Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Jolle Wisenthal.
Speaker 2: And I'm Tracy Halloway.
Speaker 1: Tracy, I don't know if I've ever like said it
Speaker 1: to you directly before. Uh oh no, but I've said
Speaker 1: it to others. I believe there is no limit on
Speaker 1: the number of real estate related episodes we could do.
Speaker 1: There's literally done.
Speaker 2: I feel like there are two topics in business media
Speaker 2: that everyone loves reading about and opining on, and one
Speaker 2: is transportation, so airlines and cars, and the other one
Speaker 2: has to be real estate because it kind of touches
Speaker 2: everyone's lives in one way or another.
Speaker 3: Well.
Speaker 1: Absolutely, And one of the most powerful impulses to read
Speaker 1: anything is anxiety. And the nice thing about real estate
Speaker 1: is no matter what's where you are, you're anxious, right
Speaker 1: Like if you own a house or something, or if
Speaker 1: you have investment property, anxious the prices are going to
Speaker 1: go down, or rents might go down. And if you
Speaker 1: don't own anything in your renter then you're anxious, like, oh,
Speaker 1: rents are going to.
Speaker 2: Go up, or if you want to buy a house, or.
Speaker 1: The cost to buy a house is going to surge.
Speaker 1: It's your anxious too. So there is no person in
Speaker 1: the world who does not have real estate anxiety.
Speaker 2: That's perfect. Whichever way the market is going, there is
Speaker 2: someone who is de facto worried about it.
Speaker 1: Yes, and so I would say there's a lot of
Speaker 1: things in real estate right now that are particularly interesting.
Speaker 1: So we talk about it a lot. But we've talked
Speaker 1: a lot about why haven't higher rates affected the home
Speaker 1: buying industry, the secondary market in housing, and we've talked
Speaker 1: about lack of supply, et cetera. And of course we've
Speaker 1: talked about commercial real estate and you know, some of
Speaker 1: the concerns about work from home and return to office
Speaker 1: and occupancy rates, et cetera. Yep, but it still feels
Speaker 1: like there's more to do on both fronts, particularly as
Speaker 1: it relates to sort of higher rates. The impact that
Speaker 1: is on like developing new properties in one sector or another.
Speaker 2: Well, absolutely, So there's been a lot of focus on
Speaker 2: what's going on with existing properties for somewhat obvious reasons.
Speaker 2: But over the past year we've seen this really interesting
Speaker 2: dynamic where the existing home sales, for instance, are almost
Speaker 2: in complete, staces just frozen. But meanwhile, a lot of
Speaker 2: the home builders have been ramping up their activity. We've
Speaker 2: seen some of their share prices really surge. Warren Buffett
Speaker 2: is making investments in some publicly traded developers, which, you know,
Speaker 2: if you're talking about things that get people's attention, that
Speaker 2: has to be one of them. And so I think
Speaker 2: we really need to dive into what's happening with the
Speaker 2: actual construction versus I guess the existing buildings.
Speaker 1: Of course, construction is affected by rates. It's also affected
Speaker 1: by commodity inflation, labor costs, so there's just a lot,
Speaker 1: a lot to get into.
Speaker 2: Let's do it well.
Speaker 1: I'm really excited. I do believe we have the perfect
Speaker 1: guest because we're going to be speaking to someone with
Speaker 1: a sort of like very broad view of the real
Speaker 1: estate market, involved in many different angles. To be speaking
Speaker 1: to David O'Reilly. He is the CEO of Howard Hughes Holdings,
Speaker 1: which is involved in real estate in many different ways.
Speaker 1: I'm going to have him explain what the business is. So, David,
Speaker 1: thank you so much for coming on odlines, thrilled to
Speaker 1: be here, Thanks for having me. Why don't you give
Speaker 1: us the sort of quick summary across the different lines.
Speaker 1: What constitutes Howard Hughes Holdings Howard.
Speaker 3: Used as a community builder.
Speaker 4: We build small cities or large scale master planning communities
Speaker 4: where we're not just the bedroom community for the adjacent city,
Speaker 4: but we're also an employment center. We prepare land, prepare
Speaker 4: it horizontally, sell it to home builders. Take that capital
Speaker 4: and use it to invest in building office, multifamily, shopping,
Speaker 4: dining experiences, amphitheaters, art, whatever the consumer needs we build.
Speaker 4: The more homes we sell, the more residents move in
Speaker 4: our communities, the more they need those amenities. The more
Speaker 4: amenities we have, the more desirable those communities are, the
Speaker 4: more residents want to move there, and that cycle goes
Speaker 4: on and on and on.
Speaker 2: So sort of multi use projects. Give us some specific examples,
Speaker 2: like what are I guess the most prominent projects that
Speaker 2: you've worked on.
Speaker 4: Well, right now, we're across six major regions. The largest
Speaker 4: or not the largest, but the most dense right now
Speaker 4: is the Woodlands, which is twenty eight thousand acres just
Speaker 4: north of Houston. It's about two times the sides of Manhattan.
Speaker 4: We have one hundred and twenty thousand residents and one
Speaker 4: and a half jobs per rooftop.
Speaker 2: One hundred twenty thousand residents in an area twice the
Speaker 2: size of Manhattan. I'm jealous.
Speaker 4: Already a third of the space was dedicated as permanent
Speaker 4: green space, and that's part of the amenity base that
Speaker 4: we think make our communities so attractive.
Speaker 1: What are some of the others you mentioned the woodlands?
Speaker 1: Where else?
Speaker 4: We have Summerland, which is just west of the Las
Speaker 4: Vegas Strip in Las Vegas. We have sixty acres on
Speaker 4: the island of Oahu on Almahana Beach Park. We have
Speaker 4: the South Street Seaport or the Seaport District here in Manhattan, Columbia,
Speaker 4: which is the oldest master playing community started by Jim
Speaker 4: Rouse in the lates sixties, and then a year and
Speaker 4: a half ago we bought thirty seven thousand acres today
Speaker 4: population zero, known as Terra valis just west of Phoenix.
Speaker 4: That will become what we think is the next great
Speaker 4: community in America.
Speaker 3: Wow.
Speaker 2: So when you say you're a community builder, how different
Speaker 2: or unique is that business model versus say, a residential
Speaker 2: property developer or a pure commercial property developer.
Speaker 3: Right, we do do development.
Speaker 4: We do residential horizontal development, we do commercial vertical development.
Speaker 4: That's we do billion and a half of that a year.
Speaker 4: I think the mindset of a community builder is different
Speaker 4: than a traditional real estate developer. A real estate developer
Speaker 4: acquires a piece of land and does everything they can
Speaker 4: to maximize the value on that piece of land, irrespective
Speaker 4: of what that does to the surrounding area. A community
Speaker 4: builder is equally as focused on that piece of land
Speaker 4: as the impact on the residents that live nearby and
Speaker 4: all of the land surrounding it. Because we own the
Speaker 4: majority of that land surrounding it. We're residents, our kids
Speaker 4: go to school there, we live there. We want it
Speaker 4: to be a better place to live, a better place
Speaker 4: to raise a family, a better place to work. So
Speaker 4: our developments have to be not just great on the
Speaker 4: four corners of the bricks and sticks, they have to
Speaker 4: have a great impact on everything around it.
