The Howard Hughes Corporation (NYSE:HHC) Q4 2022 Earnings Call Transcript

The Howard Hughes Corporation (NYSE:HHC) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good morning, and welcome to The Howard Hughes Corporation Fourth Quarter 2022 Earnings Conference Call. . I would now like to turn the conference over to Eric Holcomb, Senior Vice President of Investor Relations. Please go ahead.

Eric Holcomb: Good morning, and welcome to The Howard Hughes Corporation's Fourth Quarter 2022 Earnings Call. With me today are David O'Reilly, Chief Executive Officer; Jay Cross, President; Carlos Olea, Chief Financial Officer; Dave Striph, Head of Operations; and Peter Riley, General Counsel. Before we begin, I would like to direct you to our website, howardhughes.com, where you can download both our fourth quarter earnings press release and our supplemental package. The earnings release and supplemental package include reconciliations of non-GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP financial 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 assurance that these expectations will be achieved. Please see the forward-looking statement disclaimer in our fourth quarter earnings press release and the risk factors in our SEC filings 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 O'Reilly.

David O'Reilly: Thank you, Eric, and good morning, everyone. Welcome to our fourth quarter earnings call. On our call today, I'm going to begin with a recap of our outstanding year and cover the segment highlights for our Master Planned Communities in the Seaport. Dave Striph will cover the performance of our operating assets, followed by remarks from Jay Cross who will provide updates on our development projects in Ward Village. Finally, Carlos Olea will provide a review of our financial results before we open the lines up for Q&A. I am pleased to report that our fourth quarter results were solid and capped off another exceptional year for HHC. Considering 2022 was a year headlined by rising inflation and falling new home sales, our results were nothing short of outstanding and demonstrated the resiliency of our unique portfolio of assets, which continue to prove its ability to withstand periods of economic uncertainty.

Highlights of the year included strong MPC EBT of $283 million, aided by record residential price per acre and builder price participation revenue. Our operating assets delivered record NOI of $239 million, a 6% increase over 2021. At Ward Village, we continue to experience an exceptional pace of condo sales, contracting to sell a record number of units and delivering $677 million in net revenue with strong gross margins. And at the Seaport, foot traffic rose nearly 50% year-over-year, significantly increasing revenue and reducing NOI losses before the impact of the equity losses from the Tin Building. With these operating results generating significant cash flow as well as our strong balance sheet, we were able to continue the deployment of considerable capital into projects that we believe will unlock substantial value over the long term.

In 2022, we delivered 6 new projects, including a residential condominium, 388,000 square feet of office and retail space and 830 multifamily units. The completed operating assets have projected stabilized NOI of $25 million and implied yield on cost of 7%. Further, we commenced construction on our eighth condo project as well as 233,000 square feet of office and our first single-family for rent project. We currently estimate these operating assets will deliver combined NOI of $12 million with a 6.7% yield on cost at stabilization. Digging into our MPC segment. In the fourth quarter, we continued to deliver strong results, generating $77 million of EBT with solid land sales and a 51% increase in residential price per acre. We also benefited from record builder price participation revenue of $20 million as home prices in our communities remain strong.

Ultimately, the results of the quarter contributed to full year MPC EBT of $283 million, which reflected an 11% reduction compared to our record results in 2021. When excluding equity and earnings from The Summit, which declined $61 million year-over-year as a result of its tremendous past success and current lack of inventory, MPC EBT increased $27 million compared to 2021. This growth was ultimately driven by strong land sales, a 32% increase in price per acre sold and record full year builder price participation revenue of $72 million. In our Houston region, Bridgeland delivered another outstanding quarter with more than 60 residential acres sold at an average price of $555,000 per acre. We also closed on the sale of 2 commercial sites totaling nearly 85 acres, which generated more than $21 million of revenue.

With continued strong builder price participation, Bridgeland reported nearly $43 million of EBT in the quarter. This performance capped off a fantastic year for Bridgeland, headlined by an increase in acres sold, record average price per acre of $544,000 and the highest builder price participation revenue in the MPC's history. In The Woodlands, we commenced residential lot sales at 'A'ali'i, which encompasses 25 waterfront lots on Lake Woodlands. These custom lot closings which generated $22 million of revenue in the fourth quarter included more than 7 acres sold for a record $3 million per acre. In The Woodland Hills, we experienced a 50% reduction in residential acres sold, partially offset by a 12% increase in price per acre. For the year, we sold 62 residential acres at a record average price per acre of $382,000 and also benefited from our first commercial land sale and strong builder price participation revenue.

