Low Risk Real Estate Recovery Play

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The success of an obscure developer called the Howard Hughes Corporation (NYSE: HHC) may indicate that housing and commercial real estate are actually recovering. Even though it is named for the dashing and mentally ill aviation pioneer and movie producer, Howard Hughes, the Howard Hughes Corp has nothing to do with aviation. Instead, the Howard Hughes Corp develops business parks and other real estate projects in Las Vegas and elsewhere.

The Howard Hughes Corp has been on a roll; in the last year its share value rose from $47.02 in January 2012 to $78.84 on January 9, 2013. At the same time its revenue rose from $241 million in September 2011 to $353.62 million in September 2012.

Master planning pays off

The interesting thing is that the revenue increases seem to be based on master planned residential communities and shopping centers—two sectors that haven’t done very well in recent years. Another interesting thing about Howard Hughes Corp is its exposure to one of the nations’ most depressed housing and real estate markets—Las Vegas.

Its biggest projects are master planned communities that combine housing and retail. These projects are gigantic in scope; Summerlin, on the outskirts of Las Vegas, consists of 22,500 acres and is currently home to 100,000 people. The Woodlands, north of Houston, is even larger; it contains 28,000 acres and 97,000 residents. Hughes’ Columbia Downtown community in Columbia, Maryland, will contain 5,500 residential units, one million square feet retail space, five million square feet of commercial space, and 640 hotel rooms.

The Howard Hughes Corporation raises two interesting questions for investors. The first is: Are housing and real estate really recovering? The second is: Are giant master planned communities the best way to tap into a recovering housing market?

Economists interviewed by Bloomberg think housing is recovering. Those analysts predict that new home starts might increase by 24% in 2013, and new home sales might increase by 22%. That is good news for the Howard Hughes Corporation, which has room for 120,000 additional homes at Summerlin alone.

Several big name investors, including Warren Buffett and Mark Kiesel of Pacific Investment Management Company Inc. (PIMCO), have been betting on an extended housing recovery. Howard Hughes Corp is in a good position to take advantage of such a recovery because its primary asset is in land in good locations for residential development. The company’s main role is to create a site for other developers to put in houses, office, and retail.

Hughes has the assets to profit from housing recovery

Instead of taking the risk of building the homes itself, Hughes provides lots to other developers and homebuilders. That means it can profit from a housing revival without taking the risk of actually building houses. It simply provides the land, which it already owns. Builders currently active at Summerlin include Toll Brothers Inc. (NYSE: TOL), KB Home (NYSE: KBH), and Ryland Group Inc.  Out of these builders, Toll Brothers is experiencing the largest increase in sales.  Their revenue is up 47% over last year and their net income is up over 2600%!  As a result, the Toll Brothers' stock, like many other construction company stocks, has jumped 52% in the last 52 weeks.  KB Home stock has jumped 79% in the last year despite negative earnings growth.  Revenue is growing for KB Home due to projects on Howard Hughes' land and projects in the south west states.

Hughes is betting on Hawaii as well. The company is planning to turn 60 acres of Honolulu into another mixed-use development called Ward Village. Ward Village will be a mixed-use redevelopment of an existing urban neighborhood, similar to Downtown Columbia. Like the other projects, it will include residential and retail space.

Hughes is also diversified because it also owns major shopping centers and office buildings in its projects. A prime example of Hughes’ office projects is 3 Waterway Square, an 11-story building in the Woodlands. Hughes’ website claims that over 70% of the building has already been leased even though it won’t be ready until 2014.

One of the few standalone projects Hughes is taking a risk on is the Redlands Promenade, a new shopping center located in Redlands, California, a suburb of San Bernardino. Details of the 160,000-square foot development are not available.

The bottom line

The Howard Hughes Corp is well positioned to take advantage of an economic recovery and a housing recovery. It has a large inventory of land for new projects, and it is highly diversified. Hughes is geographically diversified as well; it has projects in California, Hawaii, Las Vegas, Texas, and even Lower Manhattan, so it can survive a downturn