Speaker 1: Real quickly, you mentioned the tin building. There's the one
Speaker 1: sort of Manhattan based property. It's the one that I've
Speaker 1: definitely been do. I may have been driven through the
Speaker 1: woodlands before, I'm not sure, but you do you own
Speaker 1: the whole seaport. What do you have down there.
Speaker 4: Under a long term ground lease with the EDC. We
Speaker 4: have the cobblestone streets on the west side, of the FDR.
Speaker 4: We have the Tin Building on the east side and
Speaker 4: Peer seventeen on the east side. That's all part of
Speaker 4: the Howard Use Seaport District.
Speaker 3: Got it.
Speaker 1: I really like the Tin Building. I went to the
Speaker 1: one of the Jean George restaurants there, one of the
Speaker 1: it was very well.
Speaker 4: There's twenty one different outlets in there. They're all personally
Speaker 4: curated by John George himself. And the foot traffic, the
Speaker 4: revenue has been nothing short of spectacular as it's reinvented
Speaker 4: the seaport and and become a great catalyst for growth
Speaker 4: in that area.
Speaker 2: Well, why don't I ask the obvious question, how has
Speaker 2: your business changed in twenty twenty three versus say, pre
Speaker 2: pandemic when rates were a lot lower.
Speaker 4: Well, I think there's a number of different changes that
Speaker 4: have occurred since the pandemic. Pandemic initially hit, the brakes
Speaker 4: got hit everywhere and it was, oh my god, what's
Speaker 4: going to happen? Anybody going to live in a home again.
Speaker 4: Sixty days later, home sales came ripping back. Low rates,
Speaker 4: free money, cost to build was relatively low. We saw
Speaker 4: incredible demand across our communities for new home buyers.
Speaker 3: Coming in and.
Speaker 2: That was how surprising was that to you? Because I
Speaker 2: feel like we are not in the real estate business,
Speaker 2: so we don't necessarily have a lot of skin in
Speaker 2: the game. But I feel like if you're a developer
Speaker 2: during the pandemic, you're probably thinking this is the end
Speaker 2: of the world, and then just two months later everything
Speaker 2: comes roaring back.
Speaker 4: Oh. I was shocked by the change. And when you
Speaker 4: think about the impact that the pandemic had on travel
Speaker 4: and tourism, and as I said, we have properties outside
Speaker 4: of Las Vegas and Hawaii, New York City, the impact
Speaker 4: that the pandemic had on energy, We have a project
Speaker 4: outside of Houston. It was a perfect storm of bad
Speaker 4: news for Howard Hughes. So we had hunkered in, We
Speaker 4: had recapitalized our balance sheet, extended debt maturities, did everything
Speaker 4: we could to whether what we thought would be a
Speaker 4: prolonged storm. The last thing that I expected was when
Speaker 4: we're not allowed to leave our homes and we're socially
Speaker 4: distancing that we wanted to buy homes.
Speaker 3: But I think that what.
Speaker 4: Led to that was the real acceleration of the migratory
Speaker 4: patterns that had existed for a couple of years that
Speaker 4: flight to better quality of life out of the northeast,
Speaker 4: out of the West coast, employees that were seeking a
Speaker 4: better quality of life, better education for their children, better
Speaker 4: connectivity to outdoor space, more square footage twice the house
Speaker 4: for half the price, and the pandemic as we were
Speaker 4: all working from home, gave them the flexibility to move
Speaker 4: with alacrity, and that really accelerted home buying.
Speaker 1: I want to ask about the new development outside Phoenix
Speaker 1: and some of the economics that you're seeing there. But
Speaker 1: before we.
Speaker 2: Do show, you're always going to Arizona, aren't you.
Speaker 1: You can't resist it Before I do, I just remember something,
Speaker 1: so just real quickly. The Tin Building property, it's still
Speaker 1: not profitable, right, correct, I read? I think I was
Speaker 1: reading through the transcript. The one quarter that it was profitable, Tracy,
Speaker 1: I think was the board apes. The NFTs had like
Speaker 1: a four day festival there and they just like brought
Speaker 1: tons of money in.
Speaker 3: Well that was that was actually at the Peer itself.
Speaker 1: Okay, that was the Peer.
Speaker 4: Yeah, the Tin Building wasn't open at the point in time. Yeah,
Speaker 4: they had an incredible festival for the bord A Boners
Speaker 4: up there with some private concerts.
Speaker 3: I love that.
Speaker 1: Like the NFT craze was so wild at the peak
Speaker 1: that it was like showing up on the earnings of
Speaker 1: big publicly traded real estate investment companies as moving the
Speaker 1: dial for some of their property.
Speaker 2: Wait, well, can I why isn't that property profitable? Because
Speaker 2: that's you know, a premier property in an up and coming,
Speaker 2: like quite trendy area of the greatest city in America. Like,
Speaker 2: what's going on?
Speaker 4: So we just opened the Tin Building, And when you
Speaker 4: open a new restaurant, you have operating losses. You have
Speaker 4: to get the menu right, you have to get the
Speaker 4: pricing right, you have to get the overhead right. In
Speaker 4: the Tin Building, we opened up twenty one restaurants, all
Speaker 4: in the same day.
Speaker 3: Wow.
Speaker 4: Go away from the Tin Building and you look at
Speaker 4: the rest of the pier. We have five restaurants on
Speaker 4: the ground floor with David Chang, Andrew Carmelini, John George.
Speaker 4: They're doing quite well, Okay, quite profitable. Our rooftop concerts series,
Speaker 4: where we have over sixty concerts. It's the most profitable
Speaker 4: in the history of the company. Right now, ESPN and
Speaker 4: Nike are in the office base on the third floor
Speaker 4: doing very well, so the Tin Building is in its
Speaker 4: infancy and it's learning how to go from crawl to
Speaker 4: walk and over the next year, if John George's track
Speaker 4: record is any indication, we're going to be turning the
Speaker 4: Tin Building to profitability, which will change the whole dynamic
Speaker 4: for the seaport.
Speaker 3: Got it.
Speaker 1: One thing that I think we really want to sort
Speaker 1: of get our wrapp our heads around in this conversation
Speaker 1: is basically, you know, like, how has the real estate
Speaker 1: business overall been affected by the surgeon interest rates? And
Speaker 1: of course different aspects of the real estate business, particularly
Speaker 1: residential verus commercial, may be different. But you look at
Speaker 1: a new project, you know, Tera Vallis previously known as
Speaker 1: Douglas Ranch. You announced this in October twenty twenty two,
Speaker 1: so already rates had gone up. But why do you
Speaker 1: talk a little bit about, like how the math pencils
Speaker 1: out on something like that long term in a time
Speaker 1: of eight percent rates to borrow at versus a five
Speaker 1: percent rate environment, how much does that affect how fast
Speaker 1: you move or how how aggressively you can develop it?
Speaker 4: No, thirty seven thousand acres terror Vallis, it's a forty
Speaker 4: or fifty year project.
Speaker 3: Okay.
Speaker 4: The only thing I know for sure over forty or
Speaker 4: fifty years is that rates are going to change.
Speaker 3: Yeah. Right.
Speaker 4: We didn't make that decision because we expected two percent
Speaker 4: rates for the rest of our lives. We made that
Speaker 4: decision because we saw household formations that outpaced new home construction.
