Value Line has initiated coverage of The Howard Hughes Corporation (HHC) in its flagship product, The Value Line Investment Survey. The company owns, develops, and manages commercial, residential, and mixed-use real estate properties in the United States. The company was incorporated in Delaware in 2010 and is headquartered in Dallas, Texas. As of December 31, 2013, Howard Hughes had roughly 1,000 employees.
Unlike most other publicly-traded real estate companies, which have elected to be taxed as a real estate investment trust and are, therefore, limited in their business activities, Howard Hughes has no restrictions on its operating activities or other types of services that it offers. The company generates revenues primarily from the sale of individual lots to home builders, as well as from tenants in the form of rent and recovery of operating expenses.
Howard Hughes operates in three segments: Master Planned Communities, Operating Assets, and Strategic Developments. The first group, which represented about 58% of 2013 revenues, consists of the development and sale of residential and commercial land, mostly for large-scale projects. The division owns four master planned communities, and includes over 11,500 acres of land that remains to be sold. Residential sales are largely made to home builders, and include standard and custom parcels for detached and attached single- and multi-home residences, ranging from entry-level to luxury households. Commercial sales include land parcels sold for retail, office, resort, government, and schools, among others.
The Operating Assets Division, which accounted for 34% of 2013 sales, owns 27 properties and investments that generate revenue. These assets include commercial mixed-use, retail, multi-family, and office properties. Finally, the Strategic Developments segment, the smallest division of the three at 8% of 2013 revenues, has near, medium, and long-term development projects for 24 of the company’s real estate properties. These locations will likely need significant development to achieve optimal profitability.
Howard Hughes faces different types of competition based on the type of property involved. In the Master Planned Communities group, competition comes from other landholders and residential and commercial property developers. In the Operating Assets segment, the company primarily competes with retail and office tenants and, to a lesser extent, residential tenants. Finally, the Strategic Developments group faces competition from other commercial property developers, retail mall development companies, and other firms that operate retail real estate. In addition, the company competes with REITs and private institutional investors.
From a risk perspective, the company has a significant amount of debt on its balance sheet. As of December 31, 2013, there was more than $1.5 billion of long-term debt on the balance sheet, including mortgages. This represented roughly 40% of total capital.
The company has been posting strong sales gains over the past couple of years. In 2013, Howard Hughes reached $474 million in revenues, a 26% jump from the prior year’s tally, while the growth rate in 2012 was an even more impressive 37%. The advances have been driven by strength from the Master Planned Communities group, thanks to higher demand for residential sites in certain areas. However, the company’s bottom line has been in the red the last two years, owing largely to losses in the Operating Assets segment, as well as higher interest expense, owing to recent increases in debt outstanding.
While the company has recovered from the 2008 financial crisis, with revenues rebounding strongly in the last couple of years, we still look for an operating loss this year. Subscribers interested in learning more about this real estate development and management company are advised to consult Value Line’s quarterly reports for Howard Hughes, as well as any supplemental reports and relevant articles that may arise as important news comes to light.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.