The Howard Hughes Corporation (NYSE:HHC) Q2 2018 Earnings Conference Call August 7, 2018 10:00 AM ET
David Striph - IR
David Weinreb - CEO and Director
Grant Herlitz - President
David O'Reilly - CFO
Peter Riley - General Counsel
Michael Hagan - CJS Securities
Alexander Goldfarb - Sandler O'Neill
Ken Ling - Citi
Tayo Okusanya - Jefferies
Vahid Khorsand - BWS Financial
Alex Barron - Housing Research
Good morning, and welcome to Howard Hughes Corporation Second Quarter 2018 Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded.
I would now like to turn the conference over to David Striph, Executive Vice President for Investor Relations. Please go ahead, Sir.
Good morning, and welcome to the Howard Hughes Corporation's Second Quarter 2018 Earnings Conference 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 Web site, www.howardhughes.com, where you can download both our second quarter earnings press release and our supplemental package.
The earnings release and supplemental package includes reconciliations of non-GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP 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 assurances that these expectations will be achieved.
Please see the forward-looking statement disclaimer in our second 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.
Thank you, Dave, and thank you all for joining us today. Welcome to our 2018 second quarter earnings call. Our investor base has been expanding over the past year, and as such, we thought that this would be a good opportunity to touch on and review the unique competitive advantages we have as a result of our self-funded, fully-integrated business model, and the virtuous cycle that is created by our three complementary business segments.
One can think of our business as an ecosystem. As the master developer of each of our communities, we control the vast majority of the land and development rights in our small cities, allowing us to limit competition, which in turn gives us pricing power, protects against recessionary environments, and allows to benefit greatly by accelerating development in growing markets.
The combination of our three complementary business segments: master plan communities, operating assets, and strategic developments, creates a virtuous cycle. We sell land to homebuilders, and the new homeowners require amenities such as retail, office, apartments, and hotels. When we build these amenities, it creates additional demand for homes and in turn makes the remaining residential land more valuable. The new residents create more demand for other commercial amenities and the virtuous cycle continues.
Once the operating assets that we have developed stabilize, their cash flow produces funding for additional development. With the cash flow from our operating assets and our residential land sales along with condo sales in Hawaii, we generate enough cash to self-fund our business on a leverage-neutral basis without ever having to raise equity and delude our shareholders.
The best way to track the progress of this strategy and to measure how we are increasing the net asset value of the company on a per share basis, it's through the following metrics. In our MPC segment, we focused on the number of acres sold, the price per acre, and the overall MPC earnings before taxes or EDT. Land sales can be volatile from quarter to quarter. So we feel these metrics are most accurate when viewed on an annual basis.
In our operating asset segment, our annualized NOI is the metric that best tracks our operational execution. Within our strategic development segment, we track new construction starts as we transform our raw land into operating assets to increase our projected stabilized NOI target. In addition, we are always mindful of the pace of condominium sales at Ward Village. I will discuss our second quarter results with these metrics in mind.
During the second quarter, we continued to make substantial progress unlocking value throughout our portfolio. At our MPCs, we continue to see strong demand for our residential land driven by robust fundamentals in the residential home sales market. But as I just mentioned, this is a long-term business that can be volatile quarter-to-quarter. We believe that it is best to evaluate it on an annual basis.
MPC EBT decreased from $52.1 million in the second quarter of 2017 to $46.6 million in the current quarter, a decrease of $6.5 million or 12.3%, largely due to the timing of land sales at the Woodlands and Bridgeland, partially offset by the Woodland Hills in the Summit. Indicative of the volatility of this business on a quarterly basis, on July 10th, shortly after the quarter ended we closed on a 123 acre land sale in Summerland for a total sales price of $69 million, which got the third quarter off to an excellent start.
Summerland was ranked by Robert Charles Lesser Company as the third highest selling master planned community, and both Bridgeland and the Woodlands ranked in the top 40 in the country through the first-half of the year. We feel that we have good visibility into the balance of the year, and remain confident that 2018 will be another year with strong performance from this segment.
In our Operating Assets segment, total NOI increased $7.6 million or 19.6% from $38.9 million in the second quarter of 2017, to $46.5 million this quarter. In our Strategic Development segment we have increased our stabilized operating asset NOI target, from $291 million at the end of the first quarter, to approximately $308.6 million, not including the Seaport District, as of June 30th. This $17.6 million increase represents a 5.8% increase, and is the result of the continued transformation of our raw land into income producing assets that upon stabilization will deliver outsized risk-adjusted returns. Keep in mind that we started at $49 million of NOI in 2010.