Speaker 4: We saw one hundred thousand people moving a year for
Speaker 4: ten years into the Arizona to the West Valley of Phoenix.
Speaker 4: It was the fastest growing county and the fastest growing
Speaker 4: city in the United States of America.
Speaker 3: And we have a.
Speaker 4: Unique opportunity to create a community like we have in
Speaker 4: the Woodlands in Summerland at Taravellis and meet the demand
Speaker 4: of home buyers that are out there that were struggling
Speaker 4: because of affordability. Phoenix in general is one of the
Speaker 4: more affordable cities in the state, in all the states,
Speaker 4: and when you think about the median income to purchase
Speaker 4: a home in Phoenix, it's a third of San Francisco,
Speaker 4: less than half in New York, and half of Los Angeles.
Speaker 4: And we thought we could build a product for the
Speaker 4: next forty years that would meet that migratory shift, that
Speaker 4: need for affordable housing, and that demographic shift of workers
Speaker 4: fleeing to lower tax higher quality of life locations.
Speaker 2: When you're deciding whether or not to embark on a project,
Speaker 2: what's the most important factor? Is it the pure maths
Speaker 2: on the financing? Is it the opportunity, is it location,
Speaker 2: the price at which you can acquire the land. How
Speaker 2: are you balancing all those different factors.
Speaker 4: Well, price of the land is incredibly important, But if
Speaker 4: you think about the price of the land relative to
Speaker 4: the investment you're making in wastewater treatment plants, water treatment plants, roads, parks,
Speaker 4: community centers, the land purchase price is a fraction of
Speaker 4: the investment.
Speaker 3: The more important.
Speaker 4: Factors for us is is it near good transportation? Is
Speaker 4: it near a major freeway, does it connect closely to
Speaker 4: an airport, Is it approximate to a large city where
Speaker 4: you have great amenities and great opportunities for your residents
Speaker 4: to have experiences with their families. And is it in
Speaker 4: the path of growth. Now, it's not often it maybe
Speaker 4: once every ten years that you can find twenty or
Speaker 4: thirty thousand acres that are fully entitled, ready to go,
Speaker 4: that meet those criteria and are priced appropriately. These are
Speaker 4: not things that we trip over you every day of
Speaker 4: the week. We're thrilled that we were able to acquire terravlice,
Speaker 4: but we may not find another one like this for
Speaker 4: another decade.
Speaker 2: Does availability of contractors enter into that equation as well? Like,
Speaker 2: have there been sites that you've identified and said, this
Speaker 2: would be fantastic, but it's too hard maybe to get
Speaker 2: the labor to build it out.
Speaker 4: Occasionally there are labor shortages, there are material shortages. We
Speaker 4: feel like we're at a competitive advantage and that we'll
Speaker 4: be building this community for forty years, and you tend
Speaker 4: to get the attention of contractors pretty easily if you
Speaker 4: can keep them busy for more than a decade.
Speaker 1: I'm reading over the most recent conference call and you're president. LJ.
Speaker 1: Cross had this common so talk about the economics of
Speaker 1: new developments. He said, increase construction costs and operating expenses
Speaker 1: of outpaced growth and rental rates meaningfully impacting anticipated returns
Speaker 1: on new developments. So let's start with that part of
Speaker 1: the question. What are some examples right now where between inflation,
Speaker 1: labor cost rates, etc. In twenty twenty three, you're making
Speaker 1: different development decisions than you might have in twenty twenty one.
Speaker 4: Oh, I think it's across every potential development is impacting
Speaker 4: our decision making. Property or insurance has in most instances doubled. Wow,
Speaker 4: utilities continue to outpace inflation, and if you layer in
Speaker 4: just taxes and a lot of the municipalities in which
Speaker 4: we work, those rates are going up faster than inflation. Now,
Speaker 4: despite the fact that we're showing double digit same store
Speaker 4: growth and rental rates and our multi family properties and
Speaker 4: our office properties, it's struggling to keep up with the
Speaker 4: increase of expenses of operating those properties. Layer into that
Speaker 4: higher labor, higher material costs. Although stabilizing flattening this year,
Speaker 4: you have seen the stabilization in twenty twenty three so far,
Speaker 4: knock on wood and higher interest rates. It's harder to
Speaker 4: create value for our shareholders with new development. With that said,
Speaker 4: we still see great opportunities, specifically within the multi family segment,
Speaker 4: to meet demand of consumers that are willing to pay
Speaker 4: more for great properties and in great locations.
Speaker 1: Now then later on, he says. That's not to say
Speaker 1: we're pencils down. He said, our development teams in each
Speaker 1: region are actively engaged in pre development so that once
Speaker 1: the market returns to a more normalized environment, we'll be
Speaker 1: ready to go. What is normalized mean in that context?
Speaker 1: Is that a rate thing? Is it like that? Do
Speaker 1: you believe that rates are sort of unsustainably high?
Speaker 3: Here?
Speaker 1: Is it the inflation labor aspect? What does normal mean?
Speaker 3: No?
Speaker 4: I think normal means in terms of return expectations, and
Speaker 4: a lot of things can impact that. It can be
Speaker 4: higher rental rates, it can be lower operating expenses. It
Speaker 4: could be lower interest rates. The pendulum is swung a
Speaker 4: little bit and it's tilted slightly out of favor.
Speaker 3: Okay, it's usually half a minute of a Ford swings
Speaker 3: back the other way.
Speaker 1: We're having you on some jinxing. There's a jincent the
Speaker 1: other day.
Speaker 3: It's sor ry. We have patience. We're going to be
Speaker 3: here for another forty years.
Speaker 2: What are you seeing from consumers in terms of demand,
Speaker 2: because obviously mortgage rates are a lot higher than they
Speaker 2: used to be, as we were talking about in the intro,
Speaker 2: do you see that crimping demand or maybe changing the
Speaker 2: types of properties that people are interested.
Speaker 4: In From a consumer perspective, there is still a demand
Speaker 4: for homes. It's slightly lower today than it was, about
Speaker 4: seven percent lower than it was in the middle of
Speaker 4: twenty twenty two. But I would tell you that higher
Speaker 4: rates has impacted supply as much as it's impacted demand.
Speaker 4: That the resale home market is non existent. And for
Speaker 4: the past twenty years, resales have averaged about eighty seven
Speaker 4: percent of all home sales. Today they're about seventy. That
Speaker 4: means new home sales have doubled as a percentage of
Speaker 4: the total home sales, and that trend is continuing to
Speaker 4: go higher every day. As a result, builders are still
Speaker 4: making very strong margins. They're still selling lots of new
Speaker 4: construction homes, and they're still in the market to buy
Speaker 4: our land. I would tell you that the price per
Speaker 4: square foot has maintained very steady over the past year
Speaker 4: in terms of what consumers are paying for home. That
Speaker 4: hasn't fallen as many would have expected because that demand
Speaker 4: is there. What we have seen is the average size
Speaker 4: of a home come down about fifteen percent. Interesting, as
Speaker 4: higher rates clearly are impacting affordability, no doubt about that.
Speaker 4: People still that want to buy a home are going
Speaker 4: to buy a home. They may trade the office, the
Speaker 4: third bedroom, the third car, garage, may wait on the
Speaker 4: pool for two years, but they're transacting. They're still forming households.
Speaker 4: They are still having children, they're still moving for jobs,
Speaker 4: they still need a place to live.
