Howard Hughes (HHC -2.14%) is an actual property inventory that’s in a category by itself. It is not an actual property funding belief, or REIT. It is not a homebuilder, actual property dealer, or mortgage enterprise. And since it has a novel enterprise mannequin, which we’ll get to in a minute, the market does not fairly know find out how to worth the corporate.
Nevertheless, administration appears to assume the worth of Howard Hughes’ belongings is far increased than the inventory market offers it credit score for. This is a rundown of the enterprise, its future development alternatives, and the way a lot administration thinks the inventory needs to be price proper now.
What does Howard Hughes Company do?
Howard Hughes’ administration describes the enterprise as a real-life model of the favored online game Sim Metropolis. The corporate develops master-planned communities, or MPCs, which might be of large scale and are designed to steadily create worth for many years.
This is the essential thought. Howard Hughes acquires a big tract of land – say, 10,000 acres or extra. It sells a small portfolio of shovel-ready land to homebuilders, who develop and construct residential neighborhoods. The presence of those houses creates demand for business belongings, comparable to workplace buildings or retail house, which Howard Hughes builds and leases out to generate revenue. Then, it sells a bit extra land to homebuilders, which has now change into extra precious as a result of the realm is getting constructed up. This cycle can repeat for many years, and ends in a self-funding portfolio of business properties.
The corporate’s extra mature communities are extra like small cities than what you’d usually affiliate with the phrase “master-planned neighborhood.” Its flagship neighborhood is The Woodlands within the Houston space, and different large MPCs are Summerlin close to Las Vegas, in addition to Columbia, Maryland. The corporate additionally owns and develops the Seaport District in New York Metropolis, Ward Village in Hawaii, and a pair smaller and newer MPCs within the Houston market. It lately acquired about 37,000 acres close to Phoenix, the place it plans to start out the Douglas Ranch MPC from scratch and anticipates 100,000 houses and 55 million sq. ft of business improvement at full build-out.
From a long-term perspective, the economics of MPC improvement are implausible. For instance, Howard Hughes paid about $16,200 per acre for the Douglas Ranch land and has a complete foundation of about $39,000 per acre for its buildable homesites. It anticipates promoting the first residential tons for $300,000 to $315,000 per acre this yr and expects land appreciation of 5%-10% per yr going ahead. From land gross sales alone, Howard Hughes ought to recoup many occasions its preliminary $600 million funding, and that does not even think about the entire business belongings it would construct alongside the way in which.
Administration thinks the inventory is price way more
On the firm’s latest investor day, Howard Hughes’ administration introduced a conservative view of the corporate’s web asset worth (NAV), together with all of its working belongings, MPCs, and the property owned at Ward Village and the Seaport, discovering a per-share sum of the elements whole of $170. That is 107% increased than the share value as I am scripting this.
This consists of conservative assumptions, comparable to valuing the Seaport at value as a substitute of its present market worth, and likewise does not embrace the impact of the 1.6 million shares the corporate repurchased to this point in 2022 or any others that will probably be repurchased underneath the corporate’s new $250 million buyback program.
Additionally, remember the fact that that is administration’s estimate of Howard Hughes’ intrinsic worth in the present day. The corporate is designed to be a self-sustaining development engine with a multi-decade time horizon to completely understand the worth of its belongings. If administration can do job of executing on its imaginative and prescient, the corporate’s intrinsic worth ought to steadily develop through the years. CEO David O’Reilly has referred to Howard Hughes as “the very best risk-adjusted return potential in actual property,” and with asset worth estimates like these, it is not tough to see why.