Our new development starts this quarter are consistent with our strategy of building to meet market demand in our MPCs where we have unique control with little to no competition. For example, in the Woodlands, where we are starting construction on the Two Lakes Edge multifamily project, our existing multifamily portfolio is approximately 98% leased. In addition, we are entirely self-funding our equity requirements on construction projects using free cash flow from our operating assets, MPC EBT, and condo sales on a leverage-neutral basis.
Moving to Ward Village, in Honolulu, our newest building, 'A'ali'I, which began public sales in January, represents the culmination of several years spent studying the most innovative residential product around the world in order to create a luxurious turnkey solution for our customers that does not exist in Hawaii. Homes are designed to maximize space and efficiency with furniture, accessories, and more all provided for residents. The building will contain approximately 751 homes, and fills a niche where strong demand exists in the market. As of June 30th, 'A'ali'I was 46.3% presold and increased to 67% presold as of July 31. We could not be more pleased with the enthusiasm that our customers are showing for this new innovative product type.
We plan to begin construction later this year. We feel that the success and rapid absorption of this product type is evidence of our opportunity to increase the pace of development of the entire neighborhood. We are pleased to share that Ae'o is completely sold out, our third building and the home of the state's flagship Whole Foods, Ae'o is approximately 90% complete. We anticipate delivering the building in early 2019. The Hawaii flagship Whole Foods, which occupies 59,000 square feet or 84% of the retail space at Ae'o opened in May. As of the end of June, we have sold 96% of the residences at Waiea, our first building to be delivered, and 99% of the residences at Anaha, our second building.
Merriman's restaurant, which occupies 6,075 square feet or 39% of the retail space of Anaha, opened in June. Ke Kilohana, our fourth building to break ground, consists of 375 workforce housing residences, which are 100% sold out, and 49 market rate homes, of which we have sold 20. In total, we are 93% sold as of June 30, which is in line with our expectations given that the building will not be delivered until 2019. It is approximately 70% complete. The retail is 100% leased to CVS/Long's Drugs. At the Seaport District, we continue to experience significant demand for the balance of the office space on levels three and four of the pier, and are working to ensure that we not only achieve the highest rents possible, but also fill the space with synergistic tenants.
On June 8th, we acquired 250 Water Street, a one acre parking lot in the Seaport District adjacent to our other holdings in the district. We continue to see our ongoing transformation of the Seaport District increase the value of the entire neighborhood. 250 Water Street sits at the gateway to the district, and we believe we can unlock tremendous value here as our vision for this development unfolds. We paid $180 million plus closing costs, and simultaneously closed on $129.7 million of financing, that David will provide more detail on in a few minutes.
In May, in partnership with Live Nation, we announced this summer's Pier 17 Rooftop Concert Series with an outstanding and diverse list of entertainers, including Amy Schumer, Kings of Leon, Diana Ross, Gladys Knight, Trevor Noah, Sting, and deadmau5. The concert series introducers New Yorkers and tourists alike to the one-of-a-kind venue on the rooftop of Pier 17, which has New York City as its backdrop, surrounding by the Brooklyn Bridge, Empire State Building, Statue of Liberty, and One World Trade. Our summer activations, including the vibrant Heineken Riverdeck and Chase Lounge have been attracting tens of thousands of locals to the district, further brining to life our vision for transforming the Seaport into a port of discovery with unique offerings that cannot be found anywhere else in New York.
We kicked of the Pier 17 Rooftop Concert Series on August 1st, with a sold-out performance by Amy Schumer and friends, followed by two sold-out performances by Kings of Leon. In advance of the Rooftop Concert Series, county superstar, Carrie Underwood performed in Spotify's inaugural Hot Country Live concert at the rooftop at Pier 17 on July 4th. Chart-topping country music duo, Dan + Shay, opened the event. Additionally, Kelly Clarkson pre-take the performance on the rooftop that was viewed by approximately 7.5 million people as a part of Macy's Fourth of July Fireworks spectacular on NBC.
Finally, am pleased to share that 10 Corso Como is set open next month in time for New York Fashion Week. We expect the 28,000 square foot store to quickly become a leading destination in the New York fashion world. 10 Corso Como will be followed by the openings of Roberto Cavalli and Cynthia Rowley, both of whom we signed earlier this month, as well as Sarah Jessica Parker in the historic district. Roberto Cavalli will be opening a unique format popup store with a focus on experiential marketing. As mentioned last call, we continue to stay the course and stay true to our vision, which we are confident best positions the Seaport District for long-term sustainable success.
With that, I will now turn the call over to Grant to discuss the details of our operational results.
Thank you, David. I'd like to move on to the details driving the recent results in our MPCs, operating assets, and then turn it over to David O'Reilly to discuss our earnings and financial activities for the quarter.
