The Howard Hughes Corporation
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Welcome to The Howard Hughes Corporation Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Peter Riley. Please go ahead.

[Peter Riley:]

Good evening. And welcome to The Howard Hughes Corporation’s fourth quarter 2016 earnings call. With me today are David Weinreb, Chief Executive Officer; Grant Herlitz, President; and David O'Reilly, Chief Financial Officer. Before we begin, I would like to direct you to our website at howardhughes.com where you can download our fourth quarter earnings press release. The earnings release includes a reconciliation of non-GAAP financial measures that will be discussed today to their most directly comparable GAAP financial measures. Certain statements made today that are not in the present tense are to discuss the company's expectations are forward-looking statements within the meaning of the U.S. 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 assurances that these expected results will actually 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 for joining us today. And welcome to our first ever quarterly earnings call. Since The Howard Hughes Corporation’s emergence as a public company six years ago, we have been sharply focused on building our business and unlocking the inherent value across our portfolio. We have made meaningful strides transforming raw land and underutilized real estate in the vibrant destination that generates substantial recurring cash flow, a number of factors differentiate HHC. Our ability to control supply and the customer experience within our small cities where we've created our own ecosystems and high barrier submarkets, our three complementary business segments and our pipeline of development opportunities. Together this position us to deliver some of the most attractive risk adjusted return opportunities in the public real estate sector. Over the past six years our focus has been on building our business and increasing the value of our assets. Today, a larger portion of our portfolio is beginning to generate recurring income and as such we feel that now is the time to begin conducting quarterly earnings call and providing increased transparency to investors. Given the relevant diversity and complexity of our business model, we recognize there is an opportunity for us to bring increased clarity to our assets so that our shareholders and future investors can more effectively underwrite the HHC value proposition and bridge the gap between our current market capitalization and what we believe is an appropriate net asset value for the company. In addition, over the coming quarters, we will be providing supplemental disclosures with our earnings releases that will provide additional visibility into the performance of our three business segments, as well as information that will allow you to better understand the net asset value of the company. With that as a backdrop, I would like to start by providing a quick recap of 2016, as well as speak briefly about a number of our key goals for the year ahead before spending a few minutes highlighting our progress at the Seaport District and Ward Village. I will then turn the call over to Grant who will take a deeper dive into our MPC and operational asset segments. Finally, David O'Reilly, our CFO will speak to our financial results and financing strategy before I finish with some closing remarks and then open the call to Q&A. The fourth quarter represented an important step in our evolution of the company. Some of the key highlights of our fourth quarter and full year 2016 results include, making meaningful progress towards growing our NOI in our operating property segment. Our fourth quarter 2016 annualized NOI was $155.6 million, compared to $128.4 million for the prior quarter, a 21.1% increase. We continue to grow our NOI closer to our pro forma stabilized NOI goal, public last quarter of approximately $215 million, excluding the Seaport. It is worth noting that this improved performance was driven by growth across all our product types, office, hospitality and multifamily were responsible for a majority of our quarterly gains. Additionally, along with our operating assets our MPC residential land sales continue to be a substantial source of cash flow and equity capital to self fund our strategic developments. We sold $49 million of residential land to homebuilders in Q4 and $163 million for the full year 2016. At Bridgeland, year-over-year new home sales were up 67.3%. We believe that the strength of this community is driven by its location near job centers in Northwest Houston and the opening of the Grand Parkway, which bisects our MPC. Additionally, in response to our view of the changing market, we adjusted our lot pricing and sizes to accommodate more moderately priced homes in 2016. The substantial increase in new home sales validated our plan and ability to adjust to a challenging economy while taking market share. While the successive 2016 was encouraging, we believe that it is just the beginning of continued acceleration of this MPC. Already in 2017 we've experienced a very dynamic start in Bridgeland with 42 new home sales in January, far outpacing the 15 home sold in January 2016. In 2017, we will look to take advantage of growing demand for homes by increasing infrastructure investment to support higher landfill velocity. We will also ramp up horizontal development of our new community, The Woodlands Hills in order to contract our first lots for sale by year end. For the fourth consecutive year, Summerlin generated over $100 million in land sales and we see no signs of this slowing down, given its unrivaled position in the market and the robust Las Vegas economy. We look to continue the strong and steady sales we experienced over the past four years. In our strategic development segment we had a number of accomplishments worth noting. First, we delivered Waiea, our first residential tower Ward Village. It is approximately 93% sold. We also welcome Nobu to the base of the building relocating from their Waikiki location. We believe that this relocation is indicative of Ward Village becoming the new center of Honolulu’s urban lifestyle. We obtained the $90 million tax incremental financing known as the TIF to fund horizontal infrastructure which will support 5 million square feet of vertical development in Downtown Columbia. We executed a lease and built-to-suit agreement with the credit tenant in the Woodlands for 203,000 square foot medical building at 100 Fellowship Drive and early in 2017 we acquired the Macy’s parcel at Landmark, paving the way for a substantial mix used development. 2016 was a very strong year and I expect 2017 to be one of significant progress as well. Our key focus for 2017 is to continue to grow NOI by leasing up and stabilizing many of our operating properties as we closed the gap between actual in-place NOI and our stabilized NOI target, made up of our existing operating property and strategic development of the construction. In addition to growing our NOI closer to our target, another one of our important goals in 2017 is to continue to increase our long-term stabilized NOI forecast as we move ahead on new developments. As we announced and begin construction on new development projects, we move the goal line of what our targeted stabilized NOI can be. Case in point, the new projects that we announced in the fourth quarter created a $16.8 million increase in our NOI goal from $215 million to $231.8 million, excluding the Seaport. I would like to provide a little bit of color on our strategic developments where we currently have more than 50 million square feet of vertical entitlements. At our MPCs, our strategy is to create complementary asset to connect our customers. They live in our communities, work in our office buildings and shop at our retail destinations. Because we control supply in these ecosystems, we have the unique ability to capture demand ahead of the curve and accelerate development by focusing on a given product mix based on market needs. This results in us having tremendous NOI upsize with limited risk and provides us with the ability to deliver outsized risk adjusted returns. Additionally, we internally fund our equity requirements for strategic developments through MPC land sales and recurring NOI. These developments will continue to raise the bar on our stabilized NOI projection and increase the net asset value of the company. A few highlights worth noting, at Ward Village we will deliver Anaha, a second residential building that is approximately 95% sold in the third quarter this year. This will generate substantial cash flow for the company. We also currently have two other buildings under construction Ke Kilohana more than 90% sold and Ae`o, which will have Hawaii’s flagship Whole Foods Market at the base of the building and it’s