Out west in Summerlin, we closed on the sale of 2 superpad sites, totaling 24 acres during the quarter. Although this represented a significant year-over-year reduction when compared to the massive 216-acre superpad sale that closed in the prior year, we achieved a new record price per acre of nearly $1.3 million and further growth in builder price participation revenue. As previously mentioned, we experienced a significant $61 million reduction in equity earnings from The Summit during the year. This extremely successful joint venture with Discovery Land has limited lots remaining in inventory pending the upcoming development of Phase II, which will include another 54 acres of land for 28 custom home sites and commence sales later this year.

Finally, in the Phoenix West Valley, we celebrated our official groundbreaking of Teravalis in late October with more than 200 key stakeholders in attendance. We continue to work diligently in Floreo, the community's first village, mass grading and selling the infrastructure needed for more than 1,000 residential lots. To facilitate this development, the Floreo joint venture closed on a $165 million credit facility that will fund horizontal development investments in this village. We currently expect lot sales will commence in the second half of this year. Looking at new home sales across all regions. As expected, we experienced a further reduction in the quarter with a total of 251 homes sold. For the year, homebuilders in our MPC sold 1,574 homes, representing a 43% reduction compared to the record sales in 2021.

The reduction was largely attributable to Summerlin, which saw a 51% decline. In Houston, lower home sales were also recorded in Bridgeland and The Woodland Hills, but a much lower magnitude of 21% and 38%, respectively. To encourage increased sales in the new year, many of our homebuilder partners are increasing incentives and offering reduced interest rates to home buyers. This is having a positive effect on sales traffic throughout our communities and has resulted in increased home sales and reduced cancellation rates on existing inventory. While it remains very early, we're cautiously optimistic given the increased pace of sales in our MPCs and markets thus far in 2023. With respect to future land sales, Carlos will discuss our 2023 guidance in a minute, but we do expect to see a reduction in acres sold in the short term as we continue our discipline of only selling land to meet the underlying demand.

Long term, many of our homebuilders are eager to purchase additional land to meet demand in the years ahead with lot inventories in Houston, Las Vegas and Phoenix remaining at near historic lows. However, for right now, many builders are in a wait-and-see mode, which we expect will subside as we progress throughout this year. As a result, we anticipate land sales this year will decline to a more normalized level seen prior to the pandemic. Shifting to the Seaport. We posted a strong year with a nearly 50% increase in foot traffic compared to the prior year. At Pier 17, this increase was particularly apparent during our Summer Concert series, which included 60 shows more than any previous year with over 180,000 tickets sold or more than 90% of ticket inventory.

The success of this year's concert series was so incredible that the rooftop was recently named the #1 Top Outdoor Music Venue in New York City by Red Bull and the #3 Top Worldwide Club by The success we experienced at the Seaport this year was not limited to the rooftop. During the year, all of our managed restaurants saw increased demand as locals and tourists return to the Seaport. We also had an increase in private events, most notably in the summer, and we leased the remaining available space in the Fulton Market Building to Alexander Wang under a 15-year agreement. The highlight of the year was without a doubt the grand opening of the Tin Building. This 54,000 square foot one-of-a-kind marketplace, curated in partnership with Jean-Georges, has been met with significant accolades from visitors in the media.

Although we encountered some labor-related challenges ramping up, which ultimately contributed to reduced hours of operations and significant equity losses in the fourth quarter, we achieved 7-day per week operations in December. We fully expect the increased operating hours and full-scale operations will help to improve performance for this venue going forward. Overall, the Seaport generated full year revenue of $88 million, a 61% increase compared to 2021. Excluding equity losses generated at the Tin Building since its opening, Seaport NOI losses improved $8 million or 44% year-over-year. This improvement highlights the appeal of this iconic neighborhood, which is firmly establishing itself as a premier dining and entertainment destination in New York City.

I'll now hand the call back over to Dave Striph.

Real Estate, Building

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David Striph: Thank you, David. In the fourth quarter, our operating assets continued their solid performance, exceeding our expectations and delivering $55 million of NOI, including the contribution from unconsolidated ventures. For the full year, we generated a record NOI of $239 million, which represented a 6% increase relative to 2021. Excluding our divested hospitality and retail assets, NOI increased 9% year-over-year. Most significant increase was seen in our multifamily portfolio, which generated fourth quarter NOI of $11 million and full year NOI of $46 million. For the year, this represented a strong 39% increase, primarily driven by the rapid lease-up of new properties in The Woodlands and Downtown Columbia. Our results were also favorably impacted by strong 12% blended in-place rent growth across the portfolio.

