Could This Unusual Real Estate Stock Be a Home Run for Patient Investors?

Howard Hughes Corporation (HHH -0.75%) isn't your typical real estate stock. It owns and develops properties in a variety of commercial real estate subsectors and has thousands of acres of land to be sold for future development. In this Fool Live video clip, recorded on Sept. 10, Fool.com contributors Matt Frankel, CFP, and Lou Whiteman discuss this unique real estate company and why investors might want to take a closer look. 

Matt Frankel: So the first one we have is known as Howard Hughes Corporation. Lou knows who Howard Hughes is. I'm not sure he knows what this company does. The company has nothing to do with Howard Hughes himself.

Lou Whiteman: And it had nothing to do with the Spruce Goose, I'm told. Right?

Frankel: That's correct.

Whiteman: Yes.

Frankel: Ticker symbol for this is HHC, Howard Hughes Corporation. Lou, have you ever played the video game SimCity?

Whiteman: Years ago, yeah.

Frankel: Howard Hughes can best be described as a real-life version of that. They are a land developer. They develop what are known as master-plan communities, which is a term that gets thrown around a lot for kind of smaller neighborhoods. Theirs are gigantic. Just to name one: They are the developer of the Summerlin neighborhood right outside of Las Vegas. Most people think Summerlin is its own city. It is about 22,500 acres in size,116,000 people live there, and it's not even close to being fully built out yet. Howard Hughes thinks it's going to have 200,000 when all is said and done. Here's how this business works. The general idea is: Howard Hughes acquires this giant tract of land. I mentioned 22,000 acres in that case. They sell some of it off to homebuilders who then build homes, develop little neighborhoods. That creates demand for commercial assets. Howard Hughes builds commercial properties to satisfy this demand, collects rent, say an office building or a hotel. The presence of those assets makes the surrounding land more valuable. So they will sell more to builders at a higher price now because it's more-attractive land. Homebuilders will continue to build homes on this land. That will create demand for even more and bigger commercial assets, and the cycle can repeat for about 50 years. Really unique model of being able to control the supply of land in such a huge area, essentially entire cities, is a huge competitive advantage. It helps protect the company during recessions. If the market is drying up, they could choose not to allow anymore building to take place. They could sell no land to homebuilders and really control the supply/demand dynamics. During the hot real estate market like this, they can sell as much as they want to and take advantage of higher real estate prices. Just to kind of give you a quick rundown of what this company owns. I mentioned the Summerlin neighborhood in Las Vegas, and that's not even their biggest one. Their flagship community is the Woodlands, right outside of Houston, which a lot of people think is its own city, but it's a Howard Hughes master-planned community. There's another one in Houston called Bridgeland. Columbia, Maryland is a Howard Hughes master-planned community. They also have the Ward Village in Hawaii, which is a big condominium development on the waterfront that's about halfway built out. In addition to those master-planned communities, they also have a unique asset known as the New York City Seaport. If anyone watches ESPN, this is where their studios are. They say "Live from the Seaport." That's a Howard Hughes building. They own the Seaport, they're redeveloping a vacant parking lot, which is really rare in Lower Manhattan, to be able to develop a vacant parking lot into a new high-rise. Really interesting company. They make their money in two ways: from selling land in their communities, like I mentioned, and from collecting rent off of their operating assets that they've developed along the way. They have about 8 million square feet of office space, almost 3 million square feet of retail space in their portfolio, over 5,000 apartments, some hotels and self-storage properties. Not a real estate investment trust. Like I said, the cycle can continue for years. They see in The Woodlands, their flagship community, it's already pretty big. They see a 20-plus-year time horizon until it's built out and another minimum of 2 million square feet of developable real estate over that time. So big long-term opportunity. They have a ton of liquidity. They have a fantastic track record of developing high-value assets, and I'll shut up in a second because I see Lou is getting bored of me talking.

Whiteman: No, this is really interesting. They do multifamily, but on the residential side it's multifamily, but they sell land to housing developers, so they are not doing single-family housing, is that right?

Frankel: Right, well think about when their communities get big enough and they develop downtown districts. You can't really have single-family homes in the downtown area. So that's where the demand for this multifamily housing comes up. In Summerlin, for example, they have I believe it's a minor league baseball stadium. That's part of their downtown property that they own and collect rent from. Places like that are great to put apartment communities and high-value apartment communities. That land wouldn't have any value if Howard Hughes hadn't developed those assets. Multifamily, it's good you brought that up. That's really where they're concentrating right now because of the hot real estate market and rent going up and things like that.

Whiteman: So they do have some exposure to residential demand, They aren't a residential homebuilder. It sounds like they have a lot of diversity within commercial real estate. They're not tied to, say, necessarily retail trends or hotel trends or housing. They have some exposure. They can, as you say, pull the lever as things are needed a little more. So within the commercial real estate universe, they have diversity, but they are kind of stuck in commercial real estate for the most part in terms of where their exposure is fairly.

Frankel: They're not a homebuilder in other words, and they don't own any single-family residential assets. It's worth mentioning Howard Hughes was hit hard by the pandemic in the early days. Think of where their properties are located. Houston, remember when oil went negative last year at the start of the pandemic. One of their biggest office tenants -- I mentioned that's the biggest component of their portfolio -- one of their biggest office tenants is Occidental Petroleum (OXY 0.09%) in their Woodlands neighborhood. Their entire headquarters I believe is there. They were leveraged to the oil market in the Houston area. Las Vegas, no economy head was hit harder than Las Vegas during the pandemic. Hawaii, people weren't allowed to go to, for the most part. And New York, in many ways, was locked down for the all of 2020, and it's still pretty restricted. In hindsight, if they would've been able to predict, were not the best going into a pandemic.

Whiteman: Right. Of course, in general, just all of the things they're doing from offices to retail, Toyota. None of those have done well through the pandemic, and that probably explains as part of Everlasting Portfolio, part of Millionacres' Mogul, I think, not really a huge success at either so far, but you still believe in the company it sounds like.

Frankel: I do. A lot of the dip was because of what happened last year. They ended up having to sell stock at a fire-sale valuation in the early days of the pandemic because they were still beaten down, to kind of shore up their balance sheet. So you saw a little bit of dip because of that. I love this long term, and I think the market really doesn't know how to value it, which is a real advantage for investors. They're probably the most long-term-focused company I've ever heard of.