approximately 58% sold. The buildings will be delivered in 2019 and 2018, respectively. We have also obtained approval for our next tower, pre-sales will commence in 2017. As has been our past practice, we do not intend to commence construction until we achieve a minimum of 50% pre-sales on a building. In Summerlin we've been master planning approximately 5 million square feet for the next phase of our Downtown. At Downtown Summerlin look for us to welcome the completion of the NHL practice facility later in the year, as well as commence construction of additional projects including office building and multifamily projects. We've also continued our discussion with the city to potentially relocate the minor league baseball team and build a state-of-the-art baseball stadium in the heart of our Downtown. In the Woodlands we will break ground on the 203,000 square feet built-to-suit medical office building for credit tenant, as well as the 292 unit multifamily project in the Creekside neighborhood. We are currently working to secure additional built-to-suit opportunity and we will evaluate further development as three Hughes Landing continues to stabilize. In Downtown Columbia we will deliver two Merriweather, a 130,000 square foot office building and m.flats, a 437 unit multifamily building. We will also commence horizontal infrastructure development and look to secure additional anchor tenants for a potential third office building, as well as design our next multifamily development. In addition, we will commence construction on our first self-storage facility in the region. At the Seaport we will continue to open new tenants in the Uplands through 2017 and 2018 and advanced development of Pier 17 for summer 2018 grand opening. Additionally, we will advance design on the Food Market in the Tin Building to open in 2019. Before turning the call over to Grant, I thought it would be worthwhile to spend a few minutes providing additional context on both the Seaport District and Ward Village. First the Seaport, our vision for the Seaport District is well on its way to becoming a reality. The initial redevelopment encompasses seven buildings, spanning several city blocks along the East River Waterfront in Lower Manhattan. The development consists of four distinct areas, the Historic District Pier 17, the Tin Building and the new markets sites. The Historic District or as we call it the Uplands consists of 180,000 square foot of retail space, which includes the 100,000 square-foot Fulton Market Building, our first cornerstone tenant to open in the revitalized district with iPic Theaters which opened in October 2016 and have a 20-year lease on 46,000 square feet in the Fulton Market Building. The iPic at the Seaport is Manhattan's first new commercial multiplex movie theater opening in over a decade and currently iPic’s only Manhattan location. In September we announced that iconic retailer 10 Corso Como founded in Milan in 1991 by style visionary and former fashion editor Carla Sozzani will open in the Uplands as well. The store will be 10 Corso Como’s only U.S. location. For those of you not familiar with 10 Corso Como, it is the world's original concept store and emulate the living magazine, with its wide range of offerings that include the restaurant, bar, art gallery, fashion, home goods, design objects, books and more. 10 Corso Como will join other previously announced tenants in the Historic District, such as McNally Jackson Books, Scotch & Soda, by CHLOE and Big Gay Ice Cream. We expect the Uplands to be substantially repositioned by mid-2018. Turning to Pier 17, the new building will house approximately 170,000 square feet over four levels overlooking the East River and Brooklyn Bridge. The first two levels will house the mix of dynamic restaurants and experiential retail, including concepts from acclaimed restaurateurs Jean-Georges and David Chang. Floors three and four will consist of approximately 90,000 square feet of space but will likely be a mix of creative office, experiential retail and event space. Pier 17 will be highlighted by 1.5 acre rooftop event and entertainment venue that you will be home to a restaurant, private events and summer concert series, as well as the vibrant winter villages experience and what will be one of the most unique settings in all of New York City with unmatched views of the Brooklyn Bridge, East River and the New York’s skyline. The rooftop will be able to hold approximately 4,000 people standing or 2,600 people seated. Pier 17 and the rooftop will open in the summer of 2018. The Tin Building will encompass approximately 50,000 square feet housing the food market that will allow the most popular experience in the world. Operated by Chef Jean-Georges the market will pay homage the original Fulton Fish Market that opened at the Seaport in 1822. The existing building will be carefully deconstructed, remove from its deteriorated platform and rebuild 33-feet Peck from the FDR Drive to restore its visibility and move it above the floodplain. The reconstruction is expected to be complete in 2019. In 2017, we intend to advance discussions with the city on the new market sites, which will allow us to take advantage of the remaining 650,000 square feet their rights we have in the Seaport District. We will work with the city to bring these assets to their highest and best use. Upon full build out the Seaport will be well-positioned to serve as an anchor to Lower Manhattan and capitalize on the vibrant growth occurring in this area. In curating the District, we've structured many of our leases to have a significant component of percentage rents. As such, our ability to realize returns at the higher end of our expectation will be driven by the ultimate sales productivity footprint that our food and restaurant offerings achieve. We could have accepted a more traditional business model with base rent and lower returns. However, I believe we can create greater risk-adjusted returns on a priceless piece of real estate by creating a destination with distinct experiences and participating in each of our tenants’ acceptance. Given the Seaport’s layered possibilities, it is currently more complicated the value than other core assets and as such will likely take time to see that. Our vision is to create a destination of property that is irreplaceable as it relates to location, architecture and iconic nature in the heart of one of the fastest growing neighborhoods in the world's most vibrant city. We are updating our total construction cost of the Seaport District, now inclusive of the Tin Building to be a gross cost of $785 million or $731 million net of our Superstorm Sandy insurance proceeds of $54.1 million. We're targeting a stabilized annual return on this investment between 6% and 8%. However, there are no true comps to district like the Seaport and as such we believe that upon stabilization the Seaport valuation could be enhanced by its potential ability to command the below market cap rates. At a minimum, I am confident that Seaport will be worth well in excess of our projected costs, with the potential to ultimately devalue at several multiples of our costs. Shifting to Hawaii, at Ward Village we are essentially developing a vertical MPC on the 60 contiguous acres we own there in the heart of Honolulu. With the completion of Waiea and the opening of Nobu in late 2016, expected completion of Anaha in 2017 and opening of the flagship Whole Foods in Aeʻo in 2018, Ward Village’s transformation is becoming more of a reality each passing day. We are creating a critical mass where Ward Village is the most desirable area live and play in the city. No other development can offer the curated master-planned environment of this great community. Our skill has not only helped to create extensive place but also provided us with some key competitive advantages. First, it has created barriers to entry for other potential condominium developers. Other developers have substantially higher predevelopment costs and could have trouble competing for the limited material and construction resources available on the island. Further, our skill provides us with first-hand in-depth market knowledge, a strong competitive advantage along with our $25 million sales gallery that is one of the most dynamic sales experiences ever seen. This information flow helps us as we are in the early development phases of our next towers and we are using the information gathered as the largest condominium developer in O‘ahu. The design units and target buyers will receive the demand is great to help drive our future success. While 2016 was a great year for Howard Hughes. We still have much to accomplish. We are squarely focused on the goals ahead. In 2017 and beyond we continue to deliver exceptional risk-adjusted returns and value creation for our shareholders. Now, I would like to turn the call over to Grant.

