Real estate development company Howard Hughes (NYSE:HHC) reported its first-quarter results before the opening bell on Monday. The business reported strong earnings growth driven by a noticeable shift that will drive steadier earnings in future quarters. Here's a look at the changes taking place and two other lessons investors should take away from the company's results.
1. The shift from sales to income
For the quarter, Howard Hughes reported adjusted net income of $24.4 million, up 18.4% from Q1 of last year. This was despite the fact that the company's master planned community land sales decreased by 4.1%. Instead, the big driver here was the company's income-producing operating assets.
That segment's net income spiked 48.9% to $27.1 million. This was driven by the 2014 opening of its Downtown Summerlin and The Outlet Collection at Riverwalk, as well as the acquisition of 10-60 Columbia Corporate Center office properties. These new additions to the portfolio provided the company with much more stable income from leases, which helped to more than offset the decline in land sales from its master planned communities.
2. More income on the way
In addition to those notable new additions last year, Howard Hughes is expecting to add several new additions in 2015 to drive incremental income growth from its operating assets. Subsequent to the quarter's end, the company completed the construction of Hughes Landing Retail, which is the retail component of Hughes Landing. As of the end of April the project was already 83.4% leased, including a strong anchor tenant. In addition to that, the company completed the construction of Creekside Village Green, a mixed-use project that was 66.3% leased as of the end of April. The addition of these income producing properties will boost Howard Hughes' bottom line in the quarters ahead.
3. Oil prices could impact future results
The real estate industry and the oil industry have something in common: the importance of location. In this case that location in Houston, Texas, which is the epicenter on the U.S. oil industry. Because of its importance as an energy hub, as well as the fact that the energy industry had been booming, Houston became a robust real estate market. And then oil prices went south.
In its Q1 report, Howard Hughes noted that the Houston economy is showing signs of an economic slowdown due to weak oil prices. Housing statistics are mixed as the inventory of houses remains low and home sales and home prices increased year over year. However, the overall weakness could have an impact on the company's Houston-area master planned communities in the years ahead, as mass layoffs could lead to a much weaker housing market.
That said, the company did note that energy powerhouse ExxonMobil (NYSE:XOM) is in the process of relocating 10,000 employees to its new campus. Further, a new highway, the Grand Parkway, is expected to be complete by the end of this year. These two factors could mitigate the impact of a weaker Houston economy on Howard Hughes communities because ExxonMobil's campus is located in close proximity to its communities, while the highway's completion will help cut down commute times, making Howard Hughes' communities more desirable.
Howard Hughes is starting to see income-producing properties substantially boost its bottom line. That positive impact should continue in 2015, as the company recently brought two more properties into the fold. This should help mute the overall lumpiness of master planned community lands sales, which are being hit by weak oil prices slowing down Houston's economy.