2018 Letter To Shareholders
Las Vegas Ballpark, Downtown Summerlin
1
2018 Letter To Shareholders Reflections on an
Outstanding
Year
The Rooftop at Pier 17, Seaport District NYC
Forward-looking statements
Non-GAAP financial measures
Statements made in this letter that are not historical facts, including statements
The Company believes that net operating income, or NOI, a non-GAAP financial
MPC Segment EBT represents the revenues less expenses of the segment,
accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,”
measure, is a useful supplemental measure of the performance of our Operating
including interest income, interest expense, depreciation and amortization and
“forecast,” “intend,” “likely,” “may,” “plan,” “project,” “realize,” “should,”
Assets because it provides a performance measure that, when compared year
equity in earnings of real estate and other affiliates. MPC Segment EBT excludes
“transform,” “would,” and other statements of similar expression and other
over year, reflects the revenues and expenses directly associated with owning
corporate expenses and other items that are not allocable to the MPC Segment.
words of similar expression, are forward-looking statements within the meaning
and operating real estate properties and the impact on operations from trends
We present MPC Segment EBT because we use this measure, among others,
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
in rental and occupancy rates and operating costs. We define NOI as operating
internally to assess the core operating performance of the segment.
Securities Exchange Act of 1934.
revenues (rental income, tenant recoveries and other revenues) less operating
These statements are based on management’s expectations, estimates,
property expenses).
assumptions and projections as of the date of this letter and are not guarantees
to the investors about the performance of our Operating Assets and MPC’s due
to the exclusions noted above, NOI and MPC Segment EBT should only be used as
of future performance. Actual results may differ materially from those expressed
NOI excludes straight-line rents and amortization of tenant incentives, net
additional measures of the financial performance of such assets and not as an
expenses (real estate taxes, repairs and maintenance, marketing and other
Although we believe that NOI and MPC Segment EBT provide useful information
or implied in these statements. Factors that could cause actual results to differ
interest expense, ground rent amortization, demolition costs, amortization,
alternative to GAAP net income (loss).
materially are set forth as risk factors in our most recent Annual Report on
depreciation, development-related marketing costs and Equity in earnings from
Form 10-K filed with the Securities and Exchange Commission. In this letter,
Real Estate and other affiliates.
forward-looking statements include, but are not limited to, expectations about
For a reconciliation of NOI and MPC Segment EBT to the most directly comparable
GAAP measure see the Reconciliation to Non-GAAP Measures at the end of this
the performance of our Master Planned Communities segment and other current
We use NOI to evaluate our operating performance on a property-by-property
letter. No reconciliation of projected NOI is included in this letter because we are
income-producing properties and future liquidity, development opportunities,
basis because NOI allows us to evaluate the impact that factors, which vary
unable to quantify certain amounts that would be required to be included in the
development spending and management plans. We caution you not to place
by property, such as lease structure, lease rates and tenant base have on our
GAAP measure without unreasonable efforts and we believe such reconciliations
undue reliance on the forward-looking statements contained in this letter and
operating results, gross margins and investment returns.
would imply a degree of precision that would be confusing or misleading to
do not undertake any obligation to publicly update or revise any forward-looking
statements to reflect future events, information or circumstances that arise
after the date of this letter except as required by law.
investors.
2
2018 Letter To Shareholders
David R. Weinreb
Chief Executive Officer
The Howard Hughes Corporation
May 2, 2019
T o the shareholders of
The Howard Hughes Corporation
from the Chief Executive Officer
2018 was an excellent year for our business across all three segments.
+
In our Master Planned Community (MPC) segment, led by Summerlin,
we had record land sales.
+
+
+
In our Operating Assets segment, we increased our year-over-year net
operating income (NOI) by 13.1% (excluding the Seaport District) as we
continued to drive occupancy and increase rental rates.
And in our Strategic Developments segment, we increased our stabilized
NOI target by 24.6% from $255 million to $318 million and
Continued to drive successful growth at Ward Village, our vertical master
planned community in Honolulu, where we contracted to sell 668 homes,
yielding more than $511 million in sales revenue – the best year of contracted
sales since the launch of our first two buildings in 2014.
In sum, 2018 was likely our best year yet.
3
2018 Letter To Shareholders
2018 Accomplishments
AEO, Ward Village
4
2018 Letter To Shareholders MPC Segment
The key performance metrics that we follow to determine the success of our MPCs are the number of acres sold, the price per
acre, and the overall MPC Earnings Before Taxes (EBT). Land sales are often volatile and, as a result, should be evaluated on an
annual and longer-term basis. In 2018, we sold 466 acres of residential and commercial land at an average price of $515,000
per acre and generated MPC EBT of $203 million, an increase of 6.6% over 2017.
