Howard Hughes Hit a Home Run in Q2

The real estate developer doesn't believe the market fully appreciates the value it's creating.

Matthew DiLallo
Matthew DiLallo
Aug 8, 2019 at 10:35AM
Financials

Howard Hughes (NYSE:HHC) has been building out a portfolio of commercial real estate assets that generate steady income. It recently finished its latest addition, the Las Vegas Ballpark, which is the new home of the company's Triple-A baseball team. The new park was a big hit during the second quarter as fans packed the stands, which provided a boost to Howard Hughes' income. The company complemented that by closing more than 400 condo units in Hawaii, which helped drive significant earnings growth during the second quarter.

Howard Hughes results: The raw numbers

Metric

Q2 2019

Q2 2018

Change

NOI from operating assets

$60.4 million

$45.8 million

31.7%

Adjusted FFO

$62.7 million

$30.7 million

104.3%

Adjusted FFO per share

$1.45

$0.71

104.2%

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

What happened with Howard Hughes this quarter?

Howard Hughes benefited from the recent completion of its ballpark in Las Vegas:

  • Howard Hughes' portfolio of operating real estate assets continues to grow. The company finished construction of the Las Vegas Ballpark in March. The park, as well as the company's baseball team, the Las Vegas Aviators, combined to generate nearly $8 million of incremental NOI during the quarter, which helped drive results. It also benefited from growth in the office and hospitality segments as recently completed properties continued to stabilize by increasing their occupancy levels.
  • The master planned community (MPC) division generated $47.2 million of earnings before taxes, which was up about 1% from last year's second quarter. That's mainly due to a large acreage sale at its Summerlin community in Las Vegas.
  • The company's strategic development segment recorded $13.3 million of earnings before taxes, which was $18.1 million higher than the year-ago quarter. That's mainly due to the timing of closing the sale of condos in Hawaii. Overall, Howard Hughes closed 418 condos during the quarter versus only seven in the year-ago period. The company also signed contracts for another 56 units at its Ward Village development during the quarter, including 45 at its newest building that it began selling in January.
  • Its New York City Seaport District business unit reported a net operating loss of $2.9 million. That's because of the company's continued investment in this development on things like start-up costs for retail, food and beverage, and other businesses.
  • The company began construction of the Millennium Phase III apartments in The Woodlands in Texas. It expects the 163-unit multifamily development to generate about $3.5 million of annualized NOI once it reaches stabilization.
  • Howard Hughes anticipates that it will eventually produce $317.1 million of annualized NOI from its portfolio of operating assets once they reach full stabilization. That's an increase of $10.4 million, or 3.4% from the year-ago period, due to the new projects it started building over the past year. However, the projection has declined by $3.4 million from the first quarter. That's because the company recently reduced its ownership in 110 North Wacker in Chicago as part of the construction financing package for that office building.
The infield of a baseball stadium.

Image source: Getty Images.


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What management had to say

CEO David Weinreb commented on the company's quarter by stating:

Our business continues to perform extremely well across our three core segments, highlighted by the 32% quarter-over-quarter growth we experienced in recurring Operating Asset NOI. Additionally, our MPCs continue to rank among the top selling communities in the country and experienced steady underlying demand as we expect to have another very strong year in the segment. At the midyear point in Bridgeland, home sales, a leading indicator of future land purchases by home builders, are up 35%, and we had a 33% increase in residential acres sold this quarter over Q2 2018 across our MPC segment. With the NOI growth in our Operating Assets segment, we have an annual run rate of $216 million with a stabilized NOI target of $317 million.

One of Howard Hughes' priorities has been to expand its portfolio of stable cash-flow-generating operating assets. That will help offset some of the lumpiness of the master planned community and strategic development segments. The company continued making good progress on this goal. Not only did it finish the Las Vegas Ballpark, but it also continued expanding its growth runway by starting construction on another project. As a result, its portfolio of operating assets is on track to grow its annualized NOI by more than $100 million, or nearly 47%, in the coming years.

Looking forward

Howard Hughes recently announced that it would conduct a review of potential strategic alternatives aimed at maximizing the value of its assets. Among the options it's considering is spinning off some of its assets, changing its corporate structure, and an outright sale of the entire company. Howard Hughes is doing this because it wants to close the significant gap between its stock price and the underlying value of its assets. At the same time the company is reviewing alternatives, it remains committed to executing its current plans. They include developing Ward Village, redeveloping the Seaport District, and building new operating assets that generate consistent cash flow.