Our assets command some of the highest rents in their markets, and at year-end our stabilized properties were 95% leased, which is a testament to the quality of our product and our highly amenitized locations. With strong demand in our markets, we continue to develop best-in-class assets, including Starling at Bridgeland, which was placed into service late in the third quarter and is already 35% leased as of year-end. Similarly, in the fourth quarter, we completed and began leasing units at Marlow in Downtown Columbia, which is recently named by as the best place to rent in America. With additional multifamily projects under construction in Bridgeland and Summerlin, we expect meaningful incremental NOI growth in the coming years as these new projects are completed and move towards stabilization.

In office, we produced fourth quarter NOI of $28 million and full year NOI of $111 million. For the quarter, this reflected a 7% year-over-year reduction, which was primarily the result of some tenant vacancies, which occurred earlier in 2022 in The Woodlands and Downtown Columbia. These reductions were partially offset by strong lease-up and the expiration of rent abatements at 6100 Merriweather and 9950 Woodloch Forest. For the full year, office NOI was up slightly, benefiting from abatement expirations and new leasing momentum throughout the portfolio. These were largely offset by the aforementioned tenant vacancies earlier in the year. During 2022, we executed approximately 510,000 square feet of new or expanded office leases, including 253,000 square feet in The Woodlands, 155,000 square feet in Downtown Columbia and 102,000 square feet in Summerlin.

We expect to benefit from this leasing momentum later in 2023 and into 2024 and beyond as office build-outs get completed and free rent periods burn off. Overall, the strong leasing performance is a testament to our world-class and amenity-rich office assets, which continue to see elevated demand as employers continue to bring their employees back into the office. With a strong focus on a flight to quality in today's market, we expect to see continued strong leasing momentum in the year ahead. In retail, NOI was $13 million in the fourth quarter, which reflected a 6% reduction compared to the prior year primarily related to increased operating expenses and reduced retail square footage in Hawaii as a result of the decommissioning of Center to prepare for the development of the Park Ward Village Condominiums.

For the full year, retail NOI was $52 million or a modest reduction of 2% compared to 2021. This reduction was primarily due to onetime rent payments at Ward Village during the prior year, which were associated with the recovery from the COVID-19 pandemic. Overall, the remainder of our retail portfolio performed well with improved occupancy and leasing percentages in all of our markets. Finally, our share of NOI from unconsolidated ventures increased 18% in the fourth quarter and 75% for the full year. This improvement is almost entirely from the absence of net operating losses at the 110 North Wacker office building, which was sold during the first quarter of 2022. I will now turn the call over to our President, Jay Cross.

Jay Cross: Thanks, Dave, and good morning, everyone. In the fourth quarter, we continued to advance our development pipeline with the completion of 3 office and multifamily projects including 1700 Pavilion, a 266,000 square foot office tower in Downtown Summerlin, which is already 50% leased; Marlow, a 472-unit multifamily development in Downtown Columbia which includes 33,000 square feet of ground floor retail space; and Creekside Medical Plaza, a 33,000 square foot medical office building here in The Woodlands. All of these projects, which were completed on time and on budget, are designated as green buildings and are projected to provide more than $18 million of incremental NOI upon stabilization. We also continue to make good progress on our other projects under construction including Tanager Echo, a 294-unit multifamily complex in downtown Summerlin expected to be completed in the second quarter of this year; Wingspan, our 263-unit single-family for rent development in Bridgeland; and the new South Lake medical office building in Downtown Columbia, which started construction during the third quarter.

We expect Wingspan and the South Lake medical office building will be completed in early '24. In the fourth quarter, we commenced construction on the Summerlin South office, a 147,000 square foot 3-story office building, which we expect will be completed later this year or early '24. We continue to see strong demand for office products in the Las Vegas Valley, and we believe this new development will nicely complement our Class A portfolio in Downtown Summerlin. Overall, 2022 was an excellent year from a development standpoint with the completion of 6 projects encompassing 388,000 square feet of office and retail space and 830 multifamily units. Combined with our 4 projects underway, all of these projects are expected to contribute incremental annual NOI of nearly $43 million to the company upon stabilization.