Since inception, we have generated approximately
$2 billion in total MPC land sales and $799 million in EBT.
MPC Price Per Acre
(residential acres only; thousands of USD)
MPC Acres Sold
300
250
200
150
100
50
0
2015
2016
2017
2018
2015
2016
2017
2018
Summerlin
The Woodlands
Bridgeland
The Woodlands Hills
Summerlin
The Woodlands
Bridgeland
The Woodlands Hills
MPC Earnings Before Taxes
(millions of USD)
$250
$200
$150
$100
$50
$0
2015
2016
2017
2018
800
700
600
500
400
300
200
100
0
5
2018 Letter To Shareholders Operating
Assets
Segment
Hughes Landing, The Woodlands
Our run-rate annual NOI is the best measure
of our operating progress and development
execution.
Since inception, we have grown NOI
from $49 million in 2010 to $173.3
million in 2018, an increase of
10.4% over 2017. Our fourth quarter
annualized NOI run rate was $187
million and our stabilized NOI target
was $318 million, representing a
549% increase in our stabilized
recurring NOI since inception.
Because it is part non-stabilized operating
asset, part development project and part
operating business, we present the Seaport
District separately in our financials and it is
not included in the NOI numbers above.
With several of the restaurants in the Pier
Village at the Seaport set to open by the end
of the summer and the Jean-Georges food hall
to follow in the next 18-24 months, the district
is moving closer to approaching its first
stabilized year. The Seaport is taking longer
to reach stabilization than anticipated, but
we remain confident that the end product will
be a spectacular asset for New York City, and
as importantly, will generate an attractive
return on our invested capital.
During the year, we purchased the parking lot
at 250 Water Street in the Seaport District,
a well-located development site of more
than one acre with approximately 290,000
square feet of as-of-right development rights.
We are working closely with the City and
Seaport District stakeholders to determine
how best to realize the full potential of this
site, together with the 415,000 square feet of
excess development rights from Pier 17, and
potentially an additional 212,000 square feet
of development rights from our option on the
New Market site, subject to discretionary
governmental approvals.
Operating Assets NOI
($ in millions)
5 4 9 % i n c r e a s e i n r e c u r
i o n
i n g N O I s i n c e i n c e p t
r
$255
$98
$232
$92
$318
$131
$187
$49
$55
$61
$51
$71
$119
$140
$157
2010
2011
2012
2013
2014
2015
2016
2017
4Q18
Annualized
Operating Assets NOI
Incremental Contribution to Operating Assets NOI
6
2018 Letter To Shareholders Strategic
Developments
Segment
50M SF
of development entitlements in our portfolio
Anaha, Ward Village
Since beginning sales in early 2014, we have
contracted to sell 2,339 homes generating
$2.68 billion in revenue as of April 30, 2019.
Our stabilized NOI target reflects new construction starts as we
transform our raw commercial acreage into assets that generate
recurring cash flow. In 2018, these new developments have
increased our projected stabilized NOI target from $255.1 million
to $317.8 million, excluding the Seaport District, an increase of
24.6%. In total, since inception we have developed, acquired,
or are in development of more than 15 million square feet of
commercial properties including 3,698 multi-family units, 975
hotel keys, 1,408 self-storage units, 6.3 million square feet of
office, 3.3 million square feet of retail and over 2,100 condo units.
We continue to generate substantial profits from our
condominium developments in Ward Village, where we target a
30% margin on sales excluding our land cost. In 2018, we closed
on $357.7 million in condominium sales. Since beginning sales in
early 2014, we have contracted to sell 2,339 homes generating
$2.68 billion in revenue as of April 30, 2019. This includes 354
homes pre-sold at our newest building Kō’ula.
7
HHC Annual Review 2018
The Woodlands
Complementary
Business
Segments
The combination of our three business segments in our MPCs
provides us with a number of competitive advantages, including
a large influence over price and product through our dominant
ownership in undeveloped land and buildings in these communities,
plus operating efficiencies achieved by our scale. Our development
and operating teams have enabled us to assemble one of the
strongest real estate platforms in the country with expertise in
planning, development, construction, capital markets, marketing,
operations and sponsorship, which we can leverage across the
business where the greatest opportunities exist.
