Howard Hughes Corp Earnings: Don't be Fooled By the Loss

Real estate developer Howard Hughes Corp reported fourth-quarter results before the opening bell on Monday. The company easily beat estimates due to strong revenue growth. However, after some adjustments the company did report a loss. Needless to say, there were a lot of moving parts this quarter, so let's take a closer look at the results.

A look at the numbersHoward Hughes reported revenue of $207 million for the quarter, which blew away estimates. Analysts only expectedthe company to generate $113.5 million in revenue for the quarter.

Leading the way were land sales at the company's Master Planned Communities segment as sales tallied $96.3 million in the quarter. This was 22.4% higher than in the fourth-quarter of 2013. Strong residential land sales at the company's Summerlin and Bridgeland communities more than offset lower land sales at The Woodlands and Columbia, MD communities.

However, the real highlight was very strong pre-sales for condominiums. Revenue from condominium rights and unit sales totaled $72 million in the quarter, which is up dramatically from the $1.8 million in the fourth-quarter of 2013.

Finally, net operating income from the company's income producing operating assets was also strong. It increased by $3.3 million to $19.8 million, or 20% higher than in the fourth quarter of 2013. The increase was primarily due to the opening of the Downtown Sumerlin mixed use development in October and the reopening of the Outlet Collection at Riverwalk in May.

Despite these strong gains, net income was really messy this quarter. The company reported net income of $21.9 million, or $0.51 per share. That was well above the $0.19 per share analysts were hoping to see. However, due to some adjustments the company actually lost $1.18 per share for the quarter. That reported loss was due to adjusting for a $78.6 million non-cash warrant gain and a $68.5 million net non-cash loss relating to a tax issue that was settled in the quarter. The tax settlement stems from the company's spin off from General Growth Propertiesin 2010. However, if we back that out the quarter was exceptional.

Building valueLooking ahead, Howard Hughes should continue to deliver strong growth. The company had $2.9 billion in projects under construction last year, of which $700 million were completed during the year. These new developments helped grow the company's recurring income stream in 2014 and should provide a strong base for 2015. Further, the company still has a number of developments in the pipeline that should be completed over the next two years and drive additional recurring income growth.

In 2015 the company expects several projects that it began construction of in 2013 to be completed. In the first quarter the company has two office buildings, a mixed-use project in the Woodlands, two multi-unit apartment complexes and a retail development to be completed which can then start generating income. In addition to that, several projects it started last year should be completed over the next few years. These assets include an office building and two hotels, which should be complete later this year, and two condominium towers, which should be complete by late next year and early 2017, respectively. Each of these assets should drive additional value creation and income growth in the years ahead.

Investor takeawayHoward Hughes delivered a very solid, albeit messy, quarter. The company's sales surged due to strong residential land and condominium sales. Meanwhile, recurring income from operated assets also grew as the company completed the construction of several important new assets last year. That trend of growing net income from operated assets should continue in 2015 as the company has several assets under construction that are expected to add to its recurring income stream throughout 2015.

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