Looking quickly at the Seaport. We continued site work at 250 Water Street during the fourth quarter, but we paused construction efforts due to a third-party lawsuit which challenged the Landmark Preservation Commission approval of the project. In January, the court ruled in favor of the petitioners and voided the Landmark's approval, requiring us to cease all construction work. We strongly disagree with the court's decision and subsequently filed an appeal. A request for a stay of the corridor was granted, which allowed foundation work to continue and pending a full hearing scheduled for this week. We'll keep you apprised as more information becomes available. Shifting over to Ward Village. We had another tremendous year, closing on 607 condo units which generated $677 million of net revenue.

The majority of these sales are related to the completion of Ko'ula, our sixth condo tower, where we closed 549 units for $620 million in net revenue. 151 of these units were closed in the fourth quarter, contributing $207 million of net revenue. At year-end, Ko'ula was 97% sold. Also in the fourth quarter, we sold the last remaining condo unit at Waiea and 7 units at 'A'ali'i, generating combined net revenue of $11 million. At the end of the year, 'A'ali'i was 96% sold. On the construction front, we are making great headway at Victoria Place as well as the Park Ward Village, which commenced construction late in 2022. Victoria Place is 100% presold, and we are on track to deliver the tower in early 2024. Park Ward Village ended the year 92% presold and we expect to complete this tower in 2025.

Finally, with respect to presales, we continue to experience a rapid pace of sales at our 2 new condo buildings launched during 2022. Ulana, the community's ninth project consisting of 696 units of fully dedicated workforce housing, where we are 97% presold with only 20 units remaining at year-end. In early January, we started construction on Ulana and also closed on $264 million construction loan for the project. Ward Village's tenth condo project consisting of 329 units launched presales in late September. This building ended the year remarkably 73% presold. Overall, in 2022, we had a record year contracting to sell 1,055 condo units with a sales value of more than $1.1 billion. Our projects under construction and in presales accounted for 961 of these units which are secured by nonrefundable deposits.

This represents significant revenue, which is a meaningful contribution to HHC's bottom line upon their completion and provide incremental funding to advance new development projects in the future. I would now like to hand the call over to our CFO, Carlos Olea, who will review our financial results.

Carlos Olea: Thank you, Jay, and good morning, everyone. In the fourth quarter, we continued our strong performance, which contributed to favorable full year results which exceeded our guidance expectations. In summary, our MPCs produced $77 million of EBT in the fourth quarter despite continued market headwinds, resulting in full year EBT of $283 million. This result for 2022 was only 11% lower than our record results in 2021 and was at the upper end of our most recent guidance, which anticipated a 10% to 17% year-over-year reduction. Our operating assets delivered $55 million of NOI during the fourth quarter with record full year NOI of $239 million. Compared to 2021, this represented a 6% increase, which compares favorably to our most recent guidance which contemplated a 3% to 5% increase.

When excluding divested assets, operating asset NOI increased 9% year-over-year. At Ward Village, we generated $62 million of condo profit in the quarter, which contributed to full year condo profit of $196 million and overall gross margins of 29%. This also exceeded our guidance expectations, which projected gross margins ranging from 26.5% to 27.5%. At the Seaport, we recorded year-over-year NOI improvement of 11% in the fourth quarter and 44% in 2022 when excluding losses from unconsolidated ventures of the Tin Building. As expected, this new asset grand opening in late September resulted in sizable equity losses from the fourth quarter, but we anticipate significant improvement going forward as this asset operates at full capacity and starts to move towards stabilization.

Lastly, we reported full year G&A of $82 million, which came in at the lower end of our $80 million to $90 million guidance range. This represents more than a 30% reduction compared to our pre-transformation G&A run rate of approximately $120 million in 2019. Overall, we are very pleased with our performance in 2022. Looking forward, we remain very positive about the long-term outlook for our businesses, but we do anticipate some near-term challenges in 2023 as a result of ongoing market headwinds. In our MPC segment, we expect the current soft housing market and reduced new home sales will impact homebuilder demand for new residential acreage. As a result, we expect MPC EBT will decline 25% to 35% compared to 2022. Although this is a sizable reduction from the outsized levels of earnings experienced in recent years, this EBT levels remain favorable and are comparable to more normal MPC earnings generated during 2017 and 2018.

