1 Real Estate Stock You Can’t Afford to Ignore
Howard Hughes Corporation (NYSE: HHC) is a developer of master-planned communities and is different from any other real estate company on the stock market. His unique business model enables him to control the land supply in large communities, which gives him a great price power advantage that could lead to billions in value added in the long term.
In this Fool Live video clip recorded on March 25thMatt Frankel, CFP of Fool.com, gives investors an overview of Howard Hughes’ business model and why this is such an exciting opportunity.
Matt Frankel: This has been a long time favorite of mine. It wasn’t a great stock in the early days of the pandemic, but it has improved quite a bit since then. Brian and I talked about video games on our last show together. Roblox, I think. I’ll use a video game analogy. The Howard Hughes Corporation’s business model is essentially to be a real-life version of the SimCity game, if you’ve ever played that. You are the developer of so-called master-planned communities.
Here is the business model. A master-planned community developer like this one will start with a huge lot, say 10,000 acres. From there it will take part of that land, a small part, and sell it to home builders. Home builders will come in, develop neighborhoods, build houses, which will then increase the demand for commercial real estate. Howard Hughes will build a commercial property, such as a mall next to it, and keep it as an income generating good. The presence of these commercial assets then makes the surrounding land more valuable. You will be selling even more to home builders. The cycle just goes on and on and on. It can take decades.
With a more mature master plan community, the amenities just keep getting bigger and bigger, and these are essentially cities in their own right. One of their communities that has just won second place in a magazine’s “Best Cities To Live” competition is huge city districts. Their flagship community is called The Woodlands in Texas if anyone heard of it. It’s also a large industrial center, 28,500 acres. These are not the Master-planned communities that many people think of. These are huge, huge assets. 119,000 people live in this community. This is not just like a neighborhood. There are schools, there are golf courses, there are high-rise office buildings. There’s a concert venue, there’s a medical district with a hospital system.
This is a huge community, and the really unique part of this business model compared to other real estate developments is that they control all of the land, the tens of thousands of acres. You can control the supplies that are available for construction at any given time. Howard Hughes has a great track record of growing the value of his land faster than the market as a whole over time as they have better control of supply than any other developer. If I bought 100 acres of development space, nothing would stop another developer from buying 100 acres off and 100 acres here and 100 acres over there. With Howard Hughes, they could sell 100 acres and then stop selling land for the next year. It really is a great added value.
The company makes its money in two ways. Land sales of his parishes planned by the master. Many of them still have thousands and thousands of acres of empty land. They’re selling land to builders whose housing demand was surprisingly high in 2020 if someone followed the property market. This is surprising as two other areas are Las Vegas and Houston that are really impacted during the pandemic. The second and most important route for long-term investors is through the income from commercial assets that they have developed along with the homes being built.
The operating portfolio includes almost 8 million square meters of office space. You have 2.9 million square meters of retail space. A couple of hotel properties. There are over 4,500 apartment blocks on their lots that they own and on which they collect rent. There they get their income. As I said earlier, 2020 was an extremely robust year for the real estate market, not necessarily for Howard Hughes as a company, but they are taking advantage and accelerating the future commercial development of their properties to 2 million square feet.
You currently have a total of six planned master communities. I mentioned the woods. You have the Summerlin neighborhood in Las Vegas; Columbia, Maryland. Ward Village is located in Honolulu, Hawaii. Nice, really potential neighborhood. They also own the seaport district in New York, which is technically not yet a master plan community. But the ESPN studios are there. Big restaurant presence there. You are in the early stages of an attempt to develop a high-rise building in a vacant parking lot. Lots of potential. It’s an extremely long-term game.
They are not a real estate investment trust, they do not pay dividends. Her focus is on creating long-term value from these communities. Because of this, the market really doesn’t know how to rate it because there is no other company like this one. However, if you believe in having control over the price and supply of an asset, that is a competitive advantage. It’s a real estate company that you might want to check out.
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