Speaker 1: Sorry, I want to go back to the development component
Speaker 1: a little bit more, and I'm not sure if there's
Speaker 1: like a sort of normalized pace. I mean, well, one question,
Speaker 1: are you still buying land?
Speaker 3: We have eighty thousand acres.
Speaker 1: Yeah, we're good because I mean this has been a
Speaker 1: question where the home builders are buying land, et cetera.
Speaker 4: We have twenty years of land to sell the home buildings. Okay,
Speaker 4: so we have fifty years of land to do commercial development.
Speaker 4: We don't need to buy land to keep our business
Speaker 4: model moving.
Speaker 1: What type of development right now doesn't pencil out to
Speaker 1: break round on right now? When in terms of like, okay,
Speaker 1: yes you say the multifamily, yes they're still demand, or
Speaker 1: maybe home building in general that you know, maybe people
Speaker 1: just want smaller lots. What are the types of things
Speaker 1: that in the current non normal environment, whether it's raids, inflation,
Speaker 1: et cetera, does not make sense to work on it.
Speaker 1: That's a very market specific question for us to peel that. Sure,
Speaker 1: the layer of the onion, just the hair. It is
Speaker 1: very difficult to get financing for certain product types Okay,
Speaker 1: and that becomes a bigger barrier right now if I
Speaker 1: want to do an office building, Yeah, it would be
Speaker 1: almost impossible to go office construction loan done. With that said,
Speaker 1: we're working on multi family projects. We're working on storage projects,
Speaker 1: we're working on medical office, we're working on senior housing.
Speaker 1: And we're hopeful to get a movie studio construction project
Speaker 1: started here in the next six months or so in
Speaker 1: the Las Vegas Valley out in Summerland.
Speaker 2: That's exciting. Well, talk to us a little bit more
Speaker 2: about financing, like what does your financing mix actually look
Speaker 2: like at the moment, How do you fund a lot
Speaker 2: of these projects, and how does it differ for say,
Speaker 2: a residential project versus an office project, where I understand
Speaker 2: a lot of the anxieties in the market are more.
Speaker 4: Focused on at the moment, we really rarely finance our
Speaker 4: horizontal development. If we're selling land to homebuilders, putting in roads,
Speaker 4: water sewer infrastructure, we're not generally borrowing against that. Capital
Speaker 4: availability doesn't impact that business, and that's largely because in
Speaker 4: the municipalities in which we work, there's municipal financing for that.
Speaker 4: In Texas, they're called MUDs. In Nevada, they're called sids.
Speaker 4: In Arizona they're CfDS, but they're all basically the same thing.
Speaker 4: Developer puts in water sewer infrastructure curves. When the homes
Speaker 4: get sold, than they create a tax basis. That tax
Speaker 4: payment becomes a debt service that services bonds. Those bonds
Speaker 4: are issued and repay the developer for the infrastructure. That
Speaker 4: is the primary tool of why housing is much more
Speaker 4: affordable in those areas. That type of municipal financing really
Speaker 4: doesn't exist in the Northeast. Interesting, you don't see it
Speaker 4: in a ton of locations, but where you see it,
Speaker 4: housing is generally much more affordable.
Speaker 3: For that very reason.
Speaker 4: So we're not relying on financing there. We're doing a
Speaker 4: billion to a billion and a half of development a year.
Speaker 4: We need construction loans to get those going. They're more expensive,
Speaker 4: they're lower leverage, they're harder to get, and then those
Speaker 4: construction loans mature two to three years later. We're turning
Speaker 4: them out with permanent financing. And that market is a
Speaker 4: little bit sideways right now.
Speaker 1: What does that mean?
Speaker 4: Well, taking a step back, the big banks balance sheets
Speaker 4: aren't growing okay, and they're not getting the repayments that
Speaker 4: they would have expected. Those office loan maturities aren't getting
Speaker 4: paid off the way they thought. And if they're not
Speaker 4: growing their balance sheet, that means very little new loans.
Speaker 4: Regional banks out of the market post signature, they're hunkered
Speaker 4: in on their capital.
Speaker 1: Right, So the balance sheet capacity that we've been talking
Speaker 1: about for a while, and lots of people have been
Speaker 1: talking about constraining banks like, it's showing up for you
Speaker 1: in certain areas, like it's noticeable.
Speaker 2: Absolutely absolutely are there alternate forms of financing when that happens,
Speaker 2: Like you know, we hear a lot about private credit
Speaker 2: getting into various parts of the market.
Speaker 4: Is that you have about the big mortgage reads, the
Speaker 4: XYZ private equity funds that they're the ones that are
Speaker 4: naturally going to fill the gap, but they rely on
Speaker 4: usually either lie letters of credit, lines to credit repo facilities,
Speaker 4: are some sort of financing from the big banks. And
Speaker 4: if the big banks don't want to backstop an office
Speaker 4: loan directly, they don't want to backstop it secondarily. So
Speaker 4: those players have largely.
Speaker 3: Been out of the market.
Speaker 4: And you know, I think that there's a segment and
Speaker 4: myself included that feel like CMBs could be part of
Speaker 4: the solution here, and going back to the securitized mortgages,
Speaker 4: the typical conduit in large loans that we did for
Speaker 4: years and years and years back in my investment banking
Speaker 4: days that right now those bond spreads are pretty wide,
Speaker 4: I think, probably too wide relative to the value that's
Speaker 4: in the loans under them. But if those bond investors
Speaker 4: come back to the market, CMBs could be the relief
Speaker 4: valve that would help this bottleneck. Right now in the
Speaker 4: capital markets, it is kind.
Speaker 2: Of weird that we've seen recently a big boom in
Speaker 2: like vanilla bond issue ins corporate bonds, but a lot
Speaker 2: of the abs market seems to have stalled. It's kind
Speaker 2: of strange.
Speaker 1: Can you talk a little bit about there's this sort
Speaker 1: of ongoing question of whether the impact of higher rates
Speaker 1: has really been felt by the economy yet, and like
Speaker 1: economists always debate this is there's going to be this
Speaker 1: lagged effect right now. My impression is that you've issued
Speaker 1: on a corporate level a fair amount of debt prior
Speaker 1: to the rate surge, and that a lot of that
Speaker 1: is locked in and that you haven't seen a big jump.
Speaker 1: Can you talk about your overall sort of like debt profile,
Speaker 1: like how people should think about it, and like at
Speaker 1: what point would it result in a big jump in
Speaker 1: monthly costs or whatever financing costs?
Speaker 3: When?
Speaker 1: When does it have to be real maturity? Yeah, people
Speaker 1: talk about the maturity wall that Tracy got it. Yeah, absolutely, Tracy,
Speaker 1: that was the phrase I was looking.
Speaker 4: Yeah, And I think that the maturity wall is often
Speaker 4: just looked at in terms of the debt maturities that
Speaker 4: show up on the schedule, and unless folks look a
Speaker 4: little bit deeper and say, well, what are your swap maturities,
Speaker 4: what are your hedging, what are your derivative maturities? Okay,
Speaker 4: that's a much more important question in this market.
Speaker 3: For Howard used.
Speaker 4: We did two billion dollars of financing in twenty twenty two,
Speaker 4: a billion of which in the fourth quarter of twenty
Speaker 4: twenty two, which puts off all meaningful debt maturities for
Speaker 4: five years.