First, within our MPC segment; total revenues decreased to $62.8 million this quarter from $78.1 million, a decrease of $15.3 million compared to the second quarter of 2017. Lower land sales revenues and a decrease in deferred revenues at Bridgeland, Summerlin, and the Woodland, partially offset by revenues at the Woodland Hills primarily drove the decrease. As David said earlier, we had a $69 million land sale in the close 10 days after the quarter ended. This is an excellent example of why we often reiterate the MPC business should not be measured on a quarterly basis. We are very confident in the demand we are seeing across all of our communities and expect to have an excellent year of land sales.
The volatility that we experienced between quarters is generally a result of timing of sales and a function of the type and location of a lot sold in any particular quarter. While we have seen some press reports of a slowdown in the growth rate of new home sales, we have not seen any evidence of it in our community. New home sales in our MPCs increase compared to 2017 by 62% in April, 29% in May and 32% in June. In total of $601 home sold in the second quarter of 2018 versus 425 in the same period of 2017, and our MPCs excluding the Woodland Hills which had not started selling in 2017. This was a 41% increase for the quarter.
At Summerlin, we continue to experience great demand for residential land sales as evidenced by this recent sales. Residential land sales for the quarter totaled 38.6 acres compared to 51.8 acres for the second quarter of 2017, the 25.5% decrease. The price per acre increased from 559,000 to 592,000 quarter-over-quarter 5.9% increase.
Summerlin had 336 new home sales during the quarter this compares with 237 during the same quarter of 2017. This equates to a 42% increase. In addition a median new home price increased 3.4% to $582,000 from $563,000. Demand is extremely strong in this market. The summit a joint venture with discovery land in Summerlin includes 260 units made up of a 146 custom lots and 114 planned dwelling units. Since the joint venture started closing lots in the second quarter of 2016, 100 lots have close for a total of $315.6 million. For the quarter, we recognized $14.1 million equity in earnings compared to $9.8 million in the second quarter of 2017. For the second quarter of 2018, the summit had twelve custom lots closed for $38.9 million dollars. This compares with six lots for $17.9 million during the same period in 2017. As of June 30, we have an additional 16 units for $61.7 million in escrow. We are pleased with this partnership.
In Bridgeland, we continue to see robust demand for new home sales which are translated into continued demand for land from homebuilders. In the second quarter of 2018, there were 150 new home sales compared to a 106 in the second quarter of last year, a 42% increase. For the three-month period ended June 30, 2018 Bridgeland sold 22.6 residential acres compared to 24.3 acres the same time period in 2017 representing a 7% decrease. We average $399,000 per acre during the second quarter compared to $386,000 per acre during the second quarter of 2017 a 3.4% increase. Increases were primarily due to the mix of lots sold during these periods.
During the second quarter, the median new home price in Bridgeland increased 16% from $355,000 to $411,000. The increase in median home prices also largely due to the mix of homes that sold during the period. According to our surveys we have 63 spec homes on the market as of June 30, 2018 which is approximately a one month supply based on current absorption rates.
Continuing in Houston, we also saw strength at the Woodlands in the sale of new homes. There were 115 new home sales during the second quarter of 2018 compared to 82 in the same period of 2017. The median new home price decreased for $577,000 to $444,500 for the quarter compared to last year. Once again this is the result of sales mix and reflects the sale of higher prices during the second quarter of 2017 and more of them moderately price and in the same period in 2018.
According to our in-house research as of June 30 we estimate that there were 97 spec homes available for all builders in the Woodlands, which is approximately a three-month supply based on current estimated 2018 absorption levels. This remains a strong indicator for this market. For the three month period ending June 30, the Woodland sold 13.7 residential acres compared to 24 during the same period last year.
The average price per residential acre increase to $798,000 for the quarter compared to $567,000 in 2017. This represented a 40.7% increase. The increase is attributable to the mix of lots sold. Turning to our operating asset segment NOI increased $7.6 million or 19.6% from $38.9 million in the second quarter of 2017 to $46.5 million this quarter. This is largely the results increases in NOI of approximately $4 million from retail, $2.4 million from Office, $2 million from hospitality as this portfolio continues to stabilize.
In our retail assets, we had an increase in NOI of approximately $4 million. This was largely due to an improvement at the Seaport District of approximately $1.7 million along with increases of approximately $1.2 million at Ward Village and an improvement at One Lakes Edge retail downtown Summerlin.
Our Office portfolio NOI increased by approximately $2.4 million led by increases in Downtown Colombia, one Summerlin and as landing. These increases were offset by 110 North Wacker which is being redeveloped and is now in our strategic development segment. Our hospitality portfolio NOI increased by approximately $2 million led by the Woodlands resort and conference center which has increased occupancy, conference bookings and food and beverage revenues. We're very pleased with the progress made in our operating assets portfolio.
