Howard Hughes │ Back to earth before taking off again

Analyst Dan Hincks of Vancouver-based investment firm Odlum Brown maintains his “buy” recommendation for real estate development firm The Howard Hughes Corporation (HHC—NYSE). He also reiterates his 12-month target price of $180.

For those who are unfamiliar with the company, there are two obvious points to address. One is the name, the other the nature of the business.

In some ways, Howard Hughes Corp. is a bundle of contradictions. Yes, it really does trace its roots back to the legendary recluse.

Howard Hughes may have been best known for his enormous clout in the aircraft industry and his passion for Hollywood, but real estate also played a part in his empire.

This began in the 1950s, when Hughes acquired the Summerlin master planned community in Las Vegas, as the city was built in the desert.

Time passed–and so did Mr. Hughes. By 1996, the real estate assets were folded into The Rouse Co. which, in turn, was acquired by General Growth Properties Real Estate Investment Trust in 2004.

Many readers likely know that General Growth Properties was one of the largest mall operators in the U.S. And that it had to file for bankruptcy protection in 2009.

As part of General Growth’s restructuring, the development properties were spun off as Howard Hughes Corp. This spinoff now develops and manages residential, commercial and mixed-use real estate in 18 states.

That brings us back to the second point noted above: the nature of the business. In investment terms, publicly-listed real estate operations tend to fall under two categories: income-oriented and growth-oriented.

Real Estate Investment Trusts (or REITs) such as General Growth Properties are income-oriented, returning about 90 per cent of their net income to unit holders. It’s worth noting, too, that before spinning off Howard Hughes Corp., General Growth was a large mall operator with a small development arm, which tended to be overlooked.

As a standalone operation, Howard Hughes Corp. can focus fully on its business–developing and managing its properties.

At this point, the key word in that description is “developing”. As Mr. Hincks says, Howard Hughes Corp. “is progressing from an asset-based company to a cash flow company as it develops its land into the most productive use.”

The assets are there, but the cash flow is just starting to pick up steam. In investment terms, this makes Howard Hughes Corp. growth-oriented rather than income-focused.

The stock pays no dividend, but share prices have more than tripled in the past three years.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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