At the recent Ira Sohn conference, billionaire hedge fund manager Bill Ackman gave a detailed presentation about Howard Hughes Corporation (NYSE: HHC), a developer of master planned communities (MPCs) that could have some major upside in the coming years. Here's why Ackman loves Howard Hughes Corporation and what you need to know about the company.
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Howard Hughes Corporation: the quick version
Howard Hughes is one of the largest MPC owners in the United States. We'll get into what an MPC is shortly, but Howard Hughes' general business model is selling residential land in its communities to homebuilders, and then developing commercial properties in the same communities to generate cash flow.
Image source: Getty Images.
Howard Hughes follows certain key principles, which it feels sets its business model apart from most other developers. For example, the communities have a single controlling owner (Howard Hughes), and the company reinvests heavily in its land, keeps a strong balance sheet, and, perhaps most importantly, approaches development from a long-term perspective. Howard Hughes aims to capitalize on the commercial development potential at its MPCs, and since the company controls most of its commercially developable land, it can limit the supply and prevent overbuilding.
As of May 2017, Howard Hughes owns approximately 7 million square feet of retail and office properties, 2,300 multi-family units, and 1,000 hotel rooms, and this could be just the beginning.
What is a master planned community, and why can it make great investments?
Generally speaking, an MPC, is a large residential development, usually 10,000 acres or more, with a particularly large amount of amenities -- perhaps golf courses, jogging trails, and commercial properties.
In his presentation at the Sohn conference, Ackman compared MPCs to a "real world SimCity."
MPCs have a few advantages that boost their investment potential. For example, since the owners of a MPC can control the supply of land to the market, land values tend to be less volatile and can increase at a quicker rate than typical residential land can. And the amenities of MPCs can make them more attractive to prospective homebuyers than standalone homes or small neighborhoods might.
Howard Hughes' master-planned communities
Howard Hughes owns four core MPCs, which were acquired from General Growth Properties (NYSE: GGP) in a 2010 spinoff transaction as General Growth emerged from bankruptcy, as well as two "high-density urban MPCs." The four MPCs are:
Data source: Howard Hughes.
In addition, Howard Hughes owns the South Street Seaport urban MPC in New York City, as well as Ward Village in Honolulu.
Growth potential of Howard Hughes' master-planned communities
Howard Hughes' current MPCs have significant potential for growth. For example, the Summerlin MPC currently has 107,000 people, and the number is expected to grow to over 200,000 by the time the build-out is complete. The community has 4,600 acres of remaining sellable and/or developable land that the company can capitalize over time. The real estate market in Las Vegas is strong, and since Howard Hughes owns the commercial acreage at downtown Summerlin, there will be tremendous opportunity to capitalize on the commercial value the increasing population will create.
In fact, Howard Hughes recently entered into a 20-year ground lease in downtown Summerlin to build a practice facility for Las Vegas' newly awarded NHL team, and it purchased the city's minor-league baseball team with the goal of building a new stadium for the club in Summerlin. In fact, there are 5.5 million square feet of additional development in downtown Summerlin planned for Howard Hughes-owned land.
In the coming years, Howard Hughes plans to continue to develop new assets, such as apartments, hotels, and retail properties, in its MPCs to capitalize on growing market demand. The company also plans to complete the construction and leasing of the Seaport District and capitalize on its Ward Village property, where several condominium projects are currently under way.
According to Ackman's presentation, Howard Hughes has the potential for 37 million square feet of total future development in its four core MPCs, which is roughly 10 times the amount of development it has completed since its separation from General Growth Properties in 2011. Including the rest of the portfolio, this figure jumps to 50 million square feet. In other words, there's massive potential for long-term value creation here. And finally, the board of directors and the company's management team own more than 20% of the company altogether, which means the insiders have a lot to gain by delivering for shareholders.
The Foolish bottom line
To be perfectly clear, I'm not saying you should invest in Howard Hughes, or any stock for that matter, simply because a billionaire does. Having said that, however, Howard Hughes Corporation does seem like a unique way to invest in real estate that has several advantages not available through other real estate stocks.
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