In our Strategic Development segment, this quarter we increased our stabilized operating asset NOI target $70.6 million from $291 million at the end of the first quarter to $308.6 million, a 5.8% increase. The increase is mainly attributable to our new development. the two lakes Edge multifamily project huge landing at the Woodlands will cost approximately a $108 million and provide approximately $8.5 million to stabilize NOI for an 8% return on cost. We expected to stabilize in 2024.
Region departments which will cost approximately $48 million is expected to generate $3.9 million to NOI and it stabilizes in 2021 for an 8.125% yields. The day care center in High Landing will cost approximately $2.7 million and we expect the deal 8% and NOI of approximately $217,000. We've also increased the stabilized projections for some of our existing assets based on the recent performance. This quarter was another excellent example of how we continue to create value for our shareholders by transforming our existing land into dynamic, operating assets that generate additional NOI and shareholder value.
With that, I'll turn the call over to David O'Reilly for our financial results and outlook.
Thank you, Grant. I'd like to start with a quick overview of our earnings, including a discussion of a change in accounting methods that had a material impact on our quarterly 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-Q earnings release and supplemental package filed yesterday which contained details of our financial and operational results.
First I'd like to begin with the change in accounting methods. As we mentioned last quarter, beginning in January of this year, following the FASB's new guidance for public companies, we have changed from recognizing condominium sales revenue on a percentage of completion basis for units under contract to recognizing revenue only when the unit sale closes.
Accordingly, we will recognize revenue and the cost of sales for condominiums only after the sale to the buyers that close. This change relates only to the timing of recognizing revenues on these sales, it means that revenue will be recognized later than it previously had been and that the revenue will be more volatile and is only recognized as unit sales close, which tend to be in large numbers just after building delivered to the buyers. This change in account method had a negative effect on our earnings and our strategic development segment, despite extremely strong condominium sales this year. Under the former accounting rules, we would have recognized an additional $196 million of revenue in our strategic development segment for the second quarter and $338 million on a year-to-date basis.
In addition, at our Waiea tower Ward Village we have taken a $13.4 million non-cash charge for future window repairs, which further contributed to the decrease in strategic development EVT and turn to our gap condo margin negative for the second quarter. We fully expect to recover this cost in the future and believe that we will be able to reverse this, when we have more certainty regarding that recovery. Largely because of the reduction in EBT in our strategic development segment, a $50.5 million due to the change in revenue recognition method and the reduction in our MPC EBT of $6.5 million due to lower land sales.
We completed the second quarter with a GAAP loss of $5.1 million or $0.12 per diluted share. This compared to a $3.1 million gain or $0.07 per diluted share for the second quarter 2017 resulting in approximately $8.2 million decrease. The decreases in strategic developments and MPC segments were offset by an increase in operating asset EBT of $13 million, a decrease in corporate and other expenses of $35 million primarily related to the absent of the significant charge of $39 million in 2018 that were incurred in the second quarter of 2017 for expenses related to warrant liability.
NAREIT defined FFO was $22.2 million or $0.52 per diluted share for the quarter, as compared to $37 million, or $0.86 for the second quarter of 2017. The $14.8 million decrease is primarily due to a change and comparative revenues resulting from the change in accounting methods previously discussed core FFO was $36.4 million or $0.85 per diluted share a decrease of $58.1 million compared to the $2.20 for diluted share in the second quarter 2017. The decrease was largely due to $3.9 million of warrant loss and $15.6 million of deferred income tax expense incurred in the second quarter of 2017 that did not occur in the second quarter of 2018.
Turning to our financings, on April 13, 2018 the company repaid the $11.8 million loan for Lakeland Village Center at Bridgeland. On April 30, we closed on a $494.5 million construction loan for 110 North Wacker. This loan initially bears interest at LIBOR plus 3% and steps down based on various leasing thresholds. This loan has a 20% repayment guarantee of which Howard use is 90% of that guarantee. The guarantee decreases overtime as we achieved various methods.
We simultaneously closed for the preferred equity partner for $170 million of equity capital. Our obligation of 110 North Wacker is to put $49 million of cash into the transaction. As of the end of the first quarter, we had approximately $39 million of cash invested in the airport expected to fund an additional $10 million. This was reflected in last quarter's financial statement.
At closing on April 30, we received a $52.2 million cash distribution from the venture, which decreased our cash investment in this asset. Over the course of the project, we will invest $42.7 million of gross proceeds to meet our total cash equity commitment of $49 million.
