Reflections on 2019
Statements made in this letter that are not historical facts, including statements accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “project,” “realize,” “should,” “transform,” “would,” and other statements of similar expression and other words of similar expression, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.
These statements are based on management’s expectations, estimates, assumptions and projections as of the date of this letter and are not guarantees of future performance. Actual results may differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ materially are set forth as risk factors in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. In this letter, forward-looking statements include, but are not limited to, expectations about the performance of our Master Planned Communities segment and other current income-producing properties and future liquidity, development opportunities, development spending and management plans. We caution you not to place undue reliance on the forward-looking statements contained in this letter and do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this letter except as required by law.
Letter to Shareholders
When I originally sat down and wrote our annual CEO letter it was January 2020, and I was focused on the successful and transformative year that our company had just completed. Then, before the letter was published in conjunction with our Annual Report, the Coronavirus pandemic had arrived and was causing unprecedented disruption in the U.S. and around the globe.
Today, the economy looks vastly different than it did just a few months ago. While the content of my original letter is still relevant and important to share, it feels incomplete in light of the current market conditions. Although the crisis is still unfolding on a daily basis, I want to include some updated perspective on our company’s preparedness and response to these new circumstances.
As such, I have kept my original letter below intact, and have added a postscript as of March 31, 2020.
To my fellow shareholders,
The year 2019 marked the beginning of a new chapter in The Howard Hughes Corporation’s history. We defined and enacted a company-wide imperative to move forward as a leaner, more nimble and efficient organization—squarely focused on unlocking the value inherent in our highly successful master planned communities where we enjoy enviable advantages in the market.
To begin to understand what makes HHC’s master planned communities (MPCs) such extraordinary places, one can walk around our properties and experience first-hand the beautiful natural settings, masterful design, and exceptional standards of development that exemplify our work. But to fully appreciate what distinguishes The Howard Hughes Corporation as a company, we must engage with and truly get to know the many residents and businesses that call our communities home.
As stewards as well as integral members of each of the MPCs in our portfolio, we continually revisit and reevaluate our development plans to adapt to the evolving needs of our communities, to meet the changing demands of the market, and to ensure that our objectives remain aligned with the long-term goals of our stakeholders. Ultimately, it is the value that our residents, customers, and tenants place upon our communities that determines the success of our business.
The year began with a familiar outlook for our company: continued strong performance across our three business segments—operating assets, strategic developments, and master planned communities—along with the ability to progress entitlement and development opportunities at some of our non-core assets.
Despite the proven successes of our businesses, there has been one ongoing challenge that HHC has faced over its nine-year history as a publicly traded corporation: the market price of our stock has not reflected the underlying value of the Company’s assets and businesses as we see them.
In June, our Board of Directors engaged an outside firm to lead the Company through a comprehensive review process which provided many valuable insights. Most importantly, it reinforced that HHC’s ability to drive significant value creation is intrinsically tied to the unique business model of our core assets: a self-funded virtuous cycle which allows us to assess, evaluate, and respond swiftly to market demand and the needs of our various stakeholders as we maintain dominant positions and high levels of control in our communities. It became clear that the way to create the greatest long-term value for our shareholders was to “double down” on our core assets, focusing our resources intently on the strongest positions that we hold.
In October, the Board of Directors appointed new leadership, and set into immediate motion a strategic transformation plan which outlined specific steps to be taken, including the sale of approximately $2 billion of non-core assets, the reduction of $50 million in G&A expenses, the decentralization of operations, and the relocation of company headquarters to The Woodlands.
As I write this letter, we have just completed the most successful quarter in our company’s history. We have already made rapid progress reducing overhead and selling non-core assets. At the same time, we have made a major acquisition—the largest in company history—purchasing The Woodlands Towers at the Waterway, along with additional assets, which has increased our office portfolio in The Woodlands by 50% and will also provide a home for the upcoming relocation of our corporate headquarters.
Across the country, the ability to unlock the value of our expansive portfolio is, at its core, built upon the strength of our exceptional regional teams, whose deep understanding of our various markets, local relationships, and industry expertise truly distinguish us from our competitors.