Since inception, we have invested $1.8 billion into our internal
developments, generating $170 million in NOI and a 9.6% return
on cost. Because of our low-cost basis in the land relative to its
market value, of the $1.8 billion, we only invested approximately
$370 million of cash equity in these projects, which is projected
to generate a 25.2% return on equity assuming a 5.5% cost of debt.
These investments and returns are based on the book value of our
land and exclusive of condominium development as well as projects
under construction.
We have invested
$1.8 billion into our
internal developments,
generating $170 million
in NOI and a 9.6%
return on cost.
8
Our development of Hughes Landing in The Woodlands is a good
example of the value we have been able to create in our MPCs. In
2012, we began development of what is now known as Hughes
Landing on Lake Woodlands. Over the course of the following 3.5
years, we developed 1.4 million square feet of office space (88%
leased), a 205 key Embassy Suites hotel (last year it was the highest
rated Embassy Suites in the chain), 390 multi-family units (95%
leased) and 126,000 square feet of retail (100% leased). During this
same time, Houston, along with The Woodlands, was booming and
we were direct beneficiaries. The total cost of Hughes Landing was
$461 million and, at stabilization, it will generate NOI of $51 million,
or an 11% unlevered return on our costs. It is worth noting that the
land on which we developed Hughes Landing was originally slated
to be sold to a home builder for approximately $40 million.
Hughes Landing demonstrates how we
are able to accelerate development
and generate substantial risk-adjusted
returns during strong economic cycles.
Subsequent to the development of Hughes Landing, oil prices
declined from over $100 per barrel to less than $30 per barrel,
and Houston’s economy slowed dramatically. The performance
of our portfolio in The Woodlands is a good example of how our
communities have outperformed the broader market during
downturns. Following the sharp drop in oil prices, Houston’s Class-A
office market had negative absorption of approximately 1.4 million
square feet in 2016 and 1.5 million square feet in 2017. Vacancy
rates increased to more than 20% and office rents declined in some
submarkets by more than $10 per square foot, or approximately
30%. In contrast, The Woodlands’ Class-A office market had
positive absorption of approximately 325,000 square feet and
144,000 square feet, respectively, during those same years. Our
average rental rates declined by less than 5% and our vacancy rates
outperformed the wider market by staying below 12%. In addition,
we did not have a single tenant default.
Combined, our MPCs span over 80,000 residential and commercial
acres, approximately five times the size of the island of Manhattan,
and are home to a population of over 349,000 residents and
approximately 160,000 jobs. We leverage our expertise by
differentiating each of our communities with a distinct environment
and rich amenity base, further fueling demand for residential and
commercial development. These self-contained ecosystems
have yielded a significant price premium over comparable homes
outside of our master planned environments and helped shield our
properties from competition and external economic pressures.
2018 Letter To Shareholders
The total cost of Hughes Landing was $461 million
and, at stabilization, it will generate NOI of
$51 million, or an 11% unlevered return on our costs.
Hughes Landing, The Woodlands
The accolades speak for themselves. A select few are noted below:
Summerlin
Columbia
The Woodlands
Summerlin was ranked by RCLCO as the
third highest-selling master planned
community in the country in 2018,
while Bridgeland and The Woodlands
respectively ranked 18th and 42nd
(Bridgeland was ranked 29th in 2017.
The Woodlands ranked near the top of
the list in the past when it still had large
amounts of remaining lots).
Bridgeland was recognized by the Texas
Association of Builders as Developer of
the Year for 2018.
Columbia ranked first on Money
magazine’s Best Places to Live in
America in 2016.
The Woodlands was named Trailblazer
of the Year in 2018 by the Greater
Houston Builders Association. In 2017,
The Woodlands was rated the best city
to live in Texas (and the sixth best city to
live in the country).
In 2017, Architectural Digest named
Ward Village the “Best Planned
Community in the U.S.”
With over 7,100 residential acres of land remaining to be developed
and sold across our portfolio, we have substantial untapped value
and expect to generate significant future cash flows within our MPCs.
In addition to the residential land, our MPC segment contains
3,384 acres designated for commercial development or sale to
non-competing users such as hospitals.
9
2018 Letter To Shareholders
The tax cuts passed in late 2017 made states with no state income tax, like Texas and Nevada, even more
desirable places to live owing to changes in how state income taxes can be deducted. As a result, we expect
the demographics in our Houston MPC’s and Summerlin to improve as people continue to move from higher
tax states to those markets with no state income taxes.