On June 8, 2018, the Company closed on a $129.7 million mortgage loan for 250 Water Street, a one-acre parking lot in the Seaport District. The loan has an initial interest-free term of six months with an initial maturity date of December 8, 2018, and three, six-month extension options at a rate of 6%. The second and third extension options each require a $30.0 million pay down.
After the end of the quarter on July 27, we closed on a $34.2 million construction loan on Bridgeland Apartments. The interest only loan versus interest at LIBOR plus 2.25% and has an initial maturity date of July 27, 2022 and one, one-year extension option. The loan has a 25% repayment guarantee that burns off after the property has achieved a 1.25 times debt coverage ratio. On July 20, 2018 we closed on a $51.2 million for Summerlin Ballpark, bearing interest at 4.92% with a maturity date of December 15, 2039.
As of the end of the second quarter our total consolidated debt total assets was approximately 44% and our net debt to enterprise value closed the quarter at 27%. From a liquidity perspective, we finished the second quarter with approximately $607 million of cash on hand.
As of June 30, we had 25 projects in our strategic development segment with anticipated total cost of $4.2 billion. Of that amount, we previously funded $2.3 billion leaving $1.9 billion in estimated remaining cost. We expect to meet this obligation with a combination of existing construction loans which at quarter end had approximately $1 billion of committed for un-drawn capacity and with anticipated loans of $335 million for three Merriweather, Columbia Apartments, Bridgeland Apartments, two Lakes Edge, and the ballpark in Summerlin. This leaves a net remaining equity requirement of $594 million. We expect to fund our remaining equity requirement through a combination of our free cash flow from our operating assets and MPC segments, net proceeds from non-core asset sales and lastly our existing cash balance.
Again, as of the end of the second quarter with approximately $607 million of cash and net equity requirements of $594 million, we have enough cash and liquidity on hand to meet all of our current funding commitments without any additional cash being generated from MPC land sales, or our operating properties.
With that I'd like to now turn the call back over to David for closing remarks.
Thank you, David. As you can see, we had another quarter of strong results and we continue to be thoughtful, creative and opportunistic in allocating capital in a manner that we believe best increases the value of the company for our shareholders. We appreciate your continued support. Thank you for joining us today.
With that, I will open up the call to Q&A.
Thank you. [Operator Instructions] And today's first question comes from Craig Bibb of CJS Securities. Please go ahead.
Good morning, guys. It's actually Mike Hagan for Craig. And I had a quick question on giving your exceptional pace of sales at 'A'ali'i, you had commented I guess increasing the pace, maybe a little more color there and thoughts on how quickly you could get to two towers per year?
Hey, Mike. This is Grant. Thanks for the question. So what we are looking at is what is the market demand, so if we can do two towers a year and the pace demands it, we will absolutely build the tower. What we have voiced on is launch sales with the hope of getting to 50% by the time we get construction financing. So ultimately, once we see the pace of sales, we know how fast we can move. What we are trying to do now, because we are dominating the market, this is segment product type, and we are seeing - being able to dominate market by segmenting product has allowed us to sell product at all different price ranges. So, 'A'ali'i is most surprise to us given in the size of the unit and a sweet spot of the market.
We cancelled our gateway product last quarter. We heard about that. We are on track to design new product for Block Seawest [ph] as well as increase the pace of design, so that we can reach our entitlements within our master agreements. And if we have the pace of design well on its way and the market demand - the market demands it, we will absolutely launch construction more than one tower.
Excellent. Thank you very much.
And our next question today comes from Alexander Goldfarb, Sandler O'Neill. Please go ahead.
Hey, good morning. So just a few questions, just, Grant, maybe following up on that. When you look at the Hawaiian market now in Honolulu, do you guys - how would you breakout sort of the luxury, the high-end versus the affordable? I mean it seems certainly for sure anything less than COGS 3 million and probably less than a million is just the absolute sweet spot. So do you see the high-end is coming back? Or for the next few years, the product that you intend to launch at Ward Village will probably be more of a workforce or small unit type condos?
I think at the end of the day, we have always said the sweet spot lies between a million and half and under. And we are seeing that in the market. However, we do know that we have significant product to deliver on the front row which is irreplaceable view that will demand a much higher price. There has been success in the market in selling the higher price products. And we are looking at developing a much higher efficient tower that will deliver a higher product price for the market. And if can get the traction we need at those, we'll launch the tower. It's worth noting that there are few units left at Hawaii and not hard to sell. We are seeing increased demand for those products. And there is no other product in the market at the higher end. So it's worth launching another tower, worth launching sales at another tower to see if there is market demand at that higher price point.
Yes. And one of the thing that I would notice, David, and that is that our levy [ph] should not be in any way thought of as workforce housing. This is high quality luxury micro units that are being very, very well received.
