not reflected in our financial results as an asset due to its pre-opening costs associated with bringing new businesses online. When looking at the company, it is critical to not lose sight of the forest. In our case, our platform of small cities and vibrant destinations in which we enjoy dominant positions that enable us to generate superior returns. Our results should be assessed by looking at how we performed across our three complementary business segments in the aggregate, which, together, are the ingredients that make us unique. As I said at the beginning of my comments, the company has never been stronger and we are making progress in every facet of the business. As always, we will continue our quest to unlock and create long-term value for you, our shareholders. Thank you, again, for joining us today. With that, I will open the call to Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Craig Bibb of CJS Securities. Please go ahead.

[Craig Bibb:]

I'm glad there's time left for questions. Before I ask a Seaport question, you guys are crushing it at Ward Village and I assume the decision is already made to pull forward to opening two towers per year?

[David Weinreb:]

Well, we didn't say we were going to do two towers a year. We said we're studying the impact of acceleration and we will always do everything we can to move as quickly as possible but we will do it in a very measured way as we have in the past.

[Craig Bibb:]

So with 110 North Wacker, you guys did a great job of mitigating risk and preserving your upside but with Seaport, you seem to be going in the other direction. It's 100% equity, you have no partner, you're actually operating many of the businesses, you added the land at 250 Water Street. Why are you doing it this way and do you plan to offload risk down the road?

[David Weinreb:]

I think as it relates to Chicago, we've consistently said, obviously, we're building what we believe to be the best, tallest office building to be built in the last three decades. Our rents are as high as we know the market is receiving. But that's not a market that we see ourselves owning a single asset in for a lifetime.

[Grant Herlitz:]

And Craig, just to kind of answer that question. So, Chicago is pretty easy. Right? It's an office building, 1.5 million square feet, vision is clear, a third leased to Bank of America, GMP in place, timeline established, and clear vision and clear road to execution. The Seaport is vastly different than that. The vision took time to develop. It's now crystal clear. The buildings took time to build. The pier had to be reconstructed. The Tin Building was then redeveloped. Agreements had to be established with the city. Ground leases changed. It's a very complex, complicated development. And so bringing in capital at any time during those phases would have been destructive to value. I think the idea of potentially bringing in capital once vision is clear is always being evaluated by management and by the board and we'll execute that at the appropriate time.

[Craig Bibb:]

And you're pushing back the Tin Building by a year or just pushing back the expected stabilization?

[Grant Herlitz:]

Well, the idea was that it was always supposed to be completed by Q4 2020. We've moved that to 2021 in terms of an opening date. As far as stabilization, that's a ramp up on sales.

[Craig Bibb:]

And what happened?

[Grant Herlitz:]

It's our best guess at a ramp-up on revenue.

[David Weinreb:]

But the answer, the direct answer is that there hasn't been any particular change in when we expect that particular part of the Seaport to open at this point based on the approvals that we have in place today.

[Craig Bibb:]

And then are you guys -- I know you're expecting to have more of the office space on the pier leased by the time you got to year end. Things get delayed. Is there a core sticking point that's slowed things down there?

[David Weinreb:]

It's just decision making on the part of big companies. But what we can reiterate is that we have tremendous interest from several big companies that are household names and we're excited to make an announcement and will do so as soon as we're in a position to do that.

[Operator:]

Our next question comes from Scott Schrier of Citi. Please go ahead.

[Scott Schrier:]

I wanted to ask, a little more broadly speaking, across your portfolio, thinking about the cash rent that's expiring, and I know you spoke about Abercrombie not renewing their lease, but just, in general, the leases that are up in '19, can you talk about negotiations or trends you're seeing in renewing these leases, in terms of no problems them, the ability to raise rents, or any types of pressures you might be seeing?

[Grant Herlitz:]