Speaker 3: Okay, average weight.
Speaker 4: Average maturity we have in six and a half years
Speaker 4: right now at locked in fixed rate financing. We do
Speaker 4: have just over a billion dollars of swaps that have
Speaker 4: floating rate to fixed and those expire staggered over the
Speaker 4: next four years. Most of those are associated with construction loans,
Speaker 4: and those construction loans on condos in Hawaii, for example,
Speaker 4: pay off when we close on the condo tower. The
Speaker 4: buyers give us their money, they take back their condo,
Speaker 4: and we use those proceeds that pay off the loan,
Speaker 4: so it doesn't roll to a new higher rate that
Speaker 4: would impact us. So we feel like we're pretty well
Speaker 4: insulated in that area.
Speaker 2: Can you talk a little bit more about the swaps,
Speaker 2: because I feel like this is kind of maybe an
Speaker 2: underappreciated aspect of why we haven't yet seen a huge
Speaker 2: impact from higher rates on a lot of companies, like
Speaker 2: there are these hedging strategies in place to help insulate
Speaker 2: them in one way or another.
Speaker 4: Yes, it's not uncommon for a borrower or a large corporate,
Speaker 4: especially in real estate, to get a floating rate loan,
Speaker 4: but I think investors pay public real estate companies that
Speaker 4: take real estate risk interest rate risk. So therefore the
Speaker 4: natural inclination is to hedge that to fixed Sometimes those
Speaker 4: hedges are shorter durations than the notional maturity of the
Speaker 4: underlying loan, and that's where you take the interest rate risk,
Speaker 4: not where the loan gets paid off. When the loan
Speaker 4: gets paid off, that's where the principal risk comes in.
Speaker 4: And if I think about the public real estate companies today,
Speaker 4: a lot of them are hunkered down with their capital
Speaker 4: and going to be relying on the bond market as
Speaker 4: much as they can. If you have an office loan
Speaker 4: that's maturing in the next several years, you're hopeful that
Speaker 4: your lender will blend and extend and push that off
Speaker 4: in some way, because if you have to refinance it,
Speaker 4: not only is the rate higher, but the proceeds are
Speaker 4: going to be much lower, and it's really going to
Speaker 4: put a strain on the cash that you have available
Speaker 4: and a strain on the liquidity of a number of
Speaker 4: these property owners.
Speaker 1: Sorry, I keep, you know what, I keep going back
Speaker 1: and looking at all of your corporate you know, reading
Speaker 1: your transcripts. While we're doing this. I'm looking at your
Speaker 1: latest investor presentation and it's forty two pages and like
Speaker 1: it looks like dozens of pages are about this development
Speaker 1: pipeline and what you're adding to existing communities. So it's
Speaker 1: like in the Woodlands, there's like something about a riv
Speaker 1: Row multifamily and a corporate campus that you're planning on
Speaker 1: building it is something that looks like a really it's
Speaker 1: going to be maybe a really nice spot for a
Speaker 1: grocery store or something like that. Like, are these the
Speaker 1: types of things that are not? Are they being constructed
Speaker 1: as fast in twenty twenty three as they would have
Speaker 1: been in twenty twenty one some of these things on
Speaker 1: the presentation.
Speaker 4: Our strategy has always been to build to meet consumer demand. Okay,
Speaker 4: there's demand, we build. If not, we're ready for when
Speaker 4: that day comes. You know those projects that you mentioned, Yeah,
Speaker 4: Riva Row our multi family projects across the Woodlands, six
Speaker 4: of them are ninety eight percent least with fifteen percent
Speaker 4: same sore growth. We need more product in the woodlands
Speaker 4: because okay, we don't have enough. If you're ninety eight
Speaker 4: percent least, you need more product, more supply to meet
Speaker 4: that demand. The corporate campus that you referenced, that's really
Speaker 4: the pin of what we're trying to do is recruit
Speaker 4: businesses to come into our communities and we're ready to go.
Speaker 4: Whether you're a tenant that's two thousand square feet or
Speaker 4: two million square feet, I have an office solution for you.
Speaker 4: And unlike a lot of office developers, when I meet
Speaker 4: with those CEOs. I'm not solving your office needs. Well
Speaker 4: i am, but not just your office needs. I'm solving
Speaker 4: for where you live, where your employees will live, will
Speaker 4: they go to school, will your church will be We
Speaker 4: just did a corporate relocation for a cosmetics company out
Speaker 4: of San Diego. They moved into the Woodlands, and I
Speaker 4: met with their CEO and I asked her what was
Speaker 4: a driving factor?
Speaker 3: Was it taxes? Politics? Crime?
Speaker 4: And I was surprised that she said she did an
Speaker 4: employees survey average agent for employees in the mid forties,
Speaker 4: and the results of that survey was that over half
Speaker 4: of them said that they didn't think they would ever
Speaker 4: be able to own a home, and more than half
Speaker 4: of them didn't think they would ever be able to
Speaker 4: send their children to college in California because they would
Speaker 4: have to get into state school to be able to
Speaker 4: afford it, and the application pool and the challenges of
Speaker 4: getting into state school in California.
Speaker 3: Are so high.
Speaker 4: And she said that was the flare that went off
Speaker 4: that said we needed a change. They moved to the Woodlands.
Speaker 4: Almost all of our employees moved with her, and now
Speaker 4: they're homeowners in the Woodlands and Spring and all the
Speaker 4: local area, and they're pursuing education for their children with
Speaker 4: the University of Texas, Texas A and M or any
Speaker 4: one of the great schools that are out there that
Speaker 4: are perhaps more affordable and a little bit easier to
Speaker 4: get into.
Speaker 2: You know, Joe and I were in Jacksonville, Wyoming recently,
Speaker 2: and I remember joking that I really wanted Mike Bloomberg
Speaker 2: to start a company town in some beautiful part of
Speaker 2: Wyoming and we can all live there happily.
Speaker 1: And you know, maybe maybe while you're in the office here,
Speaker 1: you could convince our boss to start a company town.
Speaker 4: You don't need a company town, I have them, no, Like,
Speaker 4: you just come right into our town.
Speaker 3: We'll welcome you with open arms.
Speaker 1: Tracy really wants one in Montana, though, if you could
Speaker 1: please open a master planned.
Speaker 2: Community, preferably in the middle of a national park, Tracy.
Speaker 1: Would be extremely appreciative. I have a question about the
Speaker 1: broader market, so as you say, like a lot of
Speaker 1: these developments that we're looking at on this deck might
Speaker 1: be like, Okay, you're going to try to fulfill some
Speaker 1: solution for some company in terms of like competition, Like
Speaker 1: people want to move to Texas one of the stories
Speaker 1: is that there's been a lot of supplies generally in
Speaker 1: the last couple of years, especially across the Sun Belt,
Speaker 1: absolutely booming. You're pricing it in Arizona on other pieces
Speaker 1: of land that aren't yours. I'm sure you're seeing it
Speaker 1: in Nevada. I'm sure you're seeing it in Texas, and
Speaker 1: that at least in the short and medium term, there's
Speaker 1: just a lot of capacity coming on, and that there's
Speaker 1: a lot of spec building that a lot of not
Speaker 1: everyone is building with a specific customer in mind. Can
Speaker 1: you talk a little bit about what you see as
Speaker 1: the sort of competitive market in the short medium term
Speaker 1: in some of these boom areas like Arizona and Nevada, Texas,
Speaker 1: et cetera.
