Howard Hughes: Valuation of their Prime Real Estate

Howard Hughes: Valuation of their Prime Real Estate

Howard Hughes: Valuation of their Prime Real Estate



Here’s what Charlie Munger had to say at the Daily Journal meeting

Charlie MungerCharlie Munger spoke at the Daily Journal Corporation's Annual Meeting of Shareholders today. Although Warren Buffett is the more well-known Berkshire Hathaway chief, Munger has been at his side through much of his investing career. Q4 2020 hedge fund letters, conferences and more Charlie Munger's speech at the Daily Journal meeting was live-streamed on Yahoo Read More

We’ve talked about Howard Hughes Corp (NYSE:HHC)  before but current events merit revisiting.

We will focus on just is housing units today and ignore the commercial properties. We will focus on their three most active developments in Houston, Vegas and Honolulu. For each Howard Hughes Corp is building new homes/condos.

In Honolulu Howard Hughes Corp (NYSE:HHC)  is has been permitted to build 210 luxury condos at Ward Center, just a stones throw from Ala Mona mall (the highest grossing mall per sgft in the US).

Dallas-based Howard Hughes Corp. (NYSE: HHC), which is partnering with The MacNaughton Group and the Kobayashi Group to build the 210-unit “Ala Moana Tower” atop a parking garage adjacent to the Nordstrom department store on Kapiolani Boulevard, expects to begin pre-sales of units later this year, CEO David R. Weinreb said in a statement discussing the company’s quarterly earnings.

Weinreb noted in a letter to shareholders that The MacNaughton Group and Kobayashi Group had also partnered to build the Hokua condominium, “with units currently reselling for $1,200-$1,300 per square foot.”

The Honolulu housing and condo markets have been very resilient in the down turn as condo prices have not varied materially from the $300k median level in the last three years. Bottom line is $HHC ought to have very little trouble selling luxury units in a prime location. With ~1M sqft of residential space coming at ~$1200 sgft foot, that adds up to a nice little sum for a company with a $2.3B market cap

This of course ignores the value of ~9M sqft of retail/mixed use space to be build on the existing Ward Center’s location.


The Houston housing market has been hot all year after seeing very little drop during the crash.

Homesales May WEB

$HHC owns the Woodlands and Bridgeland MPC’s there:

CEO Weinreb:

As mentioned above, the headline of 2011 for our master planned community business was our acquisition of Morgan Stanley’s 47.5% economic interest inThe Woodlands for $117.5 million, including the assumption of $297 million in debt. A simple analysis of this investment based solely on The Woodland’s history of land sales builds a convincing case that this acquisition will be very profitable for the company. The chart entitled “The Woodlands Historical Land Sale Revenues” shows actual residential and commercial land sale revenues and average price per acre in The Woodlands over the last ten years.

This ten year track record of steady revenues through one of the worst recessions of the last century demonstrates the stability of Houston and The Woodlands’ submarket. Furthermore, average residential lot selling prices are above 2005 levels and increasing. As of December 31, 2011, The Woodlands had approximately 1,164 acres of unsold residential land, representing approximately 3,669 lots, and approximately 961 acres of unsold land for commercial use, of which 36 acres are categorized as institutional land. Assuming land sales alone and no vertical development, we anticipate that we will run out of residential lots for sale in 2017 and commercial land in 2022.

The following paragraphs outline the value proposition for the acquisition of The Woodlands. This is important for two reasons. First, it outlines to you the future potential profitability of the asset. Second, it allows you a glimpse into the way we view our investments and the reasons for this acquisition and potentially others. The value proposition is a sum of the part’s value but does not take into account the following: (i) future vertical development opportunities, (ii) existing and future joint venture agreements, (iii) a change in density of uses and (iv) the time value of money.

