Howard Hughes Confirms NOI Number by Todd Sullivan, ValuePlays

Some really encouraging things…

I’ve been saying now that current operating assets and those currently under construction are going to produce a ~$200M NOI (up from the current $74M) run rate by the end of 2016-17. Today the company confirmed that in its annual letter (please read it):

Howard Hughes

Now it is critically important to recognize that this $200M number EXCLUDES NOI from the South Street Seaport scheduled to open in the fall of 2016 (more on this later). Even if we exclude the contested tower and just take the 368k sqft at the Pier 17 retail shops that are currently under construction, we can add another $35M  NOI using some very conservative assumptions for rent and cap rates.  If you want to assume more real world assumptions for rent ~$400-$500 sqft things start getting interesting to the upside.

Now, as for the “more on this later” part, the above numbers exclude not only the Pier 17 retail operations but also :

Seaport District Assemblage (New York, New York)

The Seaport District Assemblage is comprised of a 48,000 square foot commercial building on a 15,744 square foot lot with certain air rights with total residential and commercial development rights of 621,651 square feet. As of December 31, 2014, we were under contract to purchase another 58,000 square foot commercial building and air rights attributable to three additional parcels during the first half of 2015, that will ultimately create a 42,694 square foot lot entitled for 817,784 square feet of mixed use development. These properties are collectively referred to as the Seaport District Assemblage and are located in close proximity to our South Street Seaport property.

So, you have an NOI estimate above that is over 2X the current one and that numbers excludes the effect of well over 1MM sqft of NYC waterfront real estate that already has development rights.  The point here is Pier 17 is just the start of what is happening in NYC for the company and none of the current numbers or estimates are reflecting that fact.

Additionally those numbers also exclude ~1.5M more sqft of office and retail space entitled for their Hawaii development that also sits comfortably along the pacific ocean on 60 acres

In short the $200M NOI number above only encompasses what is currently announced and under construction and is just the beginning of what is coming given the 45M sqft development pipeline they have.

I’ve also written several times how the company is using its land holdings to transition the company from one that relies solely on and sales for income to one that uses those land sales to develop operating properties that produce recurring income. From the letter:

The Evolution of Howard Hughes

While we made substantial progress increasing the value of our assets in 2014, we don’t judge our progress by the volume of transactions we execute, but by the quality, scale and success of those ventures. We approach our new acquisitions with the same high return on investment standards as our existing holdings, focusing our resources on assets that are adjacent to these holdings, where our market knowledge and infrastructure give us a significant competitive advantage.

In 2014, we acquired the land in Conroe, 10-60 Columbia Corporate Center and completed the 80 South Street assemblage. All three acquisitions meet our criteria for scale, quality and returns and have the added benefit that they will not add undue burden to our corporate overhead. While we are always seeking potential opportunities to deploy capital intelligently, our existing portfolio will keep us busy for many years. We currently have one of the largest development pipelines in the industry, exceeding 45 million square feet – more than 25 million square feet in our strategic developments and over 20 million square feet embedded in vertical opportunities in our master planned community business.

Communicating the value of our company is complicated given that future development value potential varies based on input assumptions such as rental rates, absorption, construction costs and others. We use the cash flow generated from our MPC segment to reinvest at much higher rates of return into our Strategic Development segment in order to develop properties that will ultimately convert to Operating Assets. This business will continue to grow materially over the coming years as assets are placed into service and reach stabilization.

They also address the oil and Houston questions they are getting:

The most frequently asked question of the company over the past few months is our view regarding the impact of lower oil prices on our Houston assets. In late 2014, the benchmark price for Texas oil, West Texas Intermediate, began declining from around $100 per barrel to its current price of approximately $50 per barrel. We expect there to be a slowdown in economic growth in the Houston area resulting from the rapid decline in oil prices as energy-related companies reduce headcount and defer capital expenditures. The impact of lower oil prices will ultimately depend on how low prices go, and how long they stay at that level. Slower economic growth in Houston will likely result in slower absorption of vacant commercial space, and may reduce demand for new homes resulting in slower velocity of land sales.

While the capital markets appear to be very focused on challenges to the Texas economy caused by low oil prices, I believe there will be a corresponding positive impact on every one of our other major assets. Lower energy costs immediately place more disposable income into consumers’ pockets and provide a large boost to the economy. A rule of thumb suggests thatevery one cent decrease in gasoline prices translates into $1 billion in additional income that consumers can spend on other goods and services, pay down debt or increase savings.1 These are the same consumers who shop and eat at our properties, rent our apartments, purchase homes built on land we have sold and who will have more cash to spend on travel and entertainment.

We expect that more disposable income, for example, will lead to an increase in visitors to Las Vegas, arguably the entertainment capital of the world. More visitors to Las Vegas in turn create demand for more jobs and increase economic growth, more construction activity follows, and more residents create more demand for housing. Another example of where the benefits of lower energy costs will occur is at our Hawaii assets. Hawaii generates a majority of its energy from oil and the State must import virtually everything consumed by its residents using oil-powered transportation. The energy-related component of our construction materials, fabrication and transportation, for example, should decrease, and operating costs related to energy should also decrease.

While growth will likely be slower in Houston, as the owner of The Woodlands, the most established, and most highly regarded master planned community in Houston, and Bridgeland, one of the most highly regarded younger MPCs, we expect to be somewhat insulated from the impact of reduced growth in this economy.

Houston home prices in Feb jumped another 8% over 2014. While sales have slowed, because inventory remains scarce (2.7mos) prices continue to climb.  As long as inventory remains below 6mos, sellers will retain pricing power in the Houston market. With the surge of businesses relocating the North and West Houston, demand for home in the Woodlands and Bridgeland will remain strong and above the market in general. Think about it, 10,000 Exxon employees and their families will be looking for homes there in the next year…..that is demand above and beyond what they are already seeing. The Woodlands MPC has ~2,000 lots left to sell, think there might be bidding wars that increase prices? Now that the Grand Parkway section between Bridgeland and The Woodlands is finish, they  both are connected by it to the Exxon campus so Bridgeland will certainly see increased demand also.

In short, unless we see oil stay in the low $40’s for 12-18mos, I have few concerns for home sales in Howard Hughes’s MPC’s. Conversely, should that actually happen, the company has tremendous flexibility with its balance sheet to then become a buyer of distressed assets that may hit the market in the Houston area. Additionally, oil that low for that long will be a major benefit for every other MPC and strategic development the company has.  For example virtually all construction materials for Hawaii are shipped in. A prolonged drop in oil will dramatically lower shipping costs for those construction materials without any corresponding drop in demand or pricing for the end products, increasing the profitability of a massive project.

As I’ve said seemingly non stop for over a year now, 2015 is going to be a seminal year for the company.