How Howard Hughes’ $130M Houston Office Refi Defied The Narrative

Howard Hughes Holdings Inc. seems happy to be contrarian. In a metro with one of the highest office vacancies in the nation, it is seeking more office space.

And while many office owners are struggling to extend the terms of their financing, Howard Hughes last month secured a loan on an office property with better terms than when it bought the building five years ago, according to Howard Hughes Senior Vice President of Capital Markets Valerie Qualls.

The five-year, $130M nonrecourse loan is for 9950 Woodloch Forest Drive, a 601K SF Class-A office tower in The Woodlands. The building is one of two towers Howard Hughes acquired from Occidental Petroleum in late 2019. 

A commercial mortgage-backed securities conduit is the lender, and Wells Fargo was the sponsor for the loan, which has a fixed interest rate of 7.075% and amortizes on a 30-year schedule. The previous loan on the building had a floating rate, so this one is ultimately lower, Qualls said. 

The refinance comes as owners across the nation stare down $117B in office debt coming due this year. The looming maturities have the power to sink owners and up the pace of office landlords voluntarily handing keys to lenders.

“I’m going to differ with the narrative a little bit in that this one wasn’t that difficult for us,” Qualls said. “It wasn’t, because of our leasing efforts on the building.”

Tenants in the building include Western Midstream, which expanded its lease last year to 134K SF, and Kodiak Gas Services, which occupies 53K SF.

Howard Hughes followed its typical formula in this refinance. It bought the building and leased it up to stabilization — 98% occupancy, in this case — with quality tenants. It also studied its options, Qualls said.

The $130M refinancing addresses Howard Hughes’ largest debt maturity in the next two years, representing 24% of its 2025 debt maturities, the company said. 

“The office lending market is challenging right now,” Qualls said. “We’re trying to get ahead of any of those [maturities] that we can.” 

Lease stabilization drove the timing of this refinancing.

But the process was different than it would have been five years ago when interest rates, property values and capital markets were more favorable, Qualls said. Howard Hughes started looking at lenders earlier, and there were fewer options.

“There weren’t a bunch of life companies lining up for it,” she said. “We still did have a lot of options and interest. When we took the loan out, it was very quickly quoted, and we actually got the loan closed in a pretty expeditious timeline.” 

Lenders are asking different, or more detailed, questions than they would have five years ago, including specific information about tenants and how they utilize their space, Qualls said. Conduit lenders are detailed in underwriting regarding tenants’ credit quality, their lease term lengths and whether they have termination options.

“They’re really diving into the stability behind the rent roll,” she said.

Howard Hughes’ reputation and its high-quality assets and communities helped it quickly secure favorable financing terms, Qualls said. The loan was driven by debt yield and debt service coverage rather than loan-to-value.

The expected stabilized net operating income for the property is just north of $17M, making the debt yield just above 13%, “which is pretty attractive for an office loan currently,” Qualls said. 

The almost $30B in office loans set to mature in the first three quarters of this year had a weighted average debt yield of 8.9%, but the weighted average debt yield for newly originated office loans in 2023 was 14.67%, according to Trepp. 

Howard Hughes moved quickly for its loan to be included with other buildings, including some in other asset classes like retail, in a pool for securitization, which closed in June, Qualls said. The five-year term provides flexibility in case interest rates go down.

In 2023, 20% of CMBS office loans became delinquent and failed to get paid off or extended by the end of the year, Trepp reported. If Howard Hughes couldn’t secure refinancing for this building, its robust balance sheet would give it a few options, including extension, partial paydowns and rightsizing a loan, Qualls said. 

Proving Howard Hughes didn’t need those options, the company scooped up another 142K SF office building at The Woodlands Town Center for $19.2M last month. Waterway Plaza II is 55% occupied, which provides “much needed inventory” for Howard Hughes’ office portfolio in The Woodlands Town Center, which is 96% leased, according to a news release.