Howard Hughes (HHC 1.15%) recently announced the acquisition of 37,000 acres of vacant land in the Phoenix area, on which it plans to develop a new master-planned community. In this Fool Live video clip, recorded on Oct. 22, Fool.com contributors Matt Frankel and Jason Hall discuss why this is such a major development for this unique real estate company.
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Matt Frankel: This is a big deal for the company. I want to just give you a couple of statistics real quick. No. 1, between the other, I think, six master planned communities in Howard Hughes' portfolio, there's a total of 10,000 acres of vacant land remaining. This adds 37,000 to the portfolio.
Jason Hall: Right.
Frankel: Big deal. They are paying, I did the math, it works out to about $16,000 an acre for this new master planned community. They anticipate in 2022, their first land sales are going to take place to real estate developers at about $300,000 an acre. The long-term economics are fantastic. This is 37,000 acres of cheap land in terms of what they're paying for it, that they're going to unload over the course of the next 20 or 30 years at these huge prices to land developers. They also plan on building 55 million square feet of commercial development, which generates income for them. By the time this is all done, it's like a self-sustaining model, the commercial properties create cash flow while they're sitting on this land. The presence of those commercial properties makes the surrounding land even more valuable.
Frankel: Just like a value-creation cycle. This is one of my largest stock positions and has been since before the COVID pandemic, which unfortunately, they got hit pretty hard. I'm glad to see them diversify from their markets they've been in. They got hit by a perfect storm during the pandemic. No U.S. economy was more effective than Las Vegas, where I think their biggest community by land area is. Their flagship communities in Houston where their biggest commercial tenants are all oil companies. Remember when oil prices went negative in the early days of the pandemic. The Seaport in New York is one of theirs, people just weren't going there. It's just like all other communities got hit. But now, it's looking up and now they're ready to invest. I love the deal. As a shareholder, I can't overstate how much of a game changer this is.
Hall: Yeah, I think I want to point out, too, this isn't just a massive long-term acquisition, but it's something they're going to start monetizing next year. I think they're planning for 1,000 lot sales in 2022. It's important to realize that this is going to be a source of cash flow in the near term. As they accelerate over time, then it's going to start adding those recurring revenues as they develop it.
Frankel: There's no carrying costs. They paid cash for this. It's not like they're paying interest on 37,000 acres of vacant land right now, this is just cash from their balance sheet. About a year ago, they made a decision to sell a lot of non-core assets like a random office building here. A bunch of random assets scattered around the globe and focus on their master plan community business. That's where this funding came from. There's no carrying costs. As you mentioned, first half of next year, they're going to start selling land to developers in the first phase. Pretty big deal.