The Howard Hughes Corporation (NYSE:HHC)
During the quarter, HHC adopted a new revenue recognition standard that significantly reduced GAAP revenue and earnings for the quarter, but had no impact on the company’s intrinsic value or cash flows. Up until this quarter, HHC recognized revenue for its condominium projects using percentage of completion accounting where units under contract to be sold were recognized into revenue as the corresponding condominium tower was constructed. The new accounting requirement better matches cash flows as condo sales are recognized only when unit sales are completed and title is transferred to the buyer. We believe some analysts and investors were confused by the change as HHC’s stock declined despite strong demonstrated value creation during the quarter. During the quarter, the company opportunistically acquired about 1% of its shares outstanding for $120.33 per share as each of HHC’s core master planned communities (MPCs) showed continued growth and business progress as we describe in detail below.
Ninety-five percent of the 1,381 available condo units in HHC’s Hawaii Ward Village’s four existing towers under construction are now under contract or have been sold. HHC began pre-sales of its new 751 unit condo tower offering (A’ali’i) in January. In four months, the tower is already 39% pre-sold, highlighting the continued demand for high quality, differentiated, Ward Village for-sale product. With only 25% of its entitlements utilized, Ward Village offers substantial continued value creation for HHC over the next decade. The company’s outright ownership of its land allows it to carefully control the pace of deliveries, enabling HHC to meet market demand while substantially reducing the risk of oversupply.
In Summerlin, Las Vegas, continued strong land sales and increasing home prices generated continued strong cash flows. HHC began construction of the ballpark for its wholly owned Las Vegas 51s Triple A baseball team, which is expected to cost approximately $115 million and is estimated to produce approximately $7 million of cash flow. This is an attractive expected return from an amenity principally designed to increase the value of Downtown Summerlin and the surrounding property owned by HHC.
At the South Street Seaport, HHC finalized new leases (ESPN, Malibu Farms) and new sponsorship agreements (Lincoln Motor, Heineken). The Seaport is not just a real estate asset that will generate rental income, but an operating business that will have sustained sponsorship and business income in addition to rental income. Live Nation recently announced a summer 2018 rooftop concert series at the Seaport which will further enhance the visibility and attractiveness of the Seaport to the community, and increase demand for remaining space and more corporate sponsorships.
In Chicago, HHC began construction on a 53-story, 1.4 million sq. ft. Class A office development at 110 North Wacker. The total estimated cost of the project is $761 million with an estimated 7.9% unlevered yield on cost. HHC arranged third-party debt and preferred and common equity commitments, which reduce HHC’s cash investment to the project to just $49 million. HHC will retain a significant portion of the profit on the project with its share of stabilized cash flow estimated to be over $19 million. To date, we believe that few HHC shareholders have assigned significant value to this non-core asset.
In its Operating Asset segment, HHC increased its projected stabilized net operating income target from $255 million to $291 million as a result of the addition of three new developments to its pipeline. As a growing percentage of HHC enterprise value is represented by stabilized, cash-flow-generative real estate assets, it should become easier for investors to underwrite the value of its assets and HHC’s intrinsic value, which we believe is substantially greater than the current share price.
From Bill Ackman (Trades, Portfolio)'s first-quarter 2018 shareholder letter.
