Howard Hughes (HHC -2.14%) is a real estate stock that is in a class by itself. It isn’t a real estate investment trust, or REIT. It isn’t a homebuilder, real estate broker, or mortgage business. And because it has a unique business model, which we’ll get to in a minute, the market doesn’t quite know how to value the company.
However, management seems to think the value of Howard Hughes’ assets is much higher than the stock market gives it credit for. Here’s a rundown of the business, its future growth opportunities, and how much management thinks the stock should be worth right now.
What does Howard Hughes Corporation do?
Howard Hughes’ management describes the business as a real-life version of the popular video game Sim City. The company develops master-planned communities, or MPCs, that are of massive scale and are designed to steadily create value for decades.
Here’s the basic idea. Howard Hughes acquires a large tract of land – say, 10,000 acres or more. It sells a small portfolio of shovel-ready land to homebuilders, who develop and build residential neighborhoods. The presence of these homes creates demand for commercial assets, such as office buildings or retail space, which Howard Hughes builds and leases out to generate income. Then, it sells a little more land to homebuilders, which has now become more valuable because the area is getting built up. This cycle can repeat for decades, and results in a self-funding portfolio of commercial properties.
The company’s more mature communities are more like small cities than what you’d normally associate with the phrase “master-planned community.” Its flagship community is The Woodlands in the Houston area, and other massive MPCs are Summerlin near Las Vegas, as well as Columbia, Maryland. The company also owns and develops the Seaport District in New York City, Ward Village in Hawaii, and a couple smaller and newer MPCs in the Houston market. It recently acquired about 37,000 acres near Phoenix, where it plans to start the Douglas Ranch MPC from scratch and anticipates 100,000 homes and 55 million square feet of commercial development at full build-out.
From a long-term perspective, the economics of MPC development are fantastic. For example, Howard Hughes paid about $16,200 per acre for the Douglas Ranch land and has a total basis of about $39,000 per acre for its buildable homesites. It anticipates selling the first residential lots for $300,000 to $315,000 per acre this year and expects land appreciation of 5%-10% per year going forward. From land sales alone, Howard Hughes should recoup many times its initial $600 million investment, and that doesn’t even consider all of the commercial assets it will build along the way.
Management thinks the stock is worth much more
At the company’s recent investor day, Howard Hughes’ management presented a conservative view of the company’s net asset value (NAV), including all of its operating assets, MPCs, and the property owned at Ward Village and the Seaport, finding a per-share sum of the parts total of $170. That’s 107% higher than the share price as I’m writing this.
This includes conservative assumptions, such as valuing the Seaport at cost instead of its current market value, and also doesn’t include the effect of the 1.6 million shares the company repurchased so far in 2022 or any others that will be repurchased under the company’s new $250 million buyback program.
Also, keep in mind that this is management’s estimate of Howard Hughes’ intrinsic value today. The company is designed to be a self-sustaining growth engine with a multi-decade time horizon to fully realize the value of its assets. If management can do a good job of executing on its vision, the company’s intrinsic value should steadily grow over the years. CEO David O’Reilly has referred to Howard Hughes as “the best risk-adjusted return potential in real estate,” and with asset value estimates like these, it’s not difficult to see why.