Howard Hughes: Downtown Summerlin Opening [ANALYSIS]

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Downtown Summerlin Opening and More on Howard Hughes by Todd Sullivan, ValuePlays

Howard Hughes Corp (NYSE:HHC) got a $210 price target today ($151 currently)……. I’ll say what I’ve said every day since the first $70 target a couple years ago……. “still too low”

They will open “Downtown Summerlin” on Oct 9th. To get a feel for why this is so important, one need to truly get the scope of this project and what it means for the largest private landowner in Vegas, Howard Hughes Corp (NYSE:HHC) (the Fed gov’t is the largest landowner).

Downtown Summerlin is a 106 acre project covering 1.6m sqft of retail and living space (I am of the opinion this rises substantially over the next few years). To get some perspective I’ve done an admittedly rough outline of the area:

Summerlin itself is massive and Howard Hughes Corp (NYSE:HHC) still is permitted to add 40k homes to the area.

Downtown summerlin will lie in the heart of that area and be the only shopping/dining destination of any significance in that entire section of Vegas.  Currently resident must travel to downtown Vegas for those activities and independent studies estimate over $1B in annual retail sales come from Summerlin to other areas of Vegas. With the Shops in Downtown Summerlin opening,  much of that will be recaptured…

The Shops will keep residents in Summerlin were as now they leave it for these items. Retaining them there will raise the economic profile of the entire area and increase the value of Howard Hughes Corp (NYSE:HHC) ‘s remaining land.

To get a sense of what Howard Hughes Corp (NYSE:HHC) has been doing, follow below. They are a very land rich company that has holding in some of the most sought after locations in the US currently (Vegas, Hawaii, Houston, NYC). What they done to expedite the construction of revenue producing projects in trade that land for a 50% interest in various JV’s.  What you are seeing is a land company using that land and minimal cash outlays to construct revenue producing assets. When scale is reached and the income from those assets no longer fits well in the current C Corp structure Howard Hughes Corp is (currently NOI’s shield income), then the obvious option is to spin off a very unlevered REIT to shareholders or convert the entire company to a REIT (this may be a bit more complicated given the substantial land ownership).

Projects (this is just a small sampling):

Millennium Woodlands Phase II, LLC

On May 14, 2012, we entered into a joint venture, Millennium Woodlands Phase II, LLC (“Millennium Phase II”), with The Dinerstein Companies, the same joint venture partner in the Millennium Waterway Apartments I project, for the construction of a new 314-unit Class A multi-family complex in The Woodlands Town Center. Our partner is the managing member of Millennium Phase II. As the managing member, our partner controls, directs, manages and administers the affairs of Millennium Phase II. On July 5, 2012, Millennium Phase II was capitalized by our contribution of 4.8 acres of land valued at $15.5 million to the joint venture, our partner’s contribution of $3.0 million in cash and a construction loan in the amount of $37.7 million which is guaranteed by our partner. The development of Millennium Phase II further expands our multi-family portfolio in The Woodlands Town Center.

Parcel C

On October 4, 2013, we entered into a joint venture agreement with a local developer, Kettler, Inc. (“Kettler”), to construct a 437-unit, Class A apartment building with 31,000 square feet of ground floor retail on Parcel C in downtown Columbia, Maryland. We contributed approximately five acres of land having an approximate book value of $4.0 million to the joint venture. Our land was valued at $23.4 million or $53,500 per constructed unit. When the venture closes on the construction loan and upon completion of certain other conditions, including obtaining completed site development and construction plans and an approved project budget, our partner will be required to contribute cash to the venture.

Summerlin Apartments, LLC

On January 24, 2014, we entered into a joint venture with a national multi-family real estate developer, The Calida Group (“Calida”), to construct, own and operate a 124-unit gated luxury apartment development. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. This project represents the first residential development in Summerlin’s 400-acre downtown and is located within walking distance of downtown Summerlin. We will contribute a 5.5-acre parcel of land with an agreed value of $3.2 million in exchange for a 50% interest in the venture when construction financing closes. Our partner will contribute cash for their 50% interest, act as the development manager, fund all pre-development activities, obtain construction financing and provide any guarantees required by the lender. Upon a sale of the property, we are entitled to 100% of the proceeds in excess of an amount determined by applying a 7.0% capitalization rate to NOI. The venture is expected to begin construction in the fall of 2014 with a projected second quarter 2015 opening for the first phase and the final phase being opened by the end of 2015.

The Metropolitan Downtown Columbia Project

On October 27, 2011, we entered into a joint venture, Parcel D Development, LLC (“Parcel D”), with Kettler, Inc. (“Kettler”) to construct a Class A apartment building with ground floor retail space in downtown Columbia, Maryland. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. On July 11, 2013, the joint venture closed a $64.1 million construction loan which is non-recourse to us. The loan bears interest at one-month LIBOR plus 2.4% and matures in July 2020. At loan closing, our land contribution was valued at $53,500 per unit, or $20.3 million, and Kettler contributed $13.3 million in cash, of which $7.0 million was distributed to us. Both we and Kettler made additional contributions of $3.1 million to the joint venture in accordance with the loan agreement, thus increasing our total capital account to $16.4 million. This transaction was accounted for as a partial sale of the land for which we recognized a net profit of $0.7 million.

Other projects, such as the South Street Seaport, Downtown Summerlin and Hawaii they are self funding.

Below is a holdings chart from the first 10k in April 2011:

Howard Hughes

Now from the most recent 10Q:

Howard Hughes

The company is building just under 500k sqft of office space (lease already signed) for Exxon Mobil Corporation (NYSE:XOM) who is moving over 10k employees to its new campus just outside of Howard Hughes Corp (NYSE:HHC)’s MPC the Woodlands.  This is currently the largest construction project underway in the US  located on a 385-acre site and is expected to include approximately 20 buildings, representing three million square feet of space. The demand for residences from those folks incentivized the transaction in the last paragraph below.  Watch:

Where are the new millionaires being created? Dallas and Houston Texas:

Texas is red hot due to the energy complex. Howard Hughes Corp (NYSE:HHC) has MPC’s in Houston in the Woodlands and Bridgeland.

None of this above addresses the 60 acres of waterfront land in Hawaii they own (in yellow) and will put over 1M sqft  of retail and 4,000 residences on.

This also ignores the South Street Seaport in NYC that when finished will be the only waterfront large scale shopping/entertainment location in the city (that might be worth a little bit??).

Howard Hughes

To get some scope, if we assume $200sqft for rent (very low) and a 5% cap rate (fair for waterfront NYC property) the Seaport today is worth ~$2B (this excludes the value of the proposed residence tower as it is not approved).  A more likely rent per sqft is the $400-$500 area given the below rents, its location and the draw it will be for tourists once done:

When you apply a $400-$500 sqft rent, things really start getting interesting when you consider the entire company is currently valued at only $6B.

The majority of the current project come online between now and the end of 2015 (the Seaport is early 2016) so results next year from operating properties will take a material jump. Also note, nothing from the above you’ve read includes anything announced between now and the end of 2015, the Columbia properties, the Bridegland (TX) MPC (20k more homes) or the land in Princeton waiting to be developed.

One final thought… in August the company bought ~2000 acres just north of the Woodlands for $63M.  They intend to develop it for additional housing to meet the demand in the area (4600 lots starting in 2016). If they can get $500k apiece for finished lots, (currently getting $683k in the Woodlands), that $63M purchase will yield ~$1B in revenue (this excludes the revenue from the 161 acres that will be commercial use).

There is just so, so much going on here…..

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