1 unique real estate fund with huge long-term potential

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It’s hard to describe what Howard Hughes (NYSE: HHC) in two offers, as it is one of the most unique and long-term companies in the real estate market. But in this Fool Live video clip, written on June 14, Fool.com contributor Matt Frankel, CFP, along with colleague Toby Bordelon, explain why this exciting business is worth adding to your watchlist.

Matt Frankel: My last one is called Howard Hughes Corporation, ticker HHC. I don’t know if any of you played video games, Simcity… Howard Hughes is the real version of this. They are unlike any other real estate company, they are not REITs. The market really doesn’t know how to value them properly. They are like super-long-term developers. What they do is start these planned communities. Imagine 10,000 acres, 20,000 acres. In fact, these are cities. Woodland in Texas is their leading planned community. Summerlin is right outside Las Vegas, Nevada, which many people consider to be their city. This is actually a community created by the Howard Hughes Corporation. They have central districts, golf courses, entertainment venues, big shopping malls. How it works, Howard Hughes founds one of these planned communities. They will sell some of the land to a developer who will build houses, which will create demand for commercial assets. Howard Hughes could build, say, a shopping center, they would own it, take rent, collect money. The presence of these assets creates even more value for the adjacent residential land. They will sell more land to developers. There is now more population in the area. You need even more commercial and amenities, say an office building, for them to build in order to have an income generating asset. In some cases, this cycle can be repeated for 50 years. Truly value creation with a long tail. This is a truly unique model unlike most developers because they control the supply of land, as does the entire city. But controlling this land supply, especially in our hot housing market, is a tremendous asset.

Howard Hughes was really hit hard at the start of the pandemic just because of where his assets are. I mentioned that his flagship community is based in Houston. The oil market collapsed; Remember that at some point last year oil prices went negative, the oil market collapsed. Occidental Petroleum is one of the largest tenants of office space. Another large community planned by the master is Summerlin in Las Vegas. The Las Vegas economy has been hit hardest by the COVID pandemic in terms of unemployment. They have a huge investment in Lower Manhattan, and the New York seaport is a project planned by Howard Hughes. New York was probably America’s most closed city. This was the initial epicenter of the COVID pandemic. They have a Ward Village condominium in Hawaii. You couldn’t go to Hawaii last year. So it was a really hard blow. They ended up having to raise capital like a sale. Their chairman and one of their original investors, Bill Ackman, everyone knows Bill Ackman, ended up spending $ 500 million on stock at this heavily discounted price, which was a big win for him, but also helped the company get through tough times. Now Howard Hughes has a really good balance. The latest news is really encouraging. They announced they are accelerating the construction of 2 million square feet of commercial development, including tenements and an office tower that has just begun, and they recently received permission to build a new high-rise building in lower Manhattan. Anyone who has ever tried this can tell you that it takes a lot. They have a car park right next to the seaport area that people have been trying to develop for decades, and they just got the actual building permit there to build an apartment block there. This is the asset you can expect from Howard Hughes. But they really focus on creating long-term value, they don’t care about short-term profits. Because of this, the market really doesn’t know how to value them. As I said, control of the land supply is a great advantage for them. I am a major investor in Howard Hughes. I think they are going to do great things and they are really aggressively taking advantage of the current real estate market that I love.

Toby Bordelon: Matt, I’m curious now I’m actually putting this company on my watchlist because from what you said it might be interesting. One question. If you divide the market into residential and public, they have planned communities. They are in both parts, they have residential and commercial parts.

Frankel: Sure.

Bordelon: But if you split this market in half, will residential or commercial real estate be a more important factor in demand for them, and if, say, the office space market stagnates for several years, as there is some concern that this might be. Who knows what will happen to working from home? Do they care about it, or will they still be fine no matter what office space is used?

Frankel: Sure. Well, one of the great things about Howard Hughes is that they are not limited to one type of commercial real estate, as many real estate companies do. If the office market becomes weak, they may focus on multi-family communities. If not, they could focus more on retail development. If not, they could focus on the hotel property they own. They do not actually own residential assets other than multi-family communities such as rented apartments. For example, they do not build houses themselves. But they can really shift their focus to what’s in demand at the moment, so they are really accelerating the growth of multi-family homes right now, because the residential real estate market is so hot. It is on this that they are now focusing most of their efforts. Summerlin City Center was one of their biggest experiences. They built a baseball stadium and some upscale shops because there was demand at the time. They can actually move demand to where they see it. This is really interesting.

This article represents the opinion of an author who may disagree with the “official” recommendation position of Motley Fool’s premium consulting service. We are colorful! Bidding on an investment thesis – even our own – helps us all to be critical about investing and make decisions that help us become smarter, happier, and richer.



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