Howard Hughes Corporation (NYSE:HHC) is a developer of master-planned communities, and is unlike any other real estate company in the stock market. Its unique business model allows it to control the supply of land in large-scale communities, giving it a major pricing power advantage that could lead to billions in value creation over the long run.
In this Fool Live video clip, recorded on March 25, Fool.com contributor Matt Frankel, CFP, gives investors a rundown of Howard Hughes' business model and why it's such an interesting opportunity.
Matt Frankel: This is a longtime favorite of mine. It was not a great stock to own during the early days of the pandemic, but it's improved quite a bit since. Brian and I talked about video gaming on our last show together, Roblox, I believe. I'm going to use a video game analogy. Howard Hughes Corporation's business model is essentially to be a real life version of the game SimCity, if you've ever played that. They are a developer of what's called master-planned communities.
Here's the business model. A master-planned community developer like them will start with a huge plot of land, let's say 10,000 acres. From there, it will take some of that land, a small portion, and sell it to homebuilders. Homebuilders will come in, develop neighborhoods, build houses, which will then create demand for commercial properties. Howard Hughes will build a commercial property, say a strip mall next to that, and keep it as an income-producing asset. The presence of those commercial assets then makes the surrounding land more valuable. They'll sell some more off to homebuilders. The cycle just goes on and on and on. It can go on for decades.
With a more mature master-plan community, the amenities get bigger and bigger and bigger, and these are essentially self-contained cities. One of their communities, just won second place in a magazine's "Best Cities to Live In" competition, these are huge neighborhoods. Their flagship community is called The Woodlands in Texas, if anyone's heard of that. It's a big industrial hub too, 28,500 acres. This is not the master-planned communities that a lot of people think of. These are huge, large-scale assets. A 119,000 people live in this community. This is not just like a neighborhood. There are schools, there are golf courses, there are high-rise office skyscrapers there. There's a concert venue, there's a medical district with a hospital system there.
This is a huge-scale community, and the really unique part of this business model as compared to other real estate development is because they control all the land, the tens of thousands of acres. They get to control the supply that is available for building at any given time. Howard Hughes has a great track record of increasing the value of its land over time, quicker than the overall market, because they can control the supply better than any other developer can. If I were to buy 100 acres of space to develop, there's nothing to stop another developer from buying 100 acres next to it, and 100 acres over here and 100 acres over there. With Howard Hughes, they could sell 100 acres and then cut off land sales for the next year. It really is a big value add.
The company makes its money in two main ways. Land sales of its master-planned communities. A lot of them still have thousands and thousands of acres of vacant land. They sell land to homebuilders, which homebuilding demand has been surprisingly robust in 2020, if anyone has been following the real estate market, which is surprising because two other areas are Las Vegas and Houston, which are really adversely affected during the pandemic. The second way and the most important for long-term investors is from those income producing commercial assets that they developed alongside the homes that are being built.
There's almost 8 million square feet of office space in their operating portfolio. They have 2.9 million square feet of retail space. A few hotel properties. There are over 4,500 multi-family residential units on their properties that they own and collect the rent on. That's where they get their revenue. Like I said, 2020 was an extremely robust year for the housing market, not necessarily for Howard Hughes as a business, but they're taking advantage and they are accelerating 2 million square feet of future commercial development on their properties.
They own a total of six master planned communities right now. I mentioned The Woodlands. They have the Summerlin neighborhood in Las Vegas; Columbia, Maryland. Ward Village is in Honolulu, Hawaii. Beautiful, really high-potential neighborhood. They also own the seaport district in New York, which technically isn't a master-plan community yet. But the ESPN studios are there. Big restaurant presence there. They are in the early stages of trying to develop a high-rise property in a vacant parking lot. A lot of potential. It's an ultra long-term play.
They're not a real estate investment trust, they don't pay any dividend. Their focus is long-term value creation through these communities. Because of that, the market really doesn't know how to value it, because there's no other company like it. But if you are a believer in being able to control the price and supply of an asset, it's a competitive advantage. It's a real estate company you might want to take a look at.