So, obviously, because we have a very geographically diverse portfolio, you can imagine that the markets react very differently based on different trends. So, to kind of go left to right, in Hawaii, we're consistently increasing rents across the platform for the shorter term leases that are necessary while we're redeveloping the property. And, obviously, as the new buildings come online, we're getting market-leading rents and feel very encouraged by the rents that we're receiving. Summerlin, rents are moving fast. The market is moving fast and we have no problems leasing our office space or multifamily or the retail. In fact, Two Summerlin leased in half the time that One Summerlin was leased. And the Summerlin market, as you might imagine, or the Vegas market, is not a spec office market and Two Summerlin leased before the building was actually completed. So, we're very encouraged by that. That's not an accident. We've done everything we can to ensure that the amenities that are put in place in that community drive land prices primarily, because that's where the largest cash flow is generated. And then, obviously, because land prices are moving fast and promotional prices start to move, then our rents stabilize and drive value through recurring NOI, which is our virtuous cycle and we've proven over eight years it's a recipe for success. Chicago, incredible demand on 110 North Wacker. We're executing leases there. Slower to execute leases because they're bigger leases but we do have a number of things working at our expected rent. Chicago, as David said, is one of the best buildings in the market or the best development in the market and there's no real competition to it. It has the best site in the city and it will be delivered in the nearest term. In Houston, our Lakefront North is a clear example of why we dominate. It's an exceptional success story. We knew it when we went in to by that building. We bought it at a discount to replacement costs. We leased it in 60 days. Our leasing projection was two to three years. We leased it at record rents and we're 94% leased. We have 13,000 feet of contiguous space across that portfolio and our biggest obstacle is we don't have another building to deliver just yet, although we're working on it. So, that's a huge success. Multifamily, our monthly rent is increasing and retail, we don't have a lot of vacancies, so we're encouraged by that. In Columbia, it's a new market. We're creating brand awareness in that market. Downtown Columbia, although it's 40 years old, it's being rebranded, revitalized, and our 6100 Merriweather building, which comes online at the end of this year, will be a Class A+ building for the market. So, that's kind of where we are.

[David Weinreb:]

And just to add to what Grant said, the great thing about this company, we've said from day one, is our geographic diversity. And, specifically, that we're in markets that are so strong. So, on the horizon, we feel very good about where we are and how we positioned each of our major assets.

[Scott Schrier:]

For my next question, I wanted to ask a little bit about Bridgeland. Obviously, you've made tremendous progress there over the past couple of years and I understand you're opening up another village there. It seems to be an asset that's geared -- a little more affordable price points, potentially, than The Woodlands. I think now you're up there, you said, around the 380s for the ASP for the homes being built there. So, how do you think about the asset positioning there, whether from its land being used for certain ASPs, the pace of land sales versus the price points? Just the best way to optimize that asset, if you could talk a little bit about that.

[Grant Herlitz:]

Bridgeland sits in the path of growth. Northwest Houston, on the 99, the Grand Parkway. The master plan community sites around it are running out of land and it's a natural progression toward increased pace of land sales. If you look at our three-year track record, we've had increasing land sales substantially each year, year-over-year. That's not by mistake. We've designed it that way. We're hoping to get to a velocity of close to 1,000 lots in the next several years. That's subject to market demand, obviously, but we feel encouraged by that. Our goal is consistently increase price per acre on the residential. The biggest obstacle, obviously, in increasing price per acre is affordability. But when you look at where Houston sits in the affordability index for home sales, we still have room to grow. So, we're encouraged by that. February was a great month in terms of home sales and January was good. Obviously, 2018 was a great year for us. And so we feel very good about it. On the commercial side, it will take time to develop the real critical mass that's necessary for that to bring to bear but you can expect Bridgeland to be very much like The Woodlands a decade from now.

[Operator:]

Our next question comes from Vahid Khorsand of BWS Financial. Please go ahead.

[Vahid Khorsand:]

First question on your development costs and your marketing and development costs. Is that aligned? It looks higher than it was last year. Is that a standard level we should expect going forward?

[David O'Reilly:]

No. This is David O'Reilly. I'll address that. That was elevated this year. Those are costs that, under a typical development, you would expect to be capitalized but we are expensing them in accordance with GAAP. This year, we had outsized expenses there, specifically as it relates to 110 North Wacker, which was a critical project for us, as well as the Seaport, as we're opening new businesses there. So, that's a line item that I think is a little bit elevated this year and should return, in '19, to a more normalized level.

[Vahid Khorsand:]

And then going to your condo sales in Ward Village, you have Ke Kilohana coming on line middle of this year. So, I know you had said, for Ae'o, you were expecting about one-third, one-third, one-third. How do you expect to recognize the contracted sales of the new one?

[David O'Reilly:]

So, as you noted, we had three bulk closings for Ae'o, two of which occurred in December and one in January. With Ke Kilohana, we expect the majority of our closings will be in 2Q but there's a chance that some of them will slip into 3Q. It's just a matter of how quickly we can knock out the punch list, get the buyers to walk through their units, and see how quickly we can get to the closing table. With that many units, it's not something you can do on one particular day. It's something you have to space out over multiple weeks or a month. And as we get closer to that date, we'll be able to provide some additional color on the timing.