In operating assets, we anticipate the momentum throughout our multifamily portfolio to drive NOI growth going forward. In office, however, we expect a modest year-over-year NOI reduction primarily due to a loss of some office tenants during 2022. Although we had tremendous success leasing more than 500,000 square feet of vacant office space across our portfolio during 2022, office build-out times and renovation periods included in many of those new leases will limit NOI growth until later in 2023 and into 2024. Overall, excluding the contribution from divested assets in 2022, we project operating asset NOI will be down 2% to up 2% year-over-year. After another successful year of condo closings at Ward Village during 2022, we expect reduced condo sales and profit in the near term as our next tower, Victoria Place, is not expected to be delivered until early 2024.

In 2023, condo sales will be driven by closings of remaining units at 'A'ali'i and Ko'ula, which are 96% and 97% sold, respectively. As a result, condo sales in 2023 are expected to range between $45 million and $55 million with a gross margin between 25% and 28%. Condo sales are expected to materially increase in 2024 with Victoria Place closings expected to generate approximately $775 million in revenue. And finally, in 2023, we expect cash G&A to range between $80 million and $85 million, which excludes anticipated noncash stock compensation of approximately $5 million. Looking at asset dispositions. During the fourth quarter, we sold 2 retail properties, including Lake Woodlands Crossing for $23 million and Creekside Village Green for $28 million.

Total net proceeds were $39 million, with Lake Woodlands Crossing now subject to a 99-year ground lease with HHC. With a combined basis of only $23 million, this disposition has generated a $26 million gain during the fourth quarter. Together with the sale of the Outlet Collection at Riverwalk as well as our interest in 110 North Wacker earlier in the year, total net proceeds from asset sales in 2022 were $216 million. Turning to our balance sheet. We ended the year with $627 million of cash, which leaves us well positioned to deploy capital into our development pipeline. At the end of the fourth quarter, the remaining equity contribution needed to fund our current projects was $266 million. From a debt perspective, we have $4.7 billion outstanding at the end of the year with only $228 million of maturities in the next 2 years and approximately 87% due in 2026 or later.

During the fourth quarter, we closed to nearly $1 billion in financings, including $575 million of permanent debt, $219 million of construction loans for our latest developments and a $200 million access loan for horizontal development in Bridgeland. This tremendous financing achievement not only extended our weighted average debt maturity to 6 years, but it also resulted in 100% of our debt being fixed, capped or swapped to a fixed rate, which significantly mitigates our risk in this rising rate environment. With that, I would now like to turn the call back over to David.

David O'Reilly: Thank you, Carlos. Before we open up the lines for Q&A, I just want to reiterate the exceptional performance of our assets in 2022. Looking forward for 2023, we do not have a condo tower that closes and therefore we'll see reduced sales. And while we may encounter some market challenges in the short term, we believe that our unique business model has historically achieved outsized returns throughout various market cycles. We have an exceptional portfolio of assets with a robust pipeline of new development ahead of us, which well positions the company for net asset value growth in the years ahead. As the attractiveness of our communities continues to become more and more apparent, it is no accident that in 2022, The Woodlands is once again ranked the best place to live in America.

Summerlin was ranked in the top 10 selling MPCs in the country, and Columbia was rated the best place to rent best placed for jobs and safest city in America. The accolades for our communities and our company's strong results continue to speak to the success of HHC. And with the continued development in our pipeline, we know the best is yet to come. Now let's start the Q&A portion of the call. We'll begin by answering a few questions that have been generated by Safe Technology, which will be read by Eric Holcomb, Eric, first question?

A - Eric Holcomb: Thanks, David. The first question today is, will you be considering a dividend at some point in the future? Carlos, do you want to take that one?

Carlos Olea: Thank you, Eric, and good morning, everyone. Well, one of the biggest benefits of HHC is our self-funding business model, where we can harvest free cash flow to fund our development pipeline without the need to raise capital. And we intend to continue to do this going forward because we believe that the best use of our cash is to invest in new developments that create the largest risk-adjusted returns, or like we did towards the end of 2021 and early 2022, to buy back our stock when we see it as a significant discount to intrinsic value, increasing our NAV. At some point, if free cash flow exceeded the development needs and stock buybacks didn't make sense, we could consider a dividend, but we do not have any plans to implement the dividend as of now.

Eric Holcomb: Thanks, Carlos. Second question is, can you please give an overview of the water issue in Arizona? According to water authorities in Buckeye and Arizona State University, Buckeye is 1 of the top 3 cities that will have the largest water cuts by 2026. David, do you want to take this question?

