E90- Developing for the Long Term with David O'Reilly of Howard Hughes Holdings PART 2

**SPEAKER_1** (0:01)
Welcome to the Land to Lots Podcast, powered by Launch Development Finance Advisors. And now, your host, Carter Froelich.

**Carter Froelich** (0:09)
And you mentioned something, so I'm going to divert a little bit now. We talked about a typical land developer, we want to develop land, sell it to builders, we're off to the next deal. Summerland, or Howard Hughes has a much different business plan. And I'm going to talk pre-2025, post-2025.
When I started working with you guys in the early 2000s in Summerland, and I learned what the business plan was, it was kind of like, oh, wow, that is really cool. I never thought of it like that, because I'd never worked with a developer that had the business plan that you all had. Could you explain to our listeners the business plan Howard Hughes has, and had pre-2025, and then we'll talk about the segue into the new strategy? Because I think it's really important for our listeners to understand what that plan was.

**David O'Reilly** (1:09)
So our plan revolves around driving long-term value creation. At the end of the day, it becomes, if you do it right, a self-fulfilling value creation cycle, where I sell land to home builders. I take that money and I use it to build incredible amenities in our communities, and sometimes those are ballparks or shopping centers, or office buildings, or multifamily buildings. And we build those commercial amenities at outside risk-adjusted returns because we're building them in communities where we have unique control. Carter, we talked at the beginning about the risk of development. It was entitlements and competition.
I don't have entitlement risk and I don't have competition. So when I can build without competition, I can get better returns. But building amenities as a communities, such that more people want to live here, more values go up, my land value goes up. I sell that land to homebuilders at a higher and higher value which generates more capital, reinvest back into our community to build the office and multifamily and ballparks, etc. And that cycle goes on and on. And I did Investor Day later, I guess it was earlier this week. My God, the days are blending together.

**Carter Froelich** (2:20)
I know how you feel.

**David O'Reilly** (2:21)
Yeah. I said in 2017, we had our first Investor Day and I showed everyone on a discounted basis the value of our undeveloped land across our master plan communities. It was $3.7 billion.

**Carter Froelich** (2:36)
Wow.

**David O'Reilly** (2:36)
And since 2017, we've sold $2.1 billion of land, right? So math would say, hey, 3.7 minus 2.1 leaves you 1.6. But using the same discount rates and all the same assumptions, the value of our remaining land is worth $4.3 billion. Because the price per acre has appreciated so greatly from the constant reinvestment and the constant putting money back into our communities.

**Carter Froelich** (3:08)
Right.

**David O'Reilly** (3:09)
That the value of the remaining dirt, that melting ice cube that everyone's worried about, actually got bigger.

**Carter Froelich** (3:15)
That's kind of math you like. Now, when you're selling and you're building your amenities, but you're also taking that and you indicated that you're building commercial retail buildings, that you're controlling and owning, is that a correct statement?

**David O'Reilly** (3:32)
So, for the certain asset classes, we believe having a dominant market share in these communities provides outside results.

**Carter Froelich** (3:39)
Yep.

**David O'Reilly** (3:40)
Office, right? If people are going to make an office decision, they're making a 10-year decision. It really matters where your office building is. Yeah. And you're not changing it every six months. So that if you own the dominant share of Class A office in a community, your results will be better in good times and bad.

**Carter Froelich** (3:56)
Yep.

**David O'Reilly** (3:58)
We have a mindset that allows us to control the vast majority of the Class A space in all of our communities.

**Carter Froelich** (4:04)
Yeah.

**David O'Reilly** (4:05)
Same holds true for multifamily. Where I live for a year matters. Yeah. I will pay more to be in a great location.

**Carter Froelich** (4:13)
Yep. Absolutely.

**David O'Reilly** (4:15)
Core downtown retail that creates a sense of place that helps create the fabric of a community, really important to us.

**Carter Froelich** (4:24)
Yeah.

**David O'Reilly** (4:25)
Other asset classes, less so. I'll give you a classic example. Once upon a time, we owned all the hotels, rooms and hotels in the Woodlands.

**Carter Froelich** (4:33)
Yeah.

**David O'Reilly** (4:33)
Hit a downturn and rates are down. If you're making a one-night decision and it's 50 bucks for a five-minute ride down the street cheaper, you're going to take that five-minute ride. There's no benefit of owning the hotel rooms in the Woodlands market the way there was for office and multifamily.