[Grant Herlitz:]

Thanks, David. I would like to start by taking a deeper dive on some of the underlying themes driving our recent results in our MPC operational assets and strategic development segments, and then spend the few minutes highlighting some of the capital recycling activity that resulted in some important strategic acquisitions in the fourth quarter. First, within our MPC segments. At The summit in Summerlin, our joint venture with the Discovery Land company restructured the joint venture to monetize land that we were not planning to develop for over a decade. We contributed undeveloped land to the venture and agreed upon value of $125.4 million or $226,000 per acre. It is important to note that developing a typical Summerlin subdivision would require an additional investment of approximately $175,000 per acre. However, under the terms of our joint venture we are not required to contribute any further capital. Discovery is required to fund up to a maximum of $30 million for development cost as their capital contribution. After receipt of our capital contribution and a 5% preferred return Discovery is entitled to cash distribution until it has receive two times of the equity contribution. Any further cash distributions are share 50/50. Land development at the Summerlin in the second quarter of 2015 and continues to progress on schedule based upon the initial plan. For the year ended December 31, 2016 60 customer residential lots closed for $184.9 million and an additional 11 lots are under contract for $41.5 million. As of the end of 2016 we already received distributions of $22.9 million and recorded $43.5 million as our share of earnings from this joint venture. The success we have enjoyed to-date truly validate our strategy of monetizing land earlier than projected which accelerated cash flows of the company without putting additional capital at risk. Also in Summerlin we have made great strides to increase the velocity of land sales, one area we're focused on has been on developing a product that needs the Board approval of potential home buyers. In the Greater Las Vegas region approximately 70% of home sales are $400,000 and below. In Summerlin we have not historically been able to meet that segment of market demand while maintaining our current market price per acre of land. As a result of our success in terms of leading the region in home prices, we have been unable to capture 70% of the new home buyer markets. Our efforts here have been around developing a lot size structure and product type that can maintain the high-quality of product in Summerlin, allow us to have a home price point that meets this demand and maintains our current market prices per land acre. The goal would be to accelerate the sale of land into 2017 and 2018 that would otherwise not be monetized for many years into the future. This could provide for both the acceleration of near-term cash flow and also be executed in an MPV positive manner driving value creation for our shareholders. Within our operating assets segment we have drove the NOI increases, David discussed through positive leasing absorption and bringing new projects online specifically. We experienced quarterly office NOI growth of $2.5 million which is primarily attributable to the continued stabilization of two Hughes Landing and 1735 Hughes Landing, as well as contractual rate increases across our Woodlands office portfolio. We increase leasing across the portfolio from 82% to 84% quarter-over-quarter. I would also like to highlight three Hughes Landing. Our most recent 320,815 square foot office development in the Woodlands, where we lease over 35,000 square feet in the fourth quarter and over 64,000 square feet for 2016. Given the lack of available space in the Woodlands, we would have love these yields if it were not for three Hughes Landing. Moreover, the vast majority of these tenants are moving from forward away to three Hughes Landing as a primary tenant in forward way it stands. Hospitality NOI quarterly growth of $2.7 million was driven by increased activity of The Woodlands Resort & Conference Center, as well as contingence stabilization of the recently completed Westin and Embassy Suites in the Woodlands. Multifamily NOI quarterly growth of $1.4 million was driven by the stabilizations of the Metropolitan in Downtown Columbia and improved performance at first of our Millennium multifamily assets in the Woodlands Downtown. We aggressively lease our multifamily assets from 81% to 86% quarter-over-quarter. We expect occupancy to grow significantly at One Lakes Edge and the Constellation as they continue to stabilize in the coming quarters. Specifically, performance at the Constellation in Downtown Summerlin is being especially pleasing as we experience quarterly increase in percentage lease from 42.7% to 62.9% as of year end on the project we only open tenants in the third quarter of 2016. In our retail portfolio we experienced quarterly NOI growth of $590,000 that was driven by the continued stabilization of our Hughes Landing and Downtown Summerlin projects. We continue to lease Downtown Summerlin and replace underperforming tenants. We still remain committed to achieving our targeted stabilized NOI projection of $32 million within the next two year. Additionally I should note that residential rental prices are up approximately 25% in Summerlin since opening our Downtown. A great example of the complementary benefits of business segments and the virtual cycle associated with developing in our MPC ecosystems. In third quarter of this year, we did experience some headwinds in our efforts to Downtown Summerlin with the bankruptcy filing of first Sports Authority endorsement. We are actively engaged with tenant from their potential backbone and hope to have an update on these boxes in the coming quarters. Our other Sports Authority was in Ward Village. This was a rare situation where a tenant bankruptcy