Howard Hughes (NYSE: HHC) has taken investors on quite a roller-coaster ride since the COVID-19 pandemic started. But even though the stock has rallied by more than 100% in the past six months, it's still down by more than 17% from its pre-pandemic 2020 highs.
With that in mind, here's a rundown of why Howard Hughes has performed so poorly, the general business model the company uses to create value, and how much upside potential it could have in the years ahead.
Why has Howard Hughes done so poorly?
There are a few good reasons why Howard Hughes Corporation (and its stock price) had a rocky 2020:
- Howard Hughes develops master-planned communities, or MPCs, and its largest properties are in the Houston and Las Vegas areas. Houston was severely affected by the sharp drop in oil prices we saw as the pandemic crushed travel demand. And with the most tourism-dependent economy in the United States, Las Vegas is still in pretty bad shape.
- One of Howard Hughes' main growth focuses is its New York Seaport District property. New York City was the initial epicenter of the U.S. outbreak and is still very locked down.
- While Howard Hughes sells residential land to developers, its main source of cash flow comes from a portfolio of commercial properties. Many of these are retail in nature, and there are also some hotels in the company's portfolio, and these types of commercial real estate were largely forced to shut down and/or limit operations in 2020.
- Howard Hughes didn't have nearly as much financial flexibility to weather the storm as many other real estate companies. As the pandemic hit, the company was forced to do a dilutive stock sale to raise capital at a fire-sale price of just $50 per share.
Reasons to be optimistic
There are early signs that the company's business is doing well and that it will make it through to the other side of this. These include:
- For one thing, in the most recent quarter, Howard Hughes reported new home sale growth in all of its markets. Even in the hard-hit Vegas area, the company's Summerlin community experienced 27% sales growth.
- Howard Hughes has taken prudent steps to shore up its balance sheet. In addition to the stock sale, the company completed a $750 million debt offering in August and another $1.3 billion bond sale in January to refinance existing debt with more favorable terms.
- Howard Hughes is starting to enter "growth mode" again. The company is seeking approval for a new $1.4 billion mixed-use development in the NYC Seaport and is a key participant in a billion-dollar mixed use development in Alexandria, Virginia.
Could Howard Hughes be a millionaire-maker REIT?
Howard Hughes' management prioritizes long-term growth, even if it comes at the expense of short-term profits or if the decisions they make aren't exactly popular with investors. But there's a lot of value creation potential in the company's business model, and it will take decades for its existing master-planned communities to play out (and even longer if it adds new ones over time).
Howard Hughes is one of the largest stock positions in my own portfolio, and I have no plans to change that. But it's important to emphasize that Howard Hughes is only an appropriate investment for those who measure their returns in decades. In short, Howard Hughes could definitely be a millionaire-maker stock, but it isn't going to happen quickly.