Howard Hughes Corporation (NYSE: HHC) is one of the more unique real estate stocks in the market. While it owns a significant amount of land and commercial real estate assets, it is not a REIT, nor does it pay a dividend. And it was created in the wake of the financial crisis after some of mall operator General Growth Properties' assets were spun off.
Howard Hughes Corporation's core business is developing master-planned communities, or MPCs. In this article, we'll take a closer look at how this business works, Howard Hughes Corporation's MPC assets, and other important information investors should know about this company.
Howard Hughes Corporation company profile
As mentioned, Howard Hughes Corporation's core business is master-planned communities, or MPCs. If you aren't familiar with the term, a master planned community is a large-scale community filled with amenities such as parks, schools, retail and commercial districts, and more. Most MPCs are extremely large (think 10,000 acres or more) and are more like small cities than communities.
Here's why this can be such a great business. Let's say that a company like Howard Hughes acquires a massive piece of land. It then sells a small portion of it to homebuilders, who build a residential neighborhood. The presence of homes creates the demand for commercial properties -- say a convenience store, so the company builds one and leases it to an operator to generate rental income. The presence of these commercial assets in turn makes the surrounding land more desirable, so the company sells a little more to homebuilders. Now with more homes, there is demand for larger-scale commercial assets -- say an office building or hotel -- which the MPC developer builds. This cycle of value creation can take decades to play out.
Obviously, this is a simplified example, but this describes the MPC business model in a nutshell. By controlling the supply of land as well as commercial properties, Howard Hughes can keep prices and rental income steadily rising over time. Think of MPC development as a real-life version of the popular Sim City video game series.
As a real-world example, consider Howard Hughes' Summerlin master-planned community, which is located in Nevada about nine miles from the Las Vegas Strip. The community has been under development since the mid-1980s and its estimated build-out date is 2039. The 22,500-acre community has an upscale shopping district, three hotels, a baseball stadium, 10 golf courses, and much more.
In addition to its MPCs, Howard Hughes also owns and operates the Seaport District in New York City, which despite short-term effects of the COVID-19 pandemic, has the potential to be a major revenue generator for the company.
It's important to emphasize for investors that Howard Hughes focuses on long-term value creation. Management isn't terribly concerned with the company's profitability in any given quarter or year and makes decisions based on what will deliver the most value for investors over the long run. Unlike many REITs and other real estate stocks, Howard Hughes doesn't pay a dividend, choosing instead to reinvest all of its profits back into the business. The company's goal is to be financially self-sustaining -- that is, income from its portfolio of commercial properties will finance future development, without the need for dilutive stock sales.
Just to put the long-term value creation potential into perspective, consider that in 2019, Howard Hughes estimated that it had $4.5 billion of saleable land in its MPC portfolio. This is in addition to its multi-billion-dollar portfolio of commercial properties, multifamily communities, the NYC Seaport District, and condominium developments. When you consider that Howard Hughes' entire market cap is only about $4 billion as of late 2019, it's not difficult to see why there could be tremendous value to unlock over the coming decades.
Finally, it's important to mention that while Howard Hughes isn't a real estate investment trust (REIT), investors should read its financial results as if it were. In other words, because of its massive portfolio of depreciable real estate assets, Howard Hughes' funds from operations (FFO) is a much better measurement of its profitability than net income is.
Howard Hughes Corporation news
By far, the biggest news item affecting Howard Hughes Corporation is the COVID-19 pandemic. And it has hurt the company's business in several important ways:
- First and foremost, much of Howard Hughes' commercial (income-generating) real estate assets are consumer-facing in nature, such as retail properties, hotels, and entertainment venues. While rent collection in the company's office and multifamily portfolios have remained strong, Howard Hughes collected less than half of its billed retail rents in the second quarter and about two-thirds in the third quarter.
- Howard Hughes' MPCs are located in markets that have been severely affected. Its flagship Woodlands community and several others are in the Houston area, which is highly dependent on the oil industry. And the pandemic has caused oil prices to remain at depressed levels. In addition, the massive Summerlin community is in the Las Vegas area, and this tourism-driven economy has been one of the hardest-hit in the nation.
- Other operating assets are in hard-hit areas as well. The company owns the Seaport District in Manhattan, right where the initial epicenter of the U.S. outbreak happened. The summer rooftop concert series was cancelled, and many of its restaurant properties have just recently started to reopen, and on a very limited basis. And virtually all of the company's condo sales in its Ward Village community in Hawaii have come through digital means, as Hawaii hasn't exactly been a feasible destination for tourists.
On a positive note, the company has used the pandemic to bolster its financial position, first through an equity offering and then through a bond sale to pay down asset-level debt.
Finally, while it has been justifiably overshadowed by the pandemic, it's worth mentioning that Howard Hughes previously announced a transformation plan. It brought in a new CEO, decided to sell noncore assets, and began cost-cutting measures, which are now nearly complete.
Howard Hughes Corporation stock price
Like many real estate companies whose properties were severely affected by the COVID-19 pandemic, Howard Hughes Corporation has underperformed the overall stock market recently. Through the end of November, shares are down by 42% in 2020. Over the past three years, Howard Hughes shares have lost 41% of their value as compared with a 47% total return for the S&P 500.
However, it's important to keep in mind that Howard Hughes' management isn't concerned with the stock's performance over short periods. The company uses an extreme long-term focus when it comes to maximizing shareholder value. And since the company went public in 2010, Howard Hughes shares had been outperforming the S&P 500 for much of the time prior to the pandemic.
The bottom line on Howard Hughes Corporation
Howard Hughes Corporation is a unique real estate stock, focusing on building master-planned communities over time. It has several key competitive advantages, such as the ability to control the supply (and therefore the value) of buildable land and a long-tailed and diversified growth runway. While the COVID-19 pandemic has hit the company hard and it might be some time before its business truly returns to normal, Howard Hughes could be a smart addition for any investor with an ultra-long investment time horizon.