David O'Reilly: Sure. And it's a great question and one we've been answering for a while. Look, issues of water management are inherent in desert environments. Clearly, Phoenix, Arizona, as is Summerlin in Nevada are desert environments, and we thoroughly investigated the access of water for Teravalis leading into our acquisition in 2021. We relied strongly on our external experts as well as our experience in Summerlin, where over the past 10 years, the population has doubled but the per capita usage has decreased so much that the overall usage today of water in Las Vegas is less than what it was 10 years ago. Shifting to Teravalis, development in Floreo, our first village which is about 3,000 acres and 7,000 homes, is moving ahead as planned.

Floreo has already secured a 100-year certificate of assured water supply from the State of Arizona and that full development will take about 10 years to 12 years to complete. The balance of Teravalis is divided into 9 phases. In the first 5 phases, we have been awarded an analysis of assured water supply, which is the last step really before receiving a 100-year certificate that Floreo has. Look, we're going to continue to support the introduction of modern technology and innovation by collaborating with local, state and community leaders to make sure that we're executing this in the right way. We are long-term investors. We're going to own and live in these communities. Our employees live in these communities. Their kids are going to go to school in these communities.

We are absolutely committed to making sure that we protect the precious resources that we need to see the success of all of these communities. So it has our full attention, and we're incredibly confident that we're going to be able to execute the way we outlaid it when we acquired that land.

Eric Holcomb: Thanks, David. Third question today is, can you give an update on debt compliance? Are there any properties still in technical default or about to be? Carlos?

Carlos Olea: Thank you, Eric. So at year-end, we had 3 properties that did not meet the debt service coverage ratios. These are 1 Hughes landing, 2 Hughes Landing and None of them have a material impact on our liquidity or our ability to operate the assets because the noncompliance triggers a cash drop, which simply means that we can still use all the cash flows for the operation of the asset. They simply cannot be so to corporate, and they don't really have any other restrictions. Further, we expect that for Waterway Square, instance of no compliance will be cured by the second quarter of this year because it has to do with an extension that had pre-rent. And as that burns off, it will get back into compliance, While the instances in 1 and 2 Hughes Landing are related to tenant vacates that we have active prospects for.

Eric Holcomb: All right. I have another one for you, Carlos. Number four, does operating in a higher interest rate environment changed the decisions on specific projects? An example would be for an office or apartment building that was planned a year ago that might not make sense anymore.

Carlos Olea: Sure. Thanks, Eric. Well, when it comes to development projects, higher interest rates get capitalized to the basis of the asset, and they're not really one of the main components of cost for a project. Where they do have an impact on our weighted average cost of capital, which in turn has an impact on our capital allocation decisions. So internally, we meet every 2 weeks. We have a Capital Allocation Committee that meets every 2 weeks. It's a very rigorous process that we take very, very seriously, and we evaluate all of the projects regardless of where they were initially brought up, approved or thought of, and we allocate capital appropriately to the projects that achieve the highest risk-adjusted returns.

Eric Holcomb: All right. Thanks, Carlos. And our last question from today is please give details on the asset sales in The Woodlands. How does the company decide what to sell and what to keep? Generally doesn't the company prefer to have a monopoly on commercial properties and its MPCs? David?

David O'Reilly: Yes, absolutely. It's a great question. And I think I'd answer it by going back to the transformation plan in late 2019 that we announced when we shifted the company. And we said that we were going to focus on those areas of assets where we had a competitive advantage. And the question references a monopoly on commercial properties. Well, it's not a monopoly, but we do have outsized control and we do have outsized ownership of the office-based multifamily space within our communities. And those assets we intend to keep. The transformation plan, we said that we were committed to keeping the downtown city center retail that impacts the way a community feels and operates. But those one-off strip centers that we developed throughout the communities we didn't see it having a competitive advantage and therefore deemed a noncore.

Both Creekside Village Green and Lake Woodland Crossings are a perfect example of those noncore, outside of the city center retail strip centers, where we were able to develop these assets at incredible yields and sell them generating a $26 million gain. That's a tremendous profit creation opportunity for our shareholders and one that we should execute on every day that can continue to add free cash flow to the bottom line that can accelerate other developments.

Eric Holcomb: All right. Thanks, David. Gary, we'll move to the live Q&A now.

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