Ward Village in Hawaii. Source: Howard Hughes Corp.
Real estate development can be a very lumpy business, with profits not being realized until a property is complete and the sale is closed. That lumpiness was on full display during the third quarter at Howard Hughes (HHH -0.79%), which reported its results after the market closed on Monday. However, this time it was to its benefit, after it used a couple of non-recurring sales to more than offset weakening lot sales at its master planned communities in Texas.
Sinking the winning putt
For the third quarter, Howard Hughes' net income jumped 102.1% to $57.6 million. That increase was primarily attributable to a gain on the sale of The Club at Carlton Woods, which is a 36-hole golf and country club in The Woodlands. It was sold for net cash proceeds of $25.1 million and resulted in booking a pre-tax gain of $29.1 million, even though the club was a money loser for Howard Hughes, having turned in net operating income losses of $900,000 during the third quarter and $4.4 million year to date. It was initially developed as an amenity to sell lots in a gated community, most of which have already been sold.
In addition to that large one-time gain, the company also benefited from income reported on a percentage of completion method for sales contracts at its condo towers in Hawaii that are currently under construction. Further, the company also enjoyed a 75.3% boost in net operating income from its income-producing operating assets. Those assets, which help offset some of the lumpiness of land sales, produced $31.9 million worth of income during the quarter. The increase was driven by commercial retail and office properties the company opened or acquired over the past year.
The final factor driving Howard Hughes' third-quarter results was a 3.8% increase in land sales within its master planned communities. However, it is worth noting that while land sale revenue was $59.4 million during the quarter, that number was significantly boosted by $27.3 million in commercial land sales at its Houston communities after the company sold land to a school and a church. Without those two sales, land sales at its master planned communities would have declined substantially because of the impact weaker oil prices are having on demand for new homes in Houston, which is a major center for the U.S. oil industry.
Building a better future
Howard Hughes' master planned community business will probably remain under pressure for the foreseeable future. While sales at its Summerlin community near Las Vegas remain resilient because of the scarcity of attractive development acreage, a shortage of available resale homes, and robust economic conditions in the region, the same can't be said for the Woodlands and Bridgeland communities in Texas. Both communities are seeing a decrease in residential lot sales because of weak oil prices, with homebuilders taking a cautious approach by working off lot inventory purchased last year.
On a more positive note, pre-sales for the company's residential condo towers in Hawaii have been strong. To date, 83.7% and 76.9% of the total residential square footage available in the first two towers are under contract. These towers are expected to be completed by the end of 2016 and 2017, respectively. In addition, pre-sales on the next tower started this July, and 29% of the total available square footage is already under contract, with this tower expected to be complete in 2018.
The other major aspect of this project is the development of a 54,000-square-foot flagship store for Whole Foods Market (WFM). The store, which won't open until 2018, will be Whole Foods' largest location, and the fourth overall, in Hawaii. Whole Foods' presence is an important selling point to this development because residents will be able to walk or bike to get their groceries.
Another important project for the company is the redevelopment of the South Street Seaport and Pier 17 in New York City. During the quarter, Howard Hughes announced that a renowned chef and restaurateur would be bringing two new, one-of-a-kind culinary experiences to the Seaport District, including a large seafood-themed food market and a restaurant. Further, a popular independent bookstore also signed a lease for space in the development. These new tenants should really enhance the area and create a lot of value for the company.
Investor takeaway
If there was a noteworthy theme this quarter for Howard Hughes, it was that one-time sales drove robust results. In fact, if not for the sale of those two pieces of commercial land, master planned community revenue would have been very weak. That's something to keep an eye on in the future, because these gains won't always be there to be harvested, which suggests that the company's results could be very lumpy, especially in the interim between the completion of each of its major projects in Hawaii and New York City.