Speaker 4: No doubt that when capital was cheap, there was a
Speaker 4: lot of folks that built in hope they would come.
Speaker 4: I think the benefit that we have is that we
Speaker 4: are the master developer within our communities and within the
Speaker 4: twenty eight thousand acres of the woodlands. There's only one
Speaker 4: company that can really add new supply, and we only
Speaker 4: do it one building at a time, and it insulates
Speaker 4: us from that over supply risk.
Speaker 3: So when we're developing.
Speaker 4: We're not competing with developer on the second, third, and
Speaker 4: fourth corner of the intersection.
Speaker 3: It'll be first to be best.
Speaker 4: Sure you're competing with Howard and Use and you get
Speaker 4: the same answer no matter which one you ask, And
Speaker 4: that allows us to not only insulate us from oversupply,
Speaker 4: but drive better results when we bring on a new
Speaker 4: project where we have new multifamily that come online. Typically
Speaker 4: when you open a new multi family project, the project
Speaker 4: that's across the street cuts their rates to keep their tents.
Speaker 4: They don't want them moving to the competitor across the street.
Speaker 4: We do the opposite. We slightly increase our rates. We
Speaker 4: own the competitive property across the street, and if people
Speaker 4: want to move, great, they're moving into another one of
Speaker 4: our units. And it really allows us to drive better
Speaker 4: results in both the existing property and the new property,
Speaker 4: giving that kind of dominant market share that we have
Speaker 4: of class A space, both of office and multi family
Speaker 4: across our communities.
Speaker 2: Joe and I started out the conversation talking about the
Speaker 2: discrepancies between existing home sales and new construction at the moment,
Speaker 2: and I think the difference between new and existing home
Speaker 2: sales is at something like a more than decade high.
Speaker 4: I believe, oh absolutely.
Speaker 2: And this has surprised a lot of people because we
Speaker 2: thought that interest rates going up would impact affordability and demand,
Speaker 2: and instead we saw the market prove relatively resilient. And
Speaker 2: this seems to have incentivized a lot of home builders
Speaker 2: to ramp up construction. I know we've been focused on
Speaker 2: your business, but maybe talking more generally, what do you
Speaker 2: think would be the thing that would give home builders caution?
Speaker 4: I think what has impacted home sales more than the
Speaker 4: face on the rate the rate of change. When rates
Speaker 4: are volatile, home buyers pause sixty ninety days. And if
Speaker 4: rates stabilize, and then they can predict their payment and
Speaker 4: they can predict what they can afford, they'll transact. We have,
Speaker 4: depending on which researcher read, three five million home shortfall
Speaker 4: relative to household formation since the GFC. So the demand
Speaker 4: is there. I think home builders realize that. I think
Speaker 4: Warren Buffett's investment in the public homebuilders signified that he
Speaker 4: sees that long term supply demand imbalance out there. What
Speaker 4: gives them pause? If rates fell precipitously, would they pause
Speaker 4: for a second.
Speaker 3: Maybe?
Speaker 4: I just think that long term supply demand in balance
Speaker 4: is going to create a great opportunity for home builders
Speaker 4: for a long time. That's not to say that every
Speaker 4: quarter is going to be perfect. We're going to have
Speaker 4: some volatility in between. The long haul, there's a lot
Speaker 4: of value to be created, and so much demand is
Speaker 4: coming for those new constructions. Because the most valuable asset
Speaker 4: that most Americans have it's not cars, it's not jewelry,
Speaker 4: it's not art or wine.
Speaker 3: It's a mortgage.
Speaker 4: And if they have a two or three percent mortgage
Speaker 4: in today's seven percent rate world, it's really hard to
Speaker 4: sell your most valuable asset.
Speaker 2: You know, you mentioned the long haul, and this is
Speaker 2: something I always wondered for a business like property development,
Speaker 2: but you're talking about projects that take years, perhaps even
Speaker 2: decades to complete. I think you mentioned the land bank
Speaker 2: you have is good for was it eighty years something
Speaker 2: like that.
Speaker 4: That's twenty years of residential and much longer than that
Speaker 4: for commercial.
Speaker 2: So these are very long time horizons. How do you
Speaker 2: balance that sort of long term thinking with your a
Speaker 2: publicly traded company, you have shareholders that are looking at
Speaker 2: your results on a quarterly basis. How do you balance
Speaker 2: the sort of short term with the long term.
Speaker 4: Here, we're really focused on long term value creation and
Speaker 4: our board has been steadfast and directing management to focus
Speaker 4: on creating making the decisions that create long term value
Speaker 4: for our shareholders. We're never under pressure within our boardroom
Speaker 4: to make a short term decision for next quarters earnings
Speaker 4: at the detriment of a long term value creation and
Speaker 4: that has been our focus throughout due to SEC rules.
Speaker 4: The first bullet in our earnings release is what our
Speaker 4: earnings per share is. That's the last time we'll talk
Speaker 4: about it.
Speaker 2: And Bill Ackman is your chairman.
Speaker 4: Yes, he owns over thirty percent, and he is incredibly supportive,
Speaker 4: thoughtful and articulate member of our board that's actively engaged.
Speaker 1: You know, we've been talking a lot about residential and
Speaker 1: we've been talking about raids all of their aspect with
Speaker 1: office in particulars. People are concerned about vacancies and of
Speaker 1: course that it's different in different cities. So in New
Speaker 1: York there's tremendous anxiety obviously about work from home and
Speaker 1: return to office, and there's a story about it every day.
Speaker 1: What are vacant and c rates look like at the
Speaker 1: commercial offices on your properties, and say you know Houston
Speaker 1: or Summerland right now.
Speaker 4: Oh well, within our portfolio, we're in the single digits
Speaker 4: across the board in terms of vacancy.
Speaker 1: In terms of how does sorry, what would that, how
Speaker 1: does that compare to like.
Speaker 4: Relative to Houston overall, we're about half Houston's twenty or nine.
Speaker 1: What about for you say, in twenty nineteen, those same
Speaker 1: property like pre.
Speaker 3: Payment are very similar.
Speaker 1: So would you say, I mean, are these markets normalized now?
Speaker 1: I mean again, like I think our listeners maybe like
Speaker 1: we probably have a lot of listeners in La San Francisco,
Speaker 1: New York who are just like, oh God, no one's
Speaker 1: going back to work. But well, talk to us. From
Speaker 1: your perspective what you're seeing.
Speaker 4: There's no market that's immune, right, and every market has
Speaker 4: b office buildings and challenging locations that have no business
Speaker 4: being office buildings. And in New York you can look
Speaker 4: at Third Ave in Houston, you can look at a
Speaker 4: certain submarket. In any market, there's an area where that
Speaker 4: building's just not going to meet the demand of today's
Speaker 4: needs of a company, of a corporate user. Companies want
Speaker 4: to attract employees back to the office. They realize that
Speaker 4: for several years now we've been borrowing from the Culture Bank,
Speaker 4: and it's time to make some more deposits and get
Speaker 4: folks back to the office. And to do that, you
Speaker 4: need highly minitized space. You need space with access to
Speaker 4: clean air, hopefully some connectivity in nature, great amenities, but
Speaker 4: really importantly short commutes.