While our MPC’s are somewhat insulated from the broader economic cycles due to the control we can exert
in our markets, we have experienced some volatility in our Houston MPCs with energy prices. Fortunately,
it appears that a recovery is underway in Houston, which could enable us to accelerate our commercial
development at The Woodlands and Bridgeland in our Strategic Developments segment.
Howard Hughes was one of the great American entrepreneurs of the 20th century. Inspired by our namesake,
our aspiration is to create a company for the ages that becomes synonymous with place making and vibrant
communities. By further igniting our virtuous cycle and remaining committed to our business plan, we expect
to continue creating a thriving and enduring enterprise that will stand the test of time.
David R. Weinreb
Chief Executive Officer
10
2018 Letter To Shareholders Reconciliation to
Non-GAAP Measures
Reconciliation of Net Operating Income to Earning Before Taxes - Operating Assets
2018
2017
2016
For the year ended December 31,
2014
2013
2015
2012
2011
2010
Total NOI
Company's share NOI - Equity Investees
Distributions from Summerlin Hospital Investment
Total Operating Assets Dispositions and Redevelopment NOI
Total Operatings Assets NOI - Consolidated
Straight-line rent amortization
Early extinguishment of debt
Depreciation and amortization
Provision for impairment
Write-off of lease intangibles and other
Other (expense) income, net
Equity in earnings (loss) from Real Estate Affiliates
Interest expense (income), net
Less partners' share of Operating Assets EBT
Total Operatings Assets segment EBT
$
173,273
(3,948)
(3,435)
(524)
$ 165,366
12,756
-
(113,576)
-
130
(7,005)
1,529
(71,551)
-
$
(12,351)
$
157,010
(4,401)
(3,383)
690
$ 149,916
7,999
-
(122,421)
-
(575)
(315)
3,267
(61,584)
-
$
(23,713)
$
140,248
(5,069)
(2,616)
-
$ 132,563
10,689
-
(86,313)
(35,734)
(25)
4,601
2,802
(50,427)
-
$
(21,844)
$
118,530
(3,204)
(1,747)
-
$ 113,579
7,391
-
(89,075)
(671)
524
1,883
(31,111)
-
$
2,520
$
71,147
(1,488)
(1,649)
-
$
51,233
(1,533)
(2,503)
-
$
61,102
(2,783)
(2,376)
-
$
55,153
(3,926)
(3,894)
-
$ 68,010
1,064
-
(49,272)
$ 47,197
1,759
-
(31,427)
$ 55,943
(736)
-
(23,318)
$ 47,333
918
(11,305)
(20,309)
(2,216)
-
2,025
(16,930)
-
$
2,681
(2,884)
-
3,893
(19,011)
-
$
(473)
-
-
3,683
(16,104)
-
$
19,468
-
-
3,926
(12,775)
425
$
8,213
$
48,624
(1,599)
-
-
$ 47,025
183
-
(23,461)
(80,924)
-
-
(338)
(17,183)
2,157
$
(72,541)
2015
$
For the year ended December 31,
2014
$
2013
$
2,520
114,366
114,177
231,063
2,681
221,181
61,493
285,355
(473)
130,978
27,459
157,964
104,344
126,719
-
$
126,719
308,875
(23,520)
(11)
(23,531)
$
231,659
(73,695)
(95)
(73,790)
$
2012
$
19,468
91,937
(1,700)
109,705
237,248
(127,543)
(745)
(128,288)
$
2011
$
8,213
50,712
3,272
62,197
(86,273)
148,470
(1,290)
147,180
$
2010
$
(72,541)
(382,874)
(26,456)
(481,871)
(412,641)
(69,230)
(201)
(69,431)
$
Reconciliation of Net Operating Income to Earning Before Taxes - Consolidated
Operating Assets segment EBT
MPC segment EBT
Strategic Developments segment EBT
Consolidated segment EBT
Corporate expenses and other items
Net income
Net (income) loss attributable to noncontrolling interests
Net income attributable to common stockholders
2018
2017
2016
$
(12,351)
202,955
91,786
282,390
224,664
57,726
(714)
57,012
$
$
(23,713)
190,351
186,517
353,155
186,532
166,623
1,781
168,404
$
$
(21,844)
179,481
325,277
482,914
280,588
202,326
(23)
202,303
$
11
2018 Letter To Shareholders
Discovery
is the one
sensation that
will always feel
new no matter
how many
times we feel it.
The Light Garden, Ward Village
12
2018 Letter To Shareholders