Howard Hughes Corporation: A Real Estate Development Play With Strong Chances to Outperform

Howard Hughes Corporation is an interesting bet on real estate markets in Houston, Las Vegas and Maryland.

Jul 22, 2014 at 5:19PM

Source: Company

Howard Hughes Corporation (NYSE:HHC) is determined to transform itself into one of the leading master planned community developers and operators in the country. The real estate development company has a solid track record ever since it became a publicly traded company in 2010 and posts significant improvements in its operating income.

Part of the attractiveness of an investment in Howard Hughes stems from its ability to generate value in its community projects and from favorable, secular tailwinds for the real estate asset class in the United States.

Howard Hughes is an interesting real estate development company that actually gained more visibility in the investor community after New York activist investor Bill Ackman, founder of Pershing Square Capital Management, got involved with General Growth Properties (NYSE:GGP) in 2008 and played an instrumental role in steering the company out of bankruptcy.

The real estate company and second-largest mall operator in the country was on the brink of failure due to distressed credit market conditions in late 2009.

Howard Hughes, until then a part of General Growth Properties, was ultimately spun off to shareholders of GGP in November 2010 which increased visibility and public market valuation of its development real estate portfolio.

Real estate asset class
Real estate is a highly business-cycle sensitive asset class and should benefit from more dynamic economic growth and improving real estate prices. Though the real estate crisis of 2007 hurt house prices, real estate should prove to be a viable investment in the long-run that provides investors also with some protection against inflation due to rising rents and appreciating real estate portfolios.

Dependence on master planned communities
Howard Hughes develops, operates and sells properties in master planned communities. The segment contributed the majority of the company's revenues over the last twelve months: 57%.

Howard Hughes currently has four key master planned communities in Houston, Las Vegas and Maryland.


Source: Howard Hughes Corporation Investor Presentation June 2014

Furthermore, Howard Hughes has two other business segments: 1. Operating assets which include a bunch of retail properties and 2. A real estate development portfolio.

Both segments offer Howard Hughes tremendous appreciation potential and NOI growth opportunities, which should translate into a higher company valuation once the real estate asset class has launched a strong comeback in the United States.


Source: Investor Presentation June 2014

In any case, in order to see how successful Howard Hughes is in generating value from its real estate portfolio, investors only have to consider its operating income growth record over the last four years so see that there is a lot of inherent value in developing real estate across the country.

Howard Hughes' operating income grew from minus $9 million in fiscal 2010 to more than $111 million in 2013 and its concentration on master planned communities in economically strong real estate markets in Houston and Las Vegas should serve the company well going forward.

Solid stock market debut
Since going public in 2010, Howard Hughes has enriched investors and earned them multiples of their invested capital: 299% is the return of Howard Hughes stock since November 1, 2010 and the company has hugely outperformed its former parent company whose stock price gained 'just' 75% over the same time period.

The Foolish Bottom Line
Howard Hughes is a well-run real estate development company with significant exposure to strong real estate markets, which should do well going forward. If real estate markets such as Houston in Texas and Las Vegas in Nevada outperform, it's likely that Howard Hughes' stock will, too.

Furthermore, Howard Hughes has significant strategic development opportunities which only adds to the appeal of this real estate development company.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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