Speaker 3: Right.
Speaker 4: I think that those office buildings in New York is
Speaker 4: no exception. If you're on top of Grand Central or
Speaker 4: Penn Station, I think you're going to be great long
Speaker 4: term because you can offer really short commutes. And in
Speaker 4: the Woodlands, we're the largest LEAD pre certified community in
Speaker 4: the country without mass transit. And I was really worried
Speaker 4: when we went to get LEAD certified because it's still Texas.
Speaker 4: There's still a lot of pickup trucks and everyone drives
Speaker 4: to work. But your average commute in the Woodlands is
Speaker 4: less than five miles, less than ten minutes.
Speaker 3: Wow.
Speaker 2: You know, we've talked about residential, we've talked about commercial.
Speaker 2: Can we talk a little bit about retail because I
Speaker 2: feel like this this was the pre eminent area of
Speaker 2: concern between sort of twenty eight to twenty twenty, all
Speaker 2: the dead malls and then it's sort of we don't
Speaker 2: really talk about it anymore. We just ask about the
Speaker 2: office building. So what's going on with retail?
Speaker 4: So the dynamic today of nobody's ever going to work
Speaker 4: in an office again, rewind the clock ten years ago.
Speaker 4: It was nobody's going to shop in person again, everything's online.
Speaker 4: We're never going to go to the store. As I've
Speaker 4: learned over time, pendulum always swings too far right. And
Speaker 4: I think that was a perfect example. But what that
Speaker 4: did over the past ten years is it really stopped,
Speaker 4: not completely stopped, but shrunk dramatically the amount of new
Speaker 4: retail supply that came to the market, and we went
Speaker 4: from an oversupplied retail market to right now an undersupplied
Speaker 4: retail market. And when the pandemic came and it hurt
Speaker 4: a lot of those weaking performing, weaker performing retailers that
Speaker 4: they went out of business.
Speaker 3: They left.
Speaker 4: If you look at the public real estate companies that,
Speaker 4: especially in the strip center space, they backfilled those vacancies.
Speaker 4: Their occupancies are at peaks even compared to pre pandemic,
Speaker 4: at higher rents per square foot, at higher sales per
Speaker 4: square foot because they're backfilling weaker tenants with stronger tenants.
Speaker 4: It was a Darwin moment like the short not girafts
Speaker 4: are gone.
Speaker 1: You know, I remember a friend of mine during the pandemic.
Speaker 1: I had this like crazy real estate developer friend. I
Speaker 1: need to check in with him. But he bought like
Speaker 1: a sort of like he bought a mall in like Plano, Texas,
Speaker 1: in like the summer twenty twenty, and I was like,
Speaker 1: no one was paying their rent. He's like, all of these,
Speaker 1: all of the ones that in there, they all survived
Speaker 1: like the past downturn, and so they're all going to
Speaker 1: start paying their rent again. I got to check in
Speaker 1: and he said it was either going to make them
Speaker 1: a billionaire or go broke. So we'll see what happened.
Speaker 1: I'll see where he is. You know what, there was
Speaker 1: something you said very at the very beginning that I
Speaker 1: think we really need to hit on again. And yesterday
Speaker 1: I was reading through the fid's Beige Book, and by
Speaker 1: and large, there was a lot of comments about, you know, inflation, cooling,
Speaker 1: supply chains turning to normal. Well, but the one area
Speaker 1: that stood out over and over again across districts where
Speaker 1: they're saying more inflation is an insurance. And you said
Speaker 1: that in the beginning talk to us about why is insurance?
Speaker 1: First of all, why isn't insurance surging everywhere?
Speaker 4: Rates have taken off over the past year in ways
Speaker 4: that we've never experienced and I've never seen in twenty years,
Speaker 4: and I'm told there's a lot of reasons for that.
Speaker 4: The reinsurance market is drying up. People are reluctant to
Speaker 4: take risk. There have been more and more natural disasters,
Speaker 4: making it harder and harder to price insurance appropriately, and
Speaker 4: there's just fewer and fewer risk takers on the other
Speaker 4: side of the table to meet the demand of folks
Speaker 4: that need insurance on this side of the table.
Speaker 1: When you say rates are taking off like the way
Speaker 1: you've never seen, can you like put some numbers behind
Speaker 1: it in terms of just like how different, how crazy
Speaker 1: is the market or the movement the rate of change
Speaker 1: in the market in twenty twenty three versus a period
Speaker 1: that it might be.
Speaker 4: Most risk managers would define insurance markets as either hardening
Speaker 4: or softening okay, worse getting better.
Speaker 3: Every year.
Speaker 4: They always tell me it's hardening, okay, and I say,
Speaker 4: one of these days it's going to soften, and sometimes
Speaker 4: it'll soften, but they always manage my expectations by saying
Speaker 4: it's hardening. Okay, so this year they said it's hardening,
Speaker 4: and I kind of rolled my eyes and shrugged and said, okay,
Speaker 4: here we go again, and we'll suck. You know, we'll
Speaker 4: take it. We'll take a three to five percent increase,
Speaker 4: It'll be all right. And we came back with twenty
Speaker 4: five percent. Oh wait, maybe it's forty percent. And then
Speaker 4: some of our peers and some of those that I've
Speaker 4: talked to in the industry have seen a fifty percent increase.
Speaker 4: And it's just there's not as much availability as there
Speaker 4: used to be, and then therefore certain pieces of the
Speaker 4: insurance stack gets more expensive for a company like Howard
Speaker 4: to use with you know, six billion of total insurable value.
Speaker 4: We do what's called the shared and Layer program like
Speaker 4: most people do, which is think of a CMBs loan
Speaker 4: or an ABS loan, where you take the whole loan
Speaker 4: and you slice it by risk, and then you have
Speaker 4: this tetris like grid and you fill it up with insurers.
Speaker 4: Those that want to take the most risk at the
Speaker 4: top get the highest rate those and then all of
Speaker 4: a sudd at the end of the year, when you
Speaker 4: go to get your policy, there's a big gap in
Speaker 4: the middle, or you can't fill a couple of layers,
Speaker 4: and then the cost of filling those incremental layers are
Speaker 4: so pricey that it impacts the pricing of every layer
Speaker 4: around it. And it's just that there's not enough supply
Speaker 4: to meet the demand.
Speaker 2: This might be a dumb question. Do you get volume
Speaker 2: discounts as a big developer on insurance? Is there a
Speaker 2: size benefit here?
Speaker 4: There's a diversification discount, okay, right, And there are certain
Speaker 4: locations that are more susceptible to natural disasters, and if
Speaker 4: you have locations that offset that. If I have a
Speaker 4: Las Vegas to offset a Houston that helps. If I
Speaker 4: have Columbia, Maryland offset in New York City that helps,
Speaker 4: Oh so Houston.
Speaker 1: I guess the concern would be hurricanes or floods. Yes,
Speaker 1: Do you have a sense of like when you look
Speaker 1: at these big increases, how much I guess of these
Speaker 1: big thirty forty percent increases and I've seen those numbers elsewhere,
Speaker 1: Like would you say is relate to like natural disaster
Speaker 1: risk versus some sort of diminishment and just sort of
Speaker 1: capacity over all. You mentioned the reinsurers maybe tightening financial market.