despite its short-term negative NOI impact was actually good news for us. In Ward Village Sports Authority have a long-term non-cancelable lease which was impairment to the next phase of our development. The bankruptcy and our eventual acquisition of their lease phased away from more cost effective, faster redevelopment of that parcel. We have made substantial advances within our strategic developments. I would like to discuss our more nuanced achievements and highlight key accomplishments that were year in the making and critical to creating value for our shareholders. At the Seaport we make critical progress in advancing our transformative visions for the District. In October of 2016 we received approval of our Pier 17 minor modification, which includes the reconstruction of the Tin Building into Jean-Georges. In January 2017 we executed the ground lease amendment to the City of New York incorporating the Tin Building into our lease premises. With still the 80 South Street Assemblage for $390,000 or $477 per square foot significantly bolstering our cash position, finding us for new opportunities and procuring the company for changes in the real estate cycle. 80 South was an example of our team innovative approach and ability to complete large complicated transaction as we generate the approximately $140 million in profit from this deal. Turning to Colombia, in November of this past year, the Howard County Council approved the $90 million tax increment financing or TIF. As part of the TIF arrangements entitlement to exist to construct an additional 774 affordable housing units totaling approximately 1 million square feet for the local community increasing total entitle space to over 14 million square feet for all of Downtown Colombia. The TIF will provide capital for the development of key roads, infrastructure and then approximate 2,500 space parking garage to service our local office buildings and other commercial developments within Merriweather District. The infrastructure and parking it will be funded by the TIF, a critical in our 5 million square foot buildout over the Merriweather District that is currently underway. The first office building one Merriweather was recently delivered and we will complete the second office building by year end. We are actively planning future office and multifamily projects in the district. In the Woodlands we recently delivered our first self-storage facility on time and on budget. The second facility will be delivered in the second quarter. This is another example of our Woodlands team ability to transform non-income producing commercial land into long-term cash flowing assets. While speaking about the Woodlands, I would like to a spend a minute discussing the overall performance of the commercial real estate in Houston and contrast that job performance in the Woodlands. Obviously the commercial office market in Houston is taking a sharp decline over the past year and half and that decline has materialized in higher vacancy rates, increased public space and weaker net absorption. In 2016 according to CoStar office direct vacancy rates closed the year at over 22%, exclusive of approximately 11.8 million square feet sub-lease space. This is in sharp contrast with the office performance in Woodlands where we close the year 12.3% direct vacancy and experienced over 49,000 square feet of positive absorption in the fourth quarter alone. Turning to our recent acquisition and disposition activity, we engaged in several transactions that will allow us to recycle our capital from non-core assets into our core markets. In January of 2017 we closed on the sales of parcel of land at The Outlet Collection at Elk Grove of approximately 36 acres for gross sales per seats of $36 million. The disposition accelerated the monetization of land value at The Outlet while allowing us to retain upsize in the remaining 64 acres which we plan to develop. In addition, we were recognized a tax loss on net sales of $37.5 million as our tax basis on the assets was substantially higher than our sales price. In addition, we sold Park West, non-core opening shopping center in Peoria, Arizona for $32.5 million, unlocking at $17.6 million tax benefits. The combined $68 million of proceeds from the disposition will allow us to redeploy the net cash proceeds into acquisition and in developments. We were able to make great progress in our redevelopment effort at Landmark Mall in Alexandria, Virginia by purchasing the 11.4 acre Macy’s store and parking lots for $22.2 million. We plan to transform the mall and Macy’s parcel into an open and mixed use definition with retail residential and entertainment components. In addition, we redeploy capital by acquiring two office buildings in Columbia, Maryland that are strategic for our ongoing efforts to create a cohesive Downtown in Merriweather District. We acquired the American City Building for net cash proceeds of $13.5 million. While this office building is vacant, it very lies in our ability to unreveal complicated and restricted park amusements which will allow us to redevelop the significant portion of the Lakefront District in Downtown Columbia for up to 1.5 million square feet of additional density. Lastly we acquired One Mall North, a 100,000 square foot 100% leased office building in Columbia, Maryland on 5.37 acres for $22.2 million. Without assigning any value to improvements the applied purchase price for the building would equate to the value of the land we contributed to our first joint venture with Calida for the construction of the metropolitan. We believe our spaces in the building positions us to create value over the long-term. We will continue to look for opportunities to accelerate monetization of non-core assets and redeploy that capital into higher returning core development projects. With that, I will turn the call over to David O'Reilly for financial results and outlook.

[David O'Reilly:]