Okay. I should have put the workforce in quotes given the pricing out there and the quality. Next question is looking that the Seaport, can you just give us an update on timing for when the restaurants are going to open? And then what your thoughts are for the parking lot at 250 Water Street?
Sure. So there have modest delays in the build out of the restaurant boxes on Pier 17. That's nothing new not just for us, but just for everyone building in New York trades are tight. As a result, we are discussing with our restaurant partners the ideal time to open. And as we have continuously stated, we are going to open at the right now. We are committed to delivering the optimum long-term outcome for the Seaport and Pier 17 if that means opening JG in the late fall. The restaurant will be completed. We will do that if that mean opening potentially in the early part of 2019, that's what we will do.
So we are discussing those dates with our various restaurants partners. And we couldn't be more excited about the products that we are going to delivering long term. And we will make those decisions accordingly. [Indiscernible] by the way is on the track to open for Fashion Week in September; very excited about that. That's September 6th. A rooftop restaurant we will be later this year. And that's on track. And of course, we had just amazing success with our summer concert series and also our pop-up Heineken Riverdeck Bar.
Okay. And then just final, David; with the closing of the or the imminent between Brookfield GGP, you guys have the air rights over fashion show. And it doesn't cost you anything and there are air rights I assume probably very little carrier side. But given Brookfield's propensity to do development mix use et cetera, do you think there may be an opportunity for you guys to sort of monetize those with some transaction with Brookfield? Or your view is that they really don't cost much to keep on hand, so you'll just keep them until you find a point to develop?
Hey, Alex, it's David O'Reilly. I always - look, with all of the other assets we have at the firm whether it's the air rights, whether it's Cottonwoods. Any of those assets at the back of our supplemental, I would say that until we have plans and we have announced what we are going to do, will just continue to carry them at their book value. There is very little carry cost. When the time is right and we go through that analysis constantly whether it's sell, hold, develop. When we have an outcome and an resolution, we will be happy to share with you. But until then, there is really nothing really to talk about with the air rights there or any of the other assets at this point.
Okay. Thank you, David.
And our next question comes from Scott True [ph] of Citi. Please go ahead.
Hi, good morning. This is Ken Ling on for Scott. Sticking on Seaport for a little bit. Is there a timeframe for developing that? And I know David noted in the prepared comments that there was a gateway to the district. Understanding that it's few blocks away. Is there a plan to connect it someway to the rest of Seaport?
So let me answer the question 250. And Alex, I apologize you did ask about 250 Water and failed to answer that in my response. We love the opportunity to get control of that site. It's one of the larger development sites in the city that's clear and ready to go. We also have as most of you know if not all of you on the call hundreds and thousands of air rights floating around. And we are in the process now of developing what our long-term plan is. But the site is at the gateway of the Seaport. We clearly are seeing great traction with everything that we have planned. And we believe long term that that site will represent a great opportunity for us to activate some if not all of those excess air rights and those something dynamic that will be at the gateway as I said of what we are doing in lower Manhattan.
Great. Thank you for that. Turning to Woodlands Hills, sales of 37 in the quarter looks like a pretty strong start. How does that compare to your initial plan sales, and kind of just combining that with some commentary about affordability constraints, is that something you've seen around this Houston area?
So as the Houston continues to recover, we are seeing increased demand for residential sales. It couldn't be more apparent with the pace until in those communities both Bridgeland, Woodland, and Woodland Hills, I think we are very happy with pace as well. Our goal is to maintain momentum right now because this is an infant MPC. And we have to -– you remember the focus of acquiring Woodland Hills is obviously to have a return on our investment for the Woodland Hill, but the focus was to drive residential growth to that area. To spur some further commercial growth in the Woodland itself we additional resident to drive commercial opportunity, so we are happy with residential sales and there is an economic reason associated with that. And we are pleased with the momentum we have with our ability to drive commercial opportunities.
Great. Thank you and good luck.
Our next question comes from Tayo Okusanya of Jefferies. Please go ahead.
Hi, good morning. The condo business, the $13.4 million in window repairs for VX, could you just talk about kind of what's going on there? It's a relatively new building. I am just surprised that you have that much in window repairs to do.
No, without a doubt, and this is something that is an issue with the curtain wall. Some of our residents and some of the facades have experienced some noises associated with it. It's an impairment charge that we took this quarter, non-cash based on our current estimate to repair that and to make it right for resident.
As we stated in the release in the Q, Tayo, we very much expect to recover that amount in its entirety; the timing and the entity that will be providing that recovery is uncertain at this time. So I can't record an offsetting asset. So candidly I think this is really just a timing issue for us as we look to make right for our residents and eliminate that sound that's occurred in the handful of the units there.