Speaker 4: I think your question implies that one didn't create the other, Okay, right,
Speaker 4: And I do think the increase in natural disasters has
Speaker 4: negatively impacted the amount of supply on the other side,
Speaker 4: just on.
Speaker 2: The topic of climate change. So obviously, one thing you
Speaker 2: can do to mitigate those sorts of disaster risks is
Speaker 2: not built in areas that are prone to flooding or hurricanes.
Speaker 2: Is there anything you can do in terms of the
Speaker 2: actual property development or structures. I've seen a lot of
Speaker 2: people asking, well, why doesn't America build more homes out
Speaker 2: of cement versus plywood? Things like that.
Speaker 4: Absolutely, and it's not just how you build as you
Speaker 4: mitigate potential natural disasters. It's how you build to mitigate
Speaker 4: your carbon footprint, and how you build respecting the environment.
Speaker 4: I mentioned that one of our communities started in the
Speaker 4: sixties by a gentleman named Jim Rouse who lived in Timore,
Speaker 4: and he saw that he thought that people had lost
Speaker 4: their way. They stopped taking care of each other, and
Speaker 4: they stopped taking care of their environment. Some of the
Speaker 4: other new developments around Baltimore were just grazing the landscape,
Speaker 4: flattening the land, sticking up homes, and he said, I'm
Speaker 4: going to build a better community. He said, I'm going
Speaker 4: to build a garden for growing people where we're going
Speaker 4: to respect the community, respect each other, allow everybody to
Speaker 4: come in. There will be no redlining allowed in our
Speaker 4: new construction. We're going to embrace the environment and we're
Speaker 4: going to build that ideal a community. And that's really
Speaker 4: the roots of the Howard Hues Corporation, Howard Use Holdings,
Speaker 4: and that's what we embrace today. And it's not we're
Speaker 4: green or inclusive because we check a box on a
Speaker 4: scorecard and get a better rating somewhere. It's because we
Speaker 4: create a better community. When we do it, more people
Speaker 4: want to live there. It's a better quality of life
Speaker 4: for our residents when we do it, and therefore our
Speaker 4: land values are higher, our returns are higher, and it's
Speaker 4: about just doing the right thing. When Hurricane Harvey came
Speaker 4: into Houston, one of our largest master community in northwest Houston,
Speaker 4: known as Bridgeland, it's about eleven thousand acres, about halfway
Speaker 4: done so far, and I was at home on the
Speaker 4: computer looking at YouTube constantly, just typing in Bridgeland flooding,
Speaker 4: what's going on? And there was a lot of videos
Speaker 4: prosted by some folks in very big trucks, and that
Speaker 4: they would scan around on their phones and go, oh
Speaker 4: my god, the roads have flooded, Oh my god, the
Speaker 4: lakes have flooded. And I'm watching in between as they're scanning,
Speaker 4: and I'm like, thank god, the homes are dry. Everything
Speaker 4: worked the way it's supposed to. We built bridgel into
Speaker 4: the five hundred year Floodplaine when code said you only
Speaker 4: had to build to one hundred, and as a result,
Speaker 4: we didn't have a single home in Bridgeland take water
Speaker 4: during Harvey.
Speaker 1: Wow, because there weren't many places like that, I mean no.
Speaker 1: David O'Reilly, CEO of Howard Hughes Holdings, thank you so
Speaker 1: much for coming on. I feel like we could actually
Speaker 1: probably ask you questions for like four or five hours
Speaker 1: later because there's just so much here in terms, you know,
Speaker 1: construction and utility costs in Texas and all that stuff.
Speaker 1: But this is great. I learned a lot and I
Speaker 1: really appreciate you coming on online.
Speaker 3: Thanks so much for having me.
Speaker 1: Tracy. I thought that was great. I feel like we
Speaker 1: really needed that sort of pretty close to three hundred
Speaker 1: and sixty degree view on the fo State market, and
Speaker 1: that was really good.
Speaker 2: It was pretty holistic given that we hit residential, commercial,
Speaker 2: and retail.
Speaker 1: As tail, utilities, labor insure lot. Yeah, we hit a
Speaker 1: lot in that conversation.
Speaker 2: Yeah, one thing that stood out to me was David
Speaker 2: describing the sort of reaction in early twenty twenty to
Speaker 2: the pandemic. And I think this partly explains why a
Speaker 2: lot of the economy has proven to be more rate
Speaker 2: insensitive than perhaps expected. But you know, he was talking
Speaker 2: about how they rushed out and termed out their debt
Speaker 2: and now they've been using a lot of debt swaps
Speaker 2: as well on floating rate loans. Like if you think
Speaker 2: that every company in early twenty twenty basically said we
Speaker 2: need to do this right now, like that is a big,
Speaker 2: big force that's sort of holding back some of that
Speaker 2: tightening impact.
Speaker 1: And then the question is, right, are we going to
Speaker 1: hit the wall?
Speaker 3: Right?
Speaker 1: I mean, you mentioned, you know, the maturity wall, and
Speaker 1: maybe the maturity wall.
Speaker 2: Isn't that Joe, When you say maturity wall, you always
Speaker 2: have to say looming a maturity wall.
Speaker 1: That's the rule, the journalist's rule. So you mentioned for
Speaker 1: people talk about that looming and maybe it's not quite
Speaker 1: as like steep is it's not literally a wall, maybe
Speaker 1: it's a hill, but when we think about the sort
Speaker 1: of potential lag defect great hikes, and it's you know,
Speaker 1: one factor might be you know, there's clearly some slow
Speaker 1: already in terms of new development in certain areas, but
Speaker 1: one reason maybe we haven't been harder is because of
Speaker 1: that aggressive turning out.
Speaker 2: No. Absolutely. And then the other thing that stood out
Speaker 2: to me was the discussion of insurance. Yes, and this
Speaker 2: seems to be really like a growing headwind, not just
Speaker 2: for individual home owners in certain parts of the world,
Speaker 2: but also for property developers, as David laid out, and
Speaker 2: I think we really need to do an insurance episode soon.
Speaker 1: We definitely need to do. But it was great to
Speaker 1: hear from like a big buyer of insurance that like, yes,
Speaker 1: this is not like anything we've seen in the past.
Speaker 1: I mean it's like, okay, you expect a hardening market,
Speaker 1: which is a good I didn't know that phrase. A
Speaker 1: hardening market is typically four or five percent maybe, and
Speaker 1: it's like thirty to fifty percent or thirty to forty percent.
Speaker 3: Is pretty wide. Well.
Speaker 2: Also, the description of how insurance risk is kind of
Speaker 2: divvied up, you know, very similar, I guess to a colo. Sorry,
Speaker 2: my frame of reference is all structured finance. But and
Speaker 2: the idea that you can build this deal, but if
Speaker 2: you can't sell certain tranches because the buyers of that
Speaker 2: specific risk aren't there anymore, then the whole thing becomes pricier.
Speaker 2: I hadn't heard that description before. That's really interesting me neither,
Speaker 2: but that was great. All right, shall we leave it there.
Speaker 1: Let's leave it there.
Speaker 2: This has been another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow our guest David O'Reilly. He's at David O'Reilly HHC.
Speaker 1: Follow our producers Carman Rodriguez at Carman Arman and dash
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