Howard Hughes Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in millions of dollars unless stated otherwise. The filing reports the company’s first quarter under the new Howard Hughes Holdings Inc. holding-company structure, effective August 11, 2023; HHH succeeded The Howard Hughes Corporation as the public issuer.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $268.7 | $639.5 | $688.3 | $1,126.5 |
| Net income (loss) attributable to common stockholders | $(544.2) | $108.1 | $(586.1) | $131.8 |
| Basic and diluted EPS | $(10.97) | $2.19 | $(11.83) | $2.59 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(359.7) | $215.5 |
- Q3 revenue fell mainly because the prior-year quarter included 398 condominium closings at Kō‘ula; only 26 units closed in Q3 2023 across Kō‘ula and ‘A‘ali‘i. Nine-month revenue also reflected substantially fewer condominium closings.
- The company recorded a $709.5 impairment related to Seaport: $672.5 against real estate and $37.0 against unconsolidated investments. Management cited slower-than-expected stabilization and profitability, cost pressures, weaker office demand, a higher capitalization rate, and lower restaurant valuation multiples. Management reported a $555.0 after-tax impairment impact for Q3.
- Operating Assets NOI, a company-defined non-GAAP measure, was $60.7 in Q3, up $2.1 year over year; nine-month NOI was $181.1, up $8.0. MPC segment EBT was $84.8 in Q3, up $9.4, and $202.1 for nine months, down $4.2. Seaport NOI was a loss of $0.9 in Q3 versus income of $1.6; nine-month loss was $8.9 versus $4.9. Strategic Developments EBT was $0.7 in Q3 versus $124.1 and a loss of $17.8 for nine months versus income of $127.9.
- At September 30, cash and cash equivalents were $491.7 and restricted cash was $444.1. Total assets were $9.37 billion. Debt, net of financing costs, was $5.20 billion, up from $4.75 billion at December 31, 2022. Company-reported non-GAAP net debt was $4.15 billion.
- The company had $1.1 billion of undrawn lender commitments available for property development, subject to restrictions. Its six property-level debt instruments with covenant exceptions had excess property cash flow restricted to the underlying assets; management said this did not materially affect liquidity or operations. A leverage covenant failure on an $11.0 million property-level instrument, resulting from the Seaport impairment, was waived by the lender.
Material changes and management commentary
- Nine-month operating cash use was $359.7, versus cash provided of $215.5 in 2022. Management attributed the change principally to higher net cash use related to condominium activity, increased interest payments, and lower MUD receivable collections. Investing cash use was $253.7; financing cash provided was $450.3, primarily reflecting net borrowing activity.
- Variable-rate debt was approximately $1.6 billion. Management estimated that a 1 percentage-point increase in floating rates would increase annual interest costs by about $9.8 million. The weighted-average rate on variable-rate mortgages, including derivatives, was 7.86% at quarter-end versus 5.91% at year-end 2022.
- Management said existing cash, operating-asset cash flow, MPC land sales, financings, and condominium deposits should be sufficient to meet obligations and ordinary-course expenses for at least the next 12 months. No formal earnings or Seaport stabilization guidance was provided. The company specifically said it does not currently provide guidance on Seaport NOI yield or stabilization timing.
- Superpad sales in Summerlin vary by quarter; management expected a material increase in Q4 2023, citing higher year-to-date new-home sales and increased demand for acreage. This is an expectation, not a guarantee.
- On October 5, 2023, the company announced plans to form Seaport Entertainment, including Seaport-related assets and certain Las Vegas and restaurant interests, with the intention of a 2024 public-company spinoff. The filing cautions that timing and completion are uncertain.
- Ward Village’s six completed towers were effectively sold out; 97.8% of units in three towers under construction were under contract. Waiea remediation costs were estimated at $155.4, including $16.1 of additional anticipated costs recognized in 2023; recovery from contractors, other responsible parties, or insurance is uncertain.
Risks, contingencies, and unusual items
- The Seaport impairment depends on significant valuation assumptions and management estimates; further impairment adjustments could follow if estimated fair values change. The segment was approximately 67% leased, and management noted continued lease-up costs and uncertain operating outcomes.
- The company’s $155.4 Waiea remediation estimate may not be fully recoverable. Litigation over the 250 Water Street project remained subject to a pending request for permission to appeal; the matter seeks to prevent development, not monetary damages. The Timarron Park flood case was on appeal, and the company had recorded no reserve, stating a loss was not probable.
- A Floreo joint venture financing carries a collateral-maintenance commitment: the company may need to post refundable collateral if loan-to-value exceeds 50%; collateral could become nonrefundable if Floreo defaults. No collateral had been posted at quarter-end, and management did not expect posting to be required.
- The new holding company has no independent operating business and depends on subsidiaries, including HHC, for cash to meet obligations. Subsidiary debt agreements or financial needs could limit distributions to the parent. The anticipated benefits of the reorganization may not be realized.
- Other key risks identified include interest rates and refinancing, capital availability, real estate and condominium market conditions, construction costs and delays, leasing and occupancy, weather and other disruptions, and the uncertain proposed spinoff.
Important facts for investors to verify
- Whether Seaport’s operating performance, occupancy, and valuation assumptions support the recorded impairment and whether additional charges are needed.
- Cash generation and funding needs as condominium closings slow, development spending continues, and debt service rises; also verify the availability and restrictions on undrawn commitments and restricted cash.
- Debt maturities, floating-rate exposure, covenant compliance, and any changes to the six property-level cash restrictions or the waived covenant breach.
- Progress, costs, and potential recoveries for Waiea remediation, and developments in the 250 Water Street and Timarron Park matters.
- Whether the proposed Seaport Entertainment separation proceeds, its timing and scope, and the resulting allocation of assets, liabilities, and funding needs.