Also, is that development of the building that will have to pay that or an insurance company or something?
Look whether it's general contractor, the general contractor's insurance company, other insurance providers or others, again, I can't say who or the timing of when that recovery will be. But I think it's fair to say that we very much expect to recover that amount.
Okay. That's fair. Just staying on the topic, when you do kind of remove that number though, you do end up with about $5 million in profit on $21 million of sales. So that margin still seems a little bit lower than your historical margin in that business. Are there any other additional expenses that hit the quarter that we should be aware of that kind of reduced the typical gross margin you get on that business?
No. Look, it's going to depend on the units that are sold on any point in time during the quarter. And now that we are not doing percentage or completion method accounting, Tayo, what we said all along is that we expect as a whole across the board to realize about a 30% margin ex-land blended across the entire development. And if we're doing 25% one quarter just because of the particular units that were sold that quarter in which building, we don't look at that as out of line or out of place in any way, shape or form. There have been other quarters where we've delivered in margins substantially higher than 30%.
So again, the condo sales business like the land sale business is not a quarterly business. It's something that we have to take a much more longer term view on. So we feel very confident and comfortable that we're going to continue to hit our stated range of approximately 30% ex-land.
That's helpful. Then the operating assets business just for a quick minute, again, I see a very strong NOI growth on a year-over-year basis. But I was just kind of curious again at what point will you start looking at that business in regards to a same-store basis like other REITs who you are comp to? Just to kind of really understand these stabilized assets, how they are doing on a same-store basis.
Our supplemental is relatively new as you know. And we are constantly looking to provide better transparency and clarity for our investors, and same-store as well as certain metrics that are associated with different segments of the business like hospitality, office retail, multi-family is something that we continually look to add to the supplemental. I would say right now, our same-store pool, given the amount of development in addition to that pool over time is relatively small. As we continue to mature and as that same-store pool continues to grow and therefore the results of that same-store pool becomes more meaningful for our investors, we'll absolutely look to add that to our supplemental in the future.
That's helpful. Last one from me, Seaport, again just a good color you guys gave around the restaurants opening, again, I was just curious, how do you kind of underwrite these celebrity-driven restaurants? I think they can be great, but I think in the past six months or so you've seen some of these celebrity chefs get into trouble under the Me Too Movement. You've seen some pass away, like how do you kind of underwrite that risk of - it's so tied to the celebrity chef's name that if that brand is tarnished you could really have an issue?
Look, I think it's a good question, at the end of the day, what we are doing at the Seaport and what we expect at the Seaport is quite frankly all about our location, the water, the unique attributes of the site, and not solely or quite frankly primarily driven by an executive chef or a big name of a company that we might announce. It's an enhancement only. I think that the people that we've chosen from everything we know are the highest quality people, but we never know something that we don't know until we know it, but we feel very good about the direction that we're going.
I would say the most important job of a leader is being a great people picker and that includes the businesses that you choose to invest in, because whether you're leasing an office floor, you're leasing to a tenant, et cetera, you're really judging the quality of the person that you're dealing with. And the entire team couldn't be more pleased with our partners at the Seaport.
Sounds good, thank you.
And or next question today comes from Vahid Khorsand from BWS Financial. Please go ahead.
All right. Thanks for taking my call. First question, a simple question I think, on Lakeland Village Center, is that one going to now move into stabilized properties for the quarter?
We have two criteria, Vahid, which we can get back to you in terms of when we move to stabilize, one, is occupancy and the other is when we reach our actual NOI. But it's a GAAP methodology that determines when it gets moved. Again, whether we're going to hit our occupancy target or with a passage of time, you know, two years after delivery, we'll move that up into the stabilized pool, for now we haven't hit either of those, so we're going to leave it right where it is.
Okay. And then just like in your property level debt at what point do you hit a sense of urgency in closing more deals and moving more of the strategic developments forward to walk in lower interest rates?
No, it's something that we talk about all the time, it's something that we're working on real time right now. We very much appreciate our debt maturity schedule, we look constantly at those loans that are coming due in the next several years and we're hopeful that over the next couple of quarters, we'll be able to have a discussion on some of that long-term financing that will push out our maturities, hopefully reduce our rate and eliminate some of the floating rate risk that currently exist on our balance sheet, but until those deals are closed and we're ready to talk about, I think, for now, we'll just say that it's something that we're addressing real time and hopefully have more details in the coming months or quarters.
Okay. And then for background, the difference between the debt you're carrying for your pre-funded projects and then you talked about the cash balance, is that a number to look at in terms of what's the capacity?
