Howard Hughes Reports & Pipeline Update by Todd Sullivan, ValuePlays

Howard Hughes Corp (NYSE:HHC) reported today and the results were good, very good.

Howard Hughes Corp (NYSE:HHC)’s Third Quarter Highlights

· Third quarter 2014 net income increased 39.6%, or $4.4 million to $15.5 million, excluding the $24.7 million non-cash warrant gain and $5.5 million non-cash increase in the tax indemnity receivable, compared to third quarter 2013 net income of $11.1 million, excluding the $(4.5) million non-cash warrant loss and $0.7 million non-cash increase in the tax indemnity receivable.

· Master Planned Community (“MPC”) land sales increased 4.2% to $57.2 million for the third quarter 2014 compared to $54.9 million for the third quarter 2013 due primarily to increased lot sales volume and higher prices at our Woodlands and Bridgeland MPCs.

· Net operating income (“NOI”) for our income-producing Operating Assets increased 33.3% to $18.4 million for the third quarter 2014, compared to $13.8 million for the third quarter 2013. The increase is primarily related to the Outlet Collection at Riverwalk, which was re-opened in May 2014, and the One Hughes Landing and 3 Waterway Square office buildings which were placed into service in 2013 and reached stabilization in 2014. South Street Seaport NOI has been excluded from income-producing Operating Assets NOI because it is substantially shut down and under redevelopment.

· We opened Downtown Summerlin, our 1.6 million square foot mixed-use development in the heart of the Summerlin MPC, on October 9, 2014. Over 250,000 people visited the property during its four-day grand opening celebration and a majority of our tenants reported better than anticipated sales in their stores.

· We completed construction and placed into service Two Hughes Landing, the second office building in Hughes Landing which is 84.8% leased as of November 1, 2014.

· We began construction of Three Hughes Landing, a 324,000 square foot Class A office building in Hughes Landing, which is expected to open during the fourth quarter of 2015.

· We began construction of The Embassy Suites by Hilton in Hughes Landing, a nine-story, 205-room upscale, full-service hotel that will be managed by us. The hotel is expected to be completed by the end of 2015.

· Our Millennium Woodlands Phase II joint venture completed construction of, and placed into service, a 314-unit Class A multi-family property in The Woodlands Town Center.

· We announced the development of Lakeland Village Center, an 84,200 square foot mixed-use commercial project at our Bridgeland MPC. CVS Pharmacy has entered into a ground lease and will construct a 15,300 square foot store on the site to anchor the project, which will consist of ground-level retail, restaurant, and professional office space organized within nine buildings all totaling approximately 68,900 square feet. We expect to begin construction in the first quarter of 2015 with completion expected in early 2016.

· On August 6, 2014, we closed a $69.3 million non-recourse construction financing for The Westin, The Woodlands bearing interest at one-month LIBOR plus 2.65% with an August 2019 final maturity date.

· On October 2, 2014, we closed a $37.1 million non-recourse construction financing for the Embassy Suites by Hilton in Hughes Landing. The loan bears interest at one-month LIBOR plus 2.50% with an October 2020 final maturity date.

· On November 6, 2014, we closed a $600.0 million non-recourse construction financing for the Waiea and Anaha condominium towers at WardVillage bearing interest at one-month LIBOR plus 6.75% with a December 2019 final maturity date

A bright future for Howard Hughes

For a while now I have been saying that as impressive as what Howard Hughes Corp (NYSE:HHC) currently has, the future is brighter. I’ve spoken often about the breadth of their development pipeline but a neglected to do the obvious….show everyone. So, below is what is currently (to the best of what I can determine) both operational and under development for their operating properties.

One look illustrates why I have been so optimistic about the 2015-16 as their sgft in operation is set to double for both their office and retail operations:

  • I am counting Downtown Summerlin as a 2015 project as it only just opened and has had no effect on NOI for 2014).
  • Ward Centers is a wash as it is undergoing substantial redevelopment that will take several years. since it is open during construction, we’ll just account for it in both categories and simply track to NOI changes
  • The company does not receive its share of Hawaii condo projects until the buildings are open and closings occur. When that happens they book hundreds of millions in revenue from the projects.
  • Howard Hughes will own and operate the hotels on their properties.
  • Don’t expect NOI estimates to be reached immediately post opening, most projects tend open ~70% occupied which means it’ll take about a year to reach normalized annual NOI estimates

Now, it is very important to note that this only includes what has been announced to date and it is highly unlikely this list does not grow again when Q4 results are released. For instance, there is still significant additional development to be announced at the S. St. Seaport in NYC pending approvals. None of that is on this list yet but I’d expect it to be come Q1 2015.  In Hawaii, Howard Hughes Corp (NYSE:HHC) in currently getting approval for condo tower #5 which is not on this list but will be soon.  Bridgeland is only now starting land sales and development so I’d also expect additional retail/office projects announced as that progresses. In short, there is much much more to come.

Howard Hughes’ land sales from Downtown Summerlin

Now, as impressive as that is, one has to understand that the above ignores something material. Land sales from Summerlin, Bridgeland, Woodlands and the Princeton, NJ land (prob none there until late ’15 or ’16).  Land sales are coming in at ~$200M$300m /yr.   For the 1st 9mos of 2014 lot prices in Summerlin are up YOY  to $128k vs $74k, in Bridgeland up tp $92k vs $66k, and the Woodlands up to $166k vs $139k

Howard Hughes

These land sales then fund the construction of income generating assets for shareholders.

So, when we look forward a year or so and compare what we will see then for results vs what we see now, the 30% YOY growth we see in operating income and NOI are going to look paltry when compared the increases coming down the pike as these properties start coming online.