Our executive leaders—many of whom have lived and worked in their regions for decades—are fully invested members of our communities, committed to local organizations and non-profit boards that foster deep civic connections. Our entire HHC team is encouraged to give back and become enmeshed in the social fabric of their communities through our HHCares initiative, which provides paid volunteer days and exemplifies our commitment to social responsibility.
Since our inception, The Howard Hughes Corporation has been endowed with an incredibly valuable set of assets and a distinct industry advantage. Our Board and executive leadership provide a breadth of experience and knowledge, and we are fortunate to have a tremendously talented and dedicated team of employees across the portfolio. Together we share a dedication to our common goal of continuing to foster long-term growth for our communities and providing attractive, risk-adjusted returns for our investors.
We are excited to be at the beginning of this new era—for our communities and for our company—and we look forward to many shared successes ahead.
The above letter was written early in the year, just a few months into our HHC Transformation Plan. It is now the end of March, and in the time since I finished the letter, the world has been disrupted by the current Coronavirus pandemic. Additionally, the oil and energy markets have been greatly impacted by the global political climate, and our company went from finishing the strongest quarter in our history to being faced with these unprecedented challenges.
We are still in the early stages of this crisis, and the social and economic impacts are changing on a daily basis for our country and around the globe. We have temporarily suspended operations at our hotels and restaurants in Houston and at the Seaport District in New York. Our HHC team members are working from home, adapting to these new circumstances and demonstrating their endless creativity as we explore ways to collaborate using the latest technology to keep our projects and our teams moving forward.
We remain dedicated to serving our communities and are working closely with our tenants and our community partners to ensure that while guidelines are diligently monitored and safety protocols strictly followed, we continue to provide help in any way we can, including exploring ways in which we can activate any temporarily underutilized spaces to help support the health and safety of our communities.
The unique model of our MPCs creates a competitive moat around this business segment which has always provided competitive advantage. Given the unprecedented magnitude of this global pandemic and the uncertainty of its length and ultimate effects on the economy, last week we took the proactive step of raising almost $600 million in a public offering and private placement of HHC common stock. This capital provides us with a bridge across the turbulent economic landscape, taking pressure off of our cash-flow needs, and allowing us to continue to execute on our stated business plan and to unlock the great value in our core regions where we have the greatest value creation opportunity.
I am comfortable knowing that we have worked diligently to position HHC not only to survive, but to thrive. While we hope for a quick market turnaround, we have taken a disciplined approach to swiftly making the difficult, yet necessary decisions to manage our portfolio. We have further reduced our operational overhead to help get us through this downturn and ensure the ability to resume all suspended operations at the appropriate time and continue to outperform the general markets in which we operate.
We have faced crises and tenuous situations before, albeit never one this severe, and we have seen our business endure and continue to thrive. For example, our company’s economic resilience was seen during the energy sector crisis in 2016-2017, when oil dropped to mid-$20s per barrel. During this time period, we saw our office and multifamily assets significantly outperform the Houston market. Our hospitality assets and our land sales did not fare as well during this time, and we subsequently implemented a strategy to reduce our reliance on these segments of our portfolio.
Over the past years, as the market kept going up, our company’s financial discipline remained intact. We have always had more liquidity than unfunded equity commitments. We have always maintained a low-leverage balance sheet with well-staggered maturities. We focused on keeping high liquidity and ample resources. We never start development until we have the capital or until we see market demand. The steps undertaken as part of our Transformation Plan, including the cutting of $50 million in annual overhead, make our company more nimble and efficient, and will serve us well going forward.
Our company is well positioned to navigate our way through this crisis. HHC leadership has moved swiftly and proactively to take measures necessary to ensure the long-term success of our company. Our team members have adapted quickly and worked tirelessly, showing their mettle each day.
I have the greatest trust in our talented HHC team, and I look forward to leading the company through this next chapter. We are unrelenting in our determination to get the job done, and our commitment to our communities is unwavering. We will continue to rise, time and again, to face all challenges as we march forward toward renewed stability and success.
March 31, 2020