Thank you, Grant. I would like to start with the quick summary of our earnings and adjusted earnings per share before summarizing our recent financing activity and then, finally, turning to our current leverage and liquidity guidance. We completed the fourth quarter with GAAP earnings per diluted share of $1.02 as compared to $0.59 for the fourth quarter 2015. As you are probably aware we adjust GAAP net income for the non-cash impacts, depreciation, amortization and warrant liability gains and losses. We have provided a reconciliation of adjusted net income to GAAP net income on page eight of the earnings release. Adjusted earnings per diluted share for the fourth quarter 2016 was $1.69, which compares favorably with the $1.23 per diluted share in the prior period. This 73% increase in our fourth quarter EPS over the same period in 2015 is largely attributable to stabilization of properties in our operating asset segment, continued to strength in residential land sales our MPC segment and increase condominium sales volume in our strategic development cycle. For the year we have earnings per diluted share of $4.73 compared to the $1.60 in 2015. Our adjusted earnings for the full year we recorded $7.78 compared with $3.24 for 2015. This represents over a two-fold increase in our adjusted earnings per share year-over-year. Our sale of the 80 South Street Assemblage where we recorded a gain on the sale of $140 million drove the large portion of this increase. This sale contributed $3.29 of the $4.54 increase in per share adjusted earnings. Similar to the improvement in our fourth quarter adjusted EPS the remainder of the full year increase was driven by stabilization of property our operating asset segment continued strength in residential land sales in our MPC segment and increased condominium sales volume at our strategic development segments. Again, continued strength across all three business segments drove material adjusted earnings growth. Turning to our balance sheet because there are number of important financing during and subsequent to the end of the fourth quarter. Our capital market team has done a tremendous job assessing debt capital and finding Howard Hughes unique, creative and efficiently priced debt capital. The fourth quarter was another great example of their efforts. First, we closed $142.7 million partial recourse construction loss at Ke Kilohana at Ward Village. This loan has a three-year initial term with the one-year extension and there is interest at Waiea at 3.25%. The initially maturity date is December 2019. Total development cost for Ke Kilohana is expected to be $219 million and we expect to use $19 million in deposits to fund the portion of our required equity for this project. Also at Ward Village we close on a $230 million construction loan for Aeʻo. This loan bears interest at one-month LIBOR plus 4% and has a three initial term with two one-year extension option. The initial maturity date is December 23, 2019. Total development cost for Aeʻo are expected to be $429 million and we expect to use $52 million in deposits to fund the portion of our required equity for this project. In addition, we completed two long-term fixed rate financings on a few stabilized assets in the Woodlands and Columbia. In the fourth quarter 2016 we financed our Hughes Landing retail property for the $35 million 3.5% 20-year fixed rate loan and in early 2017 we financed our Columbia regional building with the $25 million, 4.48% 20-year fixed rate loan. Also subsequent to year end we upsize the 10-60 Columbia Corporate Center NOI by $14.5 million to finance acquisition of the One Mall North box building. As of the end of the fourth quarter our net debt to total market capitalization and total assets remained at conservative levels. Our net debt to total market capitalization closed the quarter at 36.8% and our total debt to total assets was at 42.3%. From a liquidity perspective we finished the year with over $665 million of cash on hand. As of December 31, 2016, we had 15 projects in our strategic development sites with anticipated total costs of $2.76 billion. Of that amount we have previously funded $1.4 billion, leaving $1.35 billion in unfunded commence. We expect to meet this obligation for the combination of existing construction books which currently have approximately $714 million are committed the undrawn capacity. Final deposits of approximately $118 million and new construction financing totaling $82 million. That leaves a net remaining equity requirement of $439 million. The majority of this amount is tied to the Seaport District which we have not yet start construction financing for. We expect to fund our remaining equity commitments through a combination of new construction financing, our free cash flow from our operating assets and MPC segments, net proceeds from non-core assets sales and lastly our existing cash balance. This puts us in a very strong position for development company of our scale. We currently have more than a cash and liquidity on hand to meet all of our funding commitments without any additional cash being generated value from MPC land sales and our operating projects. With that, I will now turn the call back over to David for closing remarks.

[David Weinreb:]

Thank you all for joining us today. One of our goals that I mentioned earlier is to provide additional clarity on our assets and business, the shareholders to increase communication and supplemental disclosures. I hope that this call is a solid step in that direction. I would also like to mention that we are planning our first Analyst and Investor Day on May 17th at the Seaport District in New York City. Please save the dates and we will follow-up with additional details as the date approaches. And with that, I will open up the call to Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Steve Shaw of Compass Point.

[Steve Shaw:]

Hi, guys. Did you gave an NOI number for the Seaport?

[David O'Reilly:]

We didn’t gave an NOI number, but in David’s prepared remarks, Steve, and this is David O'Reilly. He gave an estimated yield range between 6% and 8% and highlighted that given that most of our leases there are not traditional they are more depending on the percentage of sales that that range between 6% and 8% will be dependent upon the sales per foot of the underlying tenants, which is why that range is bit wider than we perhaps normally quote.

[Steve Shaw:]

Okay. In terms of delivery on specific assets, I think, David had said, summer 2018 for this year, 2019 for the Tin Building what was the -- when is the Historical section being delivered?

[David Weinreb:]

Hi. It’s, David, so the Historical District, obviously we opened up I think last year which haven’t been down, I hope it will commence really a dynamic experience and we think critical mass is important, so we are now targeting basically everything to open sometime between the second quarter and then during the summer of ’18.

[Steve Shaw:]

Okay. And how is the pace of leasing at right now, is it slowing down or is it faster than you guys were thinking actually at the Seaport?

[David Weinreb:]

I think it’s what we have expected. You really have to come to see the property and now that the property is getting to a point its completion that you can walk it and really feel the experience that we have created. The people that we've been talking to on an ongoing basis are very excited. So, again, I encourage you to come down if you haven't and we have got a lot of strong interest that we haven’t announced and we are quite confident that the end product is something that everyone is going to be very pleased with.

[Steve Shaw:]

And how is the leasing at one and two Merriweather?

[Grant Herlitz:]

I will take that Steve, this is Grant. What we have experienced is great demand through 10-70 Columbia of small tenants. Our goal is to fill full floor tenants at one and two Merriweather, as you know, we turned over the space in December to MedStar who -- in one Merriweather who will occupy around 50% of the building. We have some smaller deals working. We are also going to full out a floor with [ph] Spec Sweets (46

[Steve Shaw:]

It looks like conference activity is picking up in Houston is an indicator for how things on in the overall market?

[Grant Herlitz:]

There obviously as oil prices stabilized we are seeing increased activity that still hasn’t yet translated into a pickup in officer activity, but we are seeing absolutely an increase in the hotels, we had a phenomenal January and February is being great.

[Steve Shaw:]

Thanks.

[David Weinreb:]

Thanks, Steve.

[Operator:]

The next question is from Craig Bibb with CJS.

[Craig Bibb:]

Hi. Congratulations on your first ever conference call.