Based on an average 2011 residential lot price of $88,987 and an average uninflated cost to deliver of $23,848 per lot, we anticipate $65,139 in average net cash per lot on the remaining 3,669 lots, for total proceeds from residential lot sales alone of $239.0 million. With respect to the commercial land, we have three classes: 69 acres in The Woodlands Town Center, 856 acres outside of the Town Center and 36 acres of institutional land. Obviously, there is a wide divergence in land values given their proximity to The Town Center, which is the most valuable land. Without giving away too much competitive information, suffice it to say that average land prices for the remaining commercial land approximates $13.66 per square foot or $572 million. Based on the above land pricing, the total gross proceeds to be derived from the sale of the remaining residential and commercial land in The Woodlands is expected to be approximately $811 million in the aggregate.

Our income-producing operating properties, including our newest office building 3 Waterway have a current NOI of approximately $16.3 million and a stabilized NOI estimated to be $29.2 million. Valuing the operating properties using stabilized NOI and a cap rate of 7% yields a value net of completion costs of $365 million, which brings the combined gross asset value of the acquired land and operating properties to approximately $1.176 billion.

As mentioned above, an example of the additional value potential not included in the analysis is value created through vertical development. While this is harder to price than land sales, The Woodlands has an established history of developing commercial assets in its Town Center. As of the fourth quarter of 2011, the vacancy rates for Class A office and multifamily were at less than five percent.

We will break ground on 3 Waterway Square, a 232,774 square foot office building in The Woodlands Town Center in March 2012. The total project cost will be approximately $50 million (exclusive of the land cost and existing parking garage). It is currently 67% pre-leased, with another 15% of the space in active discussions. It will take approximately 15 months to deliver, and is anticipated to have a stabilized NOI of approximately $6.0 million. At a 7% cap rate, the value of this building is worth approximately $85.7 million, creating $35.7 million of value for the company. 3 Waterway is a great example of how a change in density can increase value. Originally designed as a nine story office building, we quickly realized that demand was outpacing supply. We subsequently increased the size of the building by two floors representing 45,000 square feet. At stabilization, this will create an additional $7 million in value net of completion costs. If we extrapolate this across the entire commercial land available for sale, you can quickly see how a change in density can magnify the outcome.

In the coming 18 months we plan to break ground on 800 multi-family units. Following that, we have plans for nearly 2.1 million square feet of Class A office space, another 150 multi-family units, 900 condominium units, 328,000 square feet of retail space and 300 hotel rooms.

It is important to recognize that this total does not account for the time value of money. This is dependent on determining an appropriate discount rate, which is directly correlated with risk. The greatest risk for any MPC is at inception where hundreds of millions of dollars are expended prior to collecting any revenue. When looking at an MPC from inception, a 15% to 20% discount rate range would be appropriate; however, once initial infrastructure is invested and a track record of performance has been established, as is the case with The Woodlands, a much lower discount rate is justified. In addition, as we sell land, it stands to reason that in a growing vibrant community, the remaining land will continue to appreciate in value. As we continue to build in the legacy communities of Summerlin, Bridgeland and The Woodlands, it is clear that our remaining land holdings will increase in value. This is a cyclical business and we know we cannot count on linear growth. However, we are confident that staying the course will deliver meaningful value both in current operating income and in the residual value of our assets.

Here is the implied value of the Woodlands (~50% of current market cap):
Capture574 550x420 Howard Hughes Markets Growing


Vegas was the poster child for excess in the real estate market and go hammered. However, $HHC inherited these properties when it was spun off from General Growth Properties Inc (NYSE:GGP)  post Chapter 11 in late 2011. So, for our purposes, that is where the story begins.

Here are the land sales trends:

Capture575 556x420 Howard Hughes Markets Growing

Not sure if many people have notice but the Vegas real estate market has now seen prices rise for 5 straight months.

Given that virtually no new homes were built in Vegas from ’09-’11, the demand for them has outstripped supply. I would expect continued increasing profitability from Summerlin

These three MPC are worth the current market cap of the company. For that we also get MPC’s in Columbia MD, malls in NYC, Alexandria VA, Houston, and future developments in a dozen other locations

Howard Hughes Investor Presentation (click to open pdf)


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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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