Howard Hughes Corp Closes Out a Successful Year

Howard Hughes' (HHC 0.94%) financial results tend to swing wildly from quarter to quarter due to the timing of property sales. That was no different in the fourth quarter, where earnings declined sharply -- mainly because the company didn't have as many condos left to sell at its Hawaiian development as it did in the year-ago quarter. That masked the fact that 2017 was a good year for the real estate development company. 

Howard Hughes' results: The raw numbers

Data source: Howard Hughes Corp. NOI: net operating income. FFO: funds from operations.

Image source: Getty Images.

What happened with Howard Hughes this quarter? 

The timing of property sales made the quarter look weaker than it was:

• Like last quarter, revenue from Howard Hughes' strategic development segment, which houses its condo tower development in Hawaii, fell versus the year-ago period due to a decrease in condo rights and unit sales, as homes in its first two towers have nearly sold out. For the full year, Howard Hughes sold 177 condos in Hawaii, bringing its total to 93.1% of the available residences across its four projects. In addition to that project, the company also completed and placed four other properties into service in 2017 while starting construction of five more assets during the year.
• NOI from Howard Hughes' operating assets also declined in the quarter, though that was because the tenant at one of its office buildings has stopped paying rent as a result of the company's preparation to redevelop that property. That said, full-year NOI rose 13% to $157 million due to the strong performance and stabilization of assets across its portfolio.
• Finally, earnings from the company's master planned communities (MPCs) segment declined 16.1% to $52.6 million due largely to the timing of land sales. However, earnings in the MPC segment rose 6.1% year over year to $190.4 million, thanks to the strong performance in its Bridgeland and Summerlin MPCs, as well as a solid initial start from its newest community, The Woodlands Hills.
• On the strategic front, Howard Hughes sold six non-core assets last year for $88.5 million. The company also acquired its joint venture partner's 50% interest in the Constellation multi-family project in Summerlin for $8 million and a partner's 50% interest in the Las Vegas 51s minor league baseball team for $16.4 million.
• After the quarter closed, the company bought back $57.3 million of its shares at what it believes was a "meaningful discount to the underlying net asset value of the company."

What management had to say 

CEO David Weinreb commented on the company's progress during the year, stating:

In 2017, we continued making significant progress across each of our core markets and business segments. We had our third consecutive year of increased land sales at our MPCs, highest year of NOI in our history within our operating assets segment, and a record year of sales at Ward Village without the launch of a new building -- contracting 177 units, bringing our sales to 93% of total homes sold at our four buildings delivered or under construction. Additionally, we continued to unlock value within our deep development pipeline, placing four new properties into operation while commencing construction on five projects, which upon stabilization should add $28.2 million of recurring NOI. We closed the year out strong with a successful quarter in which we sold four non-core properties, recycling the proceeds into our core assets, and unlocking meaningful tax benefits. We also increased total land sales revenues and operating income compared to the fourth quarter last year, demonstrating the continued robust demand in the market for homes within our award-winning master planned communities and the ongoing strength of our stabilizing operating portfolio.

As Weinreb notes, Howard Hughes delivered excellent performance across all its operating segments last year. Thanks to strong demand for land by home builders, its MPCs sold acreage for higher prices than they did in 2016. Meanwhile, strong growth in its office and hospitality properties helped drive the improvement in NOI. Finally, the company's strategic developments segment continued selling units from its condo development in Hawaii, as well as completing construction of several other assets around the country.

Looking forward 

Those strategic developments will help drive growth going forward. As Weinreb noted, the company started work on several more projects that will add nearly $30 million of recurring income once complete. These include a new ballpark in Summerlin for its baseball team, as well as an office building in that community, a medical building, a retail center, and an apartment complex in The Woodlands community, as well as a hotel in the Seaport District. As these and other projects come on line, they should help further unlock the value of Howard Hughes' vast real estate portfolio.