[David Weinreb:]

Thanks.

[Grant Herlitz:]

Thanks, Craig.

[David Weinreb:]

We had a good.

[Craig Bibb:]

Extremely thrill as for professional for first time out. Could you talk, the Seaport, just to make sure I 100% understand, nothing is really going to happen at Summerlin so it’s really Q2 in summer of ’18, per se it’s going to be opening in [ph] NOI (47

[Grant Herlitz:]

I think you are correct, the actual reserve rates for Pier and the Tin Building based on David’s comment earlier. But within the Historic District is already, we are already opening some long-term tenants like iPic. We are under buildout right now with Scotch & Soda and By CHLOE and as those are complete we will be opening the tenancy. So right now it’s already turning over, it’s already very vibrant on this side of FDR, but consist with David’s prepared remarks the Pier will be open in summer of ’18 grand opening and the Tin Building in 2019.

[Craig Bibb:]

Okay.

[David Weinreb:]

I think what you can expect to see particularly with the Pier and the Rooftop, this summer concert series will commence in ’18, but we are planning several dynamics events on the Roof that will happen in the second quarter, but we haven’t announced yet what those will be.

[Craig Bibb:]

Okay. And any progress on the third and fourth floors of Pier 17?

[David Weinreb:]

We have a number of tenants looking and we expect that and during this calendar year we expect to be in a position to announce who will be leasing the majority of those floors.

[Craig Bibb:]

Okay. That’s great. And then, the velocity of sale -- land sales in Houston perfectly Bridgeland really picked up, do you have a broad target of where you could be in terms of lots of acres at Bridgeland next year?

[Grant Herlitz:]

For 2017 we are hoping to be at or above where we were for 2016, but we expect the velocity pick up dramatically given the price point they were achieving at Bridgeland more of a -- if you look at the Woodlands the historical comparison, the Bridgeland as it develop could generate as many of the 1,000 lots per year, Woodlands is doing at its peak even 2,000 lots per year, Woodlands at its peak. And as development expense Northwestern Houston and the opening of the Grand Parkway our competitors are running out of land such a single rent. Bridgeland is the next major master plan community. We expect great things out of it.

[Craig Bibb:]

Okay. And it looks like you push back Anaha a quarter or am I mistaken?

[Grant Herlitz:]

It was already targeted to be delivered either in the summer or second quarter or third quarter. So, it’s probably a month difference, there is no delay on that project.

[Craig Bibb:]

And you guys have some nice press in the Wall Street Journal, I think, it was this weekend, can you talk about just like, what’s going on competitively with other large towers?

[Grant Herlitz:]

So, I think, this is a really interesting phenomenon. What we did in a couple years ago was build the sales center at which we spent around $25 million creating. This sales gallery is a one-of-a-kind. Most condo developer will build a sales trailer and ensure they are big product. We have the ability to command a premium on pricing, because we offer condo product at old price point that creates an immediate barrier to entry for any new developer. Our two major competitors will force cancel two projects. I think part of the reason I did that is because we are dominating the market. The second reason is that we have scale. It is 60 acres of continuous property overlooking the water, it’s the best land in Honolulu with the vision o0f a cohesive project. So we are creating natural barriers to entry. In addition, a single developer has to reach a 50% pre-sell threshold as well as spend %5 million to $10 million on pre-development. We are moving forward to one tower ahead of schedule. We are already designing -- we already received our approvals for our [inaudible] (51

[Grant Herlitz:]

I would add also that with Ward Village we are essentially developing a vertical MPC, as I mentioned earlier in the call. And what's exciting about getting the buildings open now with while they are open and Nobu opening at the base, Anaha opening this year and Maryland should be open before the end of the year. And then Whole Foods -- the flagship Whole Foods opening up by the end of the first quarter of ’18, people are really going to start to understand the vibrancy of what we are curating there, what we have created and quite frankly there won't be anywhere else that people are going to want to live. It’s going to be very, very hard to match the offerings of lifestyle that will be available there.

[Craig Bibb:]

Okay. And then, last one on Ward Village, I think, it’s Ward warehouse that demolish recently are getting ready to be demolish and that’s to make way for the Gateway Tower and has there been sales smoothing on that projects.

[David Weinreb:]

We have had additional sales. We are very, very committed to that project. We are taking that building down and as we do with everything that we believe in as we do that those two buildings we are planning on staying the course and clearly there is a slower demand in that higher product type, but we have great confidence in the first of those two towers moving ahead ultimately. We don't have a target date on when we'll start actual construction, but we are make -- taking first steps towards that goal.

[Craig Bibb:]

All right. Thanks a lot guys.

[Grant Herlitz:]

Thank you.

[Operator:]

The next question comes from Sam McGovern of Credit Suisse.

[Sam McGovern:]

Hey, guys. Thanks for taking my question. I was hoping you guys could talk a little bit about how you use the balance sheet with project debt versus corporate debt and if you guys have any sort of target leverage metrics?

[David O'Reilly:]

Sure, Sam. This is David O'Reilly again. So what we typically do or what we traditionally finance has been to pursue non-recourse debt by far margin whenever possible on a construction of new developments. As those projects stabilize we take out that shorter term construction financing with long-term mortgage and limited short-term interest rate risk and taking maturity off the table. And we are really focused on making sure from the balance perspective that we always have enough cash on hand to finish all the projects that we have under construction. So it’s not as much as a leverage target because our leverage metrics, whether the debt to enterprise value are going to bounce around the where we are trading any particular day and net debt to EBITDA can be very volatile because we even go from 8 times last quarter to 5.5 times this quarter based on the timing of condo sales. So those metrics while we have targets internally, we make sure we have appropriate coverage. They are not great targets getting the volatility. What we really target is making sure we have the liquidity to finish all of our in-process construction projects without having to go to market sales assets or be in a position to get caught. So that’s what’s paramount to us as a management team making sure that that we do maintain that liquidity and take that risk of getting caught in one point of the cycle off the table.