Okay. What we tried to do is to give you an understanding of what our - both our net debt is and then also the fact that we're carrying large cash balances to fund our equity commitments remaining in our developments in one of the schedules of the queue, you can see that outlined at the bottom of the schedule. Also is the financings we intend to put on the assets are working through to get that done, so you can understand what our outstanding commitments are.
And I would echo that. I think that Grant answered it really well in just saying that review our potential development capacity in what we could potentially take on for new projects any given quarter, any given year, it's really about maintaining that financial discipline on a self-funded, leveraged mutual basis using the free cash flow from our operating assets, our condo sales, our MPC land sales and noncore asset sales to fund the equity components of those new developments making sure that the overall company and our overall balance sheet remained on a net debt to enterprise value basis at that 30% or below level. And again, another quarter where we're in the mid 20s we feel very confident that we're in a good spot where we're continuing to maintain the self-funded business model.
And then my final question on the condo sales with the new tax law changes. Is there's going to be a quarter where you're just going to blow out a large number, or will it be a gradual…
Yes, and that's really an accounting rule change, not a tax law change. From an accounting perspective, when we closed the units on the next tower that will be complete, which will be IO which we've said is targeted towards the very end of this year or very early next year, we will have a large number of closings that will contribute a great amount of cash for the balance sheet and some substantial earnings on the gains of those units, because we're only going to record the revenue and expenses associated with the sale of those units when they closed. And as a result, that will create more lumpiness on a quarter to quarter basis within that segment of our company.
Okay. But my specific question is it's going to be like one big giant number and then the next quarter it's a smaller number or is it going to be something that's a little bit gradual to see or do you not know that right now?
We're looking through what we call a bulk closing in determining how many of the units we can close at any individual time. You know, there are 450 units you should work on at least a third of them being in the first closing.
Okay. Thank you.
Yes, and that building is 100% sold out so I would expect it to be very lumpy in the quarter that we get through those bulk closings. And we won't have any inventory to sell for the next several quarters. So I wouldn't expect it to be slow in those following quarters. I would expect it to be much more lumpy.
And our next question comes from Alex Barron with Housing Research. Please go ahead.
Yes, thanks guys. A few questions on the Hawaii towers, I guess, there's only a few units left in Waiea, Anaha, are those mainly like penthouse, because I looked at the dollars left to complete those two projects, and it looks pretty big. So it's just a few regular units and one big penthouse or - can you kind of give us some color on that?
Yes, in Waiea, we have the two grand penthouses, in Anaha, the two penthouses, and then there are a couple of villas that are in Waiea. Those are the numbers. We're expecting to hopefully have a good bit of the other units sold by the end of the year. We haven't forecast selling the grand penthouses by the end of the year. I mean, we may actually sell them, but we haven't forecasted selling them.
Got it. So when it says those costs to complete, is that because you still need to kind of customize those to the buyer or what is the gap I guess to those congress?
There is one floor of Grand Penthouse at Waiea that's unfinished, and one floor of Grand Penthouse at Anaha that's not finished. So those would be part of the cost. The other cost or the retention cost that may or may not be due to the contract.
Okay. Now, as it pertains to the other two towers, I/O and Ke Kilohana, did I understand you right that you expect the margins to still be in the 30% range? I mean, even though - and what about this new tower, the one with the workforce unit, did those types of unit will make those types of margins or really lower?
What we are trying to do is establish a benchmark of a blended 30% margin excluded land - excluding land across all towers, as David said. Obviously, in the higher price units, you would expect the margins to be higher and in the low price unit, a little lower. So we had substantial demand for the market rate housing at 'A'ali'i, where we are very pleased with the margins associated with that. So I think you should be comfortable forecasting a blended 30 across all product types.
Got, it. Okay. I guess one just last one on the Houston, especially The Woodlands Hills, are people - are builders, they are buying essentially based on their sales or are they just contracted to buy a certain rate per month kind of thing?
Yes, so it's very typical takedown contract with a takedown of number of losses per quarter. The industry unfortunately has earnest money deposit, a very little. So even though there may be a contract to takedown units over a two-year basis with an inflator, the builder can walk away from the contract without very little damage. So what we are seeing is the leading indicators clearly are home sales, and so we know that there has been increased velocity of home sales in all of our communities; 42% quarter-over-quarter increase at Summerlin, 40% at The Woodlands, and 42% at Bridgeland. Woodland Hills is obviously a young MPC, and so there is no quarter-over-quarter growth rate, but we are very confident in the momentum and in the price for it.
Got it. Okay, well best of luck. Thank you.
Yes, thank you.
And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to the management team for any closing remarks.
I just want to thank everyone again for listening in and joining us. And as always, we are available on our cell phones at the office if we can ever answer any questions, and look forward to being with you next quarter, if not sooner.
And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.