[Vahid Khorsand:]

And then my final question, on the MPC segment, specific to The Woodlands. I know you told us not to think of the acreage in The Woodlands as a material number but is that something you're looking to hold onto and use it to self-develop either a multifamily or retail or office spot there?

[David O'Reilly:]

I would say that the split between residential and commercial acreage is widest in The Woodlands. And when I say that, I mean we have the least amount of residential relative to commercial development. We have over 700 acres of commercial land to develop in the future and that's where I would expect to see the office, multifamily, retail, hospitality, etc. The 176 residential acres, I still expect to be sold as residential. And we have plenty of the development to do on the commercial acres so there's no need to shift that over.

[Operator:]

Our next question will come from Daniel Santos of Sandler O'Neill. Please go ahead.

[Daniel Santos:]

My first question, a two-parter on the Seaport. The first part is have you seen any change in the approval or planning process in light of the Amazon HQ2 experience? And then I know you talked about the potential of a JV partner. Have you had any initial discussions with anyone and what are you really looking for in a partner if that's the route you choose to go?

[Grant Herlitz:]

I think to kind of answer that, Daniel, obviously, we're keeping a lot of that close to our vest. But we continue to make progress with the municipalities relative to our entitlements at the Seaport. And Amazon HQ2, obviously, had a lot of press related to it. We're trying to stay above the fray and away from that and just make progress on our own development. As it relates to the JV partner, we haven't made plans to…

[David O'Reilly:]

Or financing or anything. We haven't discussed anything along those lines publicly, nor would I expect to until we have anything to announce. And I would say that we're not actively looking either. As David said, we are creating value there all the time. And to monetize a piece of an asset before it has maximized its value would cost our shareholders in terms of value creation. So, while we're always open to the opportunity of a structure like a 110 North Wacker and other of our assets, it would have to be when the cost of that capital is appropriate. And we'll have the best cost of that capital when we've taken risk out of the project and we have a couple of milestones that are very near term, within reach, at the Seaport, in terms of opening restaurants this summer, in terms of hopefully working with the local folks to move some air rights that will really create some value, de-risk the project, and I think, potentially, if we do look to raise capital, reduce that cost.

[Daniel Santos:]

And just, David, with Abercrombie moving out and the higher expenses, you said, offsetting some of the lease-up NOI, could you just give a little bit more color on what the next impact to Howard Hughes will be in 2019, both on a partial year and an annualized basis?

[Grant Herlitz:]

I think it's around $1 million of NOI on the Abercrombie lease.

[Daniel Santos:]

And then just one last quick one. Obviously, the demand for affordable condos in Ward Village is pretty healthy. Are you seeing an increase in demand or in competition just across the island? Or are you guys still the only ones sort of developing that?

[David Weinreb:]

I think the demand is just consistent. But I think what we've done is we've figured out that sweet spot in the market where we're creating product that is helping accelerate people acting and executing on buying new homes. So, we're very pleased with that.

[Daniel Santos:]

And are you seeing more competition from other developers?

[Grant Herlitz:]

There are a number of planned developments in the area but the barriers to entry is clear. Entitlement, No. 1, ownership of the land, No. 2, and pre-sales and pre-development costs, No. 3. All of which we have in our pocket. At the end of the day, we have the best location in the market. Sixty acres on the water overlooking Ko'olau with Diamondhead views. None of the other five are anywhere close to that. Clearly, any additional condo towers are competition. Any units are competition. But, at the end of the day, competition breeds success and our buyers are going to be attracted to us relative to the others.

[David O'Reilly:]

And I think, really, the best example, when we talk about critical mass, Ward Village exemplifies that because you can now see the Village coming to life with the buildings that have opened and it makes a huge difference. And we're hopeful that you will continue to see -- we will continue to see accerlation in our business plan there.

[Operator:]

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

[David Weinreb:]

I appreciate you all being with us today. I know our call ran a little bit longer than normal. Hopefully, you found that the additional details on the Seaport will be helpful and we will be discussing with investors the format to see if it's a good one to use on a move-forward basis. But as always, I'm available, Grant, David, Peter, we're only a phone call away if we can help. We appreciate you believing in us and we're going to continue to work real hard to create lots of value for our shareholders. Thanks and look forward to talking with you soon.

[Operator:]

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