There are some companies that are so different that they are difficult for the market to value, and Howard Hughes Corporation (HHH 3.84%) definitely fits into this category. With a business model like no other company and an extreme long-term focus, Howard Hughes Corporation is a real estate stock in a class by itself.
In addition to being unique, Howard Hughes might just be an overlooked opportunity for patient long-term investors.
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Howard Hughes Corporation: The quick version
The short explanation of what Howard Hughes Corporation does is that it develops large-scale communities. Think of Howard Hughes as a real-life version of the video game Sim City.
For a little more color, Hughes develops master-planned communities, or MPCs. However, unlike most other MPC developers, its communities are huge: think tens of thousands of acres. The company's more-established communities like The Woodlands in the Houston area and Summerlin in Las Vegas are more like self-contained cities.
Here's the general idea of how this works as a business. Hughes acquires a large tract of undeveloped land. It sells a small portion to homebuilders, which develop residential neighborhoods. The presence of these homes creates demand for commercial assets, such as office buildings, shopping centers, or hotels. Howard Hughes builds these and uses them to generate rental income.
Then, the presence of these amenities makes the surrounding land even more valuable, so the company sells a little more to builders. The increased population creates demand for larger commercial assets. And this cycle of value creation can repeat for decades.
In addition to the two large communities already mentioned, Hughes has several other large-scale communities, as well as the beachfront Ward Village neighborhood in Hawaii and the Seaport district in Lower Manhattan.
Tons of long-term value creation potential
Howard Hughes already has an impressive portfolio of commercial assets in its communities, including 8 million square feet of office space, 2.8 million square feet of retail space, and over 5,300 multifamily housing units. But this could be just the beginning.
For starters, there's plenty of room for growth at its established communities. The Woodlands, which already has a population of more than 120,000, has plans for over 1.9 million square feet of commercial development over the next 10 years and an additional 749 acres of commercial land remaining. The nearby Bridgeland MPC has 17,500 residents, and Howard Hughes expects it will have 65,000 at full build-out.
Summerlin already has an extremely attractive downtown area and a ton of amenities, but the company sees over 5 million square feet of new commercial developments within the next decade alone. At the company's oldest and most established MPC (Columbia, Maryland), Hughes still sees 9 million square feet of development potential over the long run.
The New York Seaport recently gained approval for a new $850 million high-rise development, and Ward Village still has several condominiums set for future construction.
And most exciting, Howard Hughes recently acquired 37,000 acres of land near Phoenix to start a brand-new MPC (Douglas Ranch) from scratch. This will be the company's largest MPC to date, and land sales are set to begin this year.
A tough stock for the market to value
When I interviewed CEO David O'Reilly last year, he said that he believed the company was the best risk/reward opportunity in the entire real estate sector. And management is certainly putting money behind this statement. Howard Hughes recently announced a $250 million buyback plan, and that's on top of another $250 million buyback it recently completed. Combined, this is an aggressive buyback rate of about 10% of the company's shares and shows that management believes the stock is a tremendous value.
Because of its ultra-long-term focus, Howard Hughes is a difficult stock for the market to value, but that's a good thing for patient investors who measure their returns in decades. This is a business with a remarkable opportunity to create shareholder value over the long term, and investors who buy and hold on could be handsomely rewarded.