[Sam McGovern:]

Got it. That’s helpful. Thanks so much. I will pass it along.

[David Weinreb:]

Thanks, Sam.

[Operator:]

The next question comes from Alex Barron at Housing Research Center.

[Alex Barron:]

Hey, guys. Congratulations on all the progress over the last two years.

[David Weinreb:]

Thank you.

[Alex Barron:]

I want to ask about your views on the Houston housing market, obviously that market has been hit pretty hard over the last couple years since oil fell and I guess it has to -- has have to readjust but kind of wondering what your view of that market is at this point in time and what you're hearing from the various builders that you're talking to as you are preparing to sell land for them?

[David Weinreb:]

To try to answer that, we started ’16 thinking that it would be much slower year for Bridgeland. We moderated pricing and by doing so we attracted demand. By moderating that pricing and increasing velocity we accelerated our development spend to allow for that to reoccur in 2017. January and February been exceptional months compared to January and February last year. And that is for the moderated product. The Woodlands is still not selling as fast as it was before, although, January and February being better compared to the year before. What I would say here is that, Texas, is a vibrant state. There is job growth all over the state. Houston has built an economy that is although it still dependent on oil and gas, its first bite into healthcare and other sector. It still has one of the second largest in the country. There is job growth even in one of the most severe declines. So what we would like to think is that this is an affordable place to live in the country and that as it continues to grow and as job growth accelerate that will increase demand for housing.

[Alex Barron:]

Okay. And the Woodlands, how many residential lots are left there before you guys run out and when does the Conroe property take in?

[Grant Herlitz:]

So Conroe property we expect the first sales to take place in the fourth quarter. We have accelerated development there and now looking forward to that grand opening. And answer the number of lots I am going to turn it over to David O'Reilly.

[David O'Reilly:]

We have 338 residential acres left in the Woodlands and 781 commercial acres left. Number of lots, it’s -- we can give you an estimate…

[Grant Herlitz:]

About 1,200.

[David O'Reilly:]

That’s going to change as we adjust lot sizes to maximize pricing of the acres and velocity as necessary.

[Alex Barron:]

Okay. And you are not including the Conroe property within those numbers, right?

[David Weinreb:]

No. that’s correct. That exclusive, that -- those acreage exclude Conroe.

[Alex Barron:]

Okay. Great. If I could ask one on Hawaii, which buildings are you guys recognizing revenues at this point. Is it just Waiea and Anaha or some other ones as well?

[David Weinreb:]

Just those two, just those two.

[Alex Barron:]

You expect the others to start pretty soon like next or so?

[David Weinreb:]

Well, I would say that, as construction progresses and if it start moving on schedule, I think, the early listing, probably towards the second half end of this year is where we will see the next tower start to show. It all depends on the number of contracts that we have to qualify and how fast that construction progresses to make sure that we are meeting threshold for the percentage completion method.

[Alex Barron:]

And as it pertains to those units, especially like Waiea that’s almost, pretty much completed, what kind of units are left, is it depend on housing or what’s left to sell?

[David Weinreb:]

The remaining 12 units or 15 units in Waiea are higher priced units. They are on the $4 million per unit or higher and the two top penthouses are currently listed at $35 million a piece.

[Grant Herlitz:]

Actually we just completed the 36 floor penthouse which is the penthouse that was noted in the Wall Street Journal article and we have a lot of sales associates all over the world that are now showing this to clients and we have had a strong interest in seeing the product and people that have been there. We also have the upcoming art biennial which will be the first of its kind in Honolulu and we expect a lot of wealthy people from the West Coast to be in town for that and we expect them to be touring those properties during that time.

[Alex Barron:]

Okay. If I could ask one last one, on the line item equity and in earnings from real estate affiliates where you book $57 million this year and can you provide any sort of guidance for 2017?

[Grant Herlitz:]

No. We historically have not provided guidance on any individual line item, although really at any level within Howard Hughes. I think that we are going to look to see what would be the most appropriate guidance on a going forward basis as we progress through the rest of this year as we start to increase our disclosure. Our non-consolidated joint ventures and the income that we received there have been largely a result of our joint venture in the Summerlin with Discovery Land at the Summit and we expect that will continue to be very successful and generate significant equity and earnings.

[Alex Barron:]

Okay. Thanks and congrats on all the progress.

[David Weinreb:]

Thank you.

[Grant Herlitz:]

Thank you.

[Operator:]

The next question is from [ph] Tracy Pawet (01

[Unidentified Analyst:]

Hi. My first question is for Grant. Grant, how many lots remain unsold in the Summit?

[Grant Herlitz:]

Tracy, it’s a good question and I get hand out one second, I get you a exact answer. It’s 278 lots total of which I want to say about 150 lots are sold and there are about 40 under contract right now.

[Unidentified Analyst:]

Okay. Thank you. And then the next two questions are for David O'Reilly. How cash will be generated by the exercises of the warrants?

[David O'Reilly:]

Which warrants are you referring to, so there are two warrants, there are sponsor warrants and management warrants. Both of which I would expect to be net settled such as they would not generate any cash for the company, but I don’t know for use that that will be the case with the management warrants. Right now the sponsor warrants only have the ability to net settle.

[Unidentified Analyst:]

And it’s the management warrants are exercised then what would be additional cash fee to the balance sheet?

[David O'Reilly:]

It would be $100 million.

[Unidentified Analyst:]

$100 million.

[David O'Reilly:]

If they are cash settle in full.

[Unidentified Analyst:]

And my last question, David is, some of my predecessors who already spoke mentioned in their research reports that the company is undervalued and underfollowed, what are you doing to see that the company is no longer underfollowed?

[David O'Reilly:]

Well, we -- as I think we all figure out we started conference call, so that’s a good first step. We are also going to continue to increase the depth and breathe of our disclosure as you saw in our REIT drafted 10-K and what we with additional supplemental information in the coming quarters. As David, we are going to have an Analyst and Investor Day that will be here in the Seaport in May of this year which we hope to get additional eyeballs on and I am counting on doors all up and down in New York City and Wall Street, trying to highlight the value opportunity that we believe that Howard uses and how we think that smart research analyst and investors can really make a name for themselves by highlighting that opportunity to their clients.

[Unidentified Analyst:]

Good. Thank you very much.

[David Weinreb:]

Thank you.

[Grant Herlitz:]

Thanks.

[Operator:]

The next question is from Will Randall of Citi.

[Unidentified Analyst:]

Hi. This is [ph] Ken (01

[Grant Herlitz:]

I will answer than and David you can add something if you have it. But I would say that we are as optimistic as ever regarding what we are building here. We always felt like this would be -- that the property would be focused on great FNB, entertainment and destination retail as evidence by our announcement of 10 Corso Como. We are on track to deliver that and I think will be creating an experience at the Seaport that’s unlike any other New York, quite frankly, any other anywhere in the country and I think that that’s going to drive great traffic down here, particularly the locals.

[David Weinreb:]

Yeah. And I would just add to that, the softness in the retail market is the direct results of the tenancy in that market. These are national tenants that are competing with the likes of Amazon. These are not the tenants that were seeking for the project.

[Unidentified Analyst:]

Got it. It’s very helpful. Thank you.

[David Weinreb:]

Sure.

[Unidentified Analyst:]

And in terms of your master plan communities, can you talk about lot pricing regionally, it sounds like you guys very confident and optimistic about the Bridgeland, maybe you could talk about just lot pricing in general for other areas as well?

[David O'Reilly:]

Okay. Let me take that, if we look at Summerlin we are averaging a $500,000 per acre, that’s probably a better disclosure than the per lot price given that we sell superfast. If you look at the average Las Vegas market, momentum in housing units at the peak it was around 15,000 units, today we are at around 7,000 units in totality. As I mentioned on the call earlier we are missing out an about 70% of that market given that total prices are selling at $300,000 per lot. If we restructured our superfast in certain sections to offer a higher density product, where we weren’t commence the land value per acre and we expect that the average price per to be at or low above where we are today. In terms of the Woodlands, obviously, we have seen some degradation in pricing, our goal in the Woodlands is being to hold land, yeah. We look at land as a depleting assets and in our mind we are well-capitalized, we have enough cash on the balance sheet David mentioned to complete our developments therefore selling any land in the Woodlands below what we believe is a value necessary to achieve our required rates of return or redeploy that capital on our balance sheet as full earned.

[Unidentified Analyst:]

Great. Thanks for taking my questions.

[Operator:]

The next question is from Steven Ko at Starvine Capital.

[Steven Ko:]

I had a high level question on capital allocation. Clearly there is an attractive long-term development pipeline in which these are cash flow, but the stock prices also cheap. So how you view share repurchases at the two locking value in the near-term and as cash generation increases going forward, are stock buyback something shareholder should expect to see impact on opportunist basis?

[David Weinreb:]

So, it’s a great question and one is very timely and one that this management team and board discusses a lot and it's about how we are going to use the capital that we have available to us to maximize returns for our shareholders. To-date the highest return opportunities have been with developing within our own portfolio where we own and control entire ecosystems. We have limited competition from competing developers and we can get outsize risk-adjusted returns. As the stock has not performed up to our expectations that dynamic can end and as the time shifted where a buyback could be in play. One thing to just be cognizant of that we're very careful of and we pay very close attention to is that it does a share buyback having added impacted increasing the leverage as we are decreasing the denominator of our equity. So for every dollar that we could use on our buyback we are going to shutdown at $20-ish of potential dollars that we could investment into our development pipeline on our leverage neutral basis. So it is on the table. It is something we consider and today the decision has been that the highest and best return opportunities available to us have been to continue to invest within our incredible portfolio of 50 million square feet of entitlements.

[Steven Ko:]

Wonderful. Thank you and thank you for starting these conference calls.

[David Weinreb:]

You’re welcome.

[Operator:]

The next question is from Steve Shaw of Compass Point.

[Steve Shaw:]

Hey, guys. There’s seem like there has been a flourish of activity around what you would call non-core assets, Landmark, West Windsor, Elk Grove, is it a result of how the market spread out and maybe opportunities coming to you guys or is that a fundamental change in strategy to monetize some more things you maybe actually build on the core portfolio?

[David Weinreb:]

So, Steve, we’ve had these conversations before. We view our non-core assets to deep out of the money options. And what we have done is we have a development team that is focused on them, that means that at the times if we monetize them in the case of Park West and Elk Grove land sales, at outside we continue to focusing on them to create shareholder value by looking at development plans. With the acquisition of the Macy's land parcel we have the ability to redesign and re-plan Landmark, this is a unique piece of land in a very dense market where we think there is outsize returns to be had, that's why we acquired the Macy’s parcel. As to Park West, there was no further outside in that asset and it will we dispose. In addition to that we realize tax losses which offset our income that we’re generating in the landing business, in our condo business. So those are two ways we look at the assets. The other thing to notice there is no point in selling an asset that depreciated but for the tax benefits that we might offset. So I think that’s a way to answer. We continue to look at our non-core assets as value enhancement but we do note that the majority of the value creation potential lies in the six core assets of the company where our shareholders will benefit.

[Steve Shaw:]

Does that eventually turn into a member of the core portfolio?

[David Weinreb:]

I think it’s too early to say that. We are excited about the prospect of that we think there is significant demand in that market but until we understand what the land plan to look like with the unified site it’s too early.

[Steve Shaw:]

Okay. Thanks a lot guys.

[David Weinreb:]

Yeah.

[Operator:]

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

[David Weinreb:]

Just want to thank everyone again for listening in to our first conference call. Remind you that we will have our first Analyst and Investor Day here at the Seaport on May 17th and look forward to welcoming you here and touring you to the Seaport and show you the dynamic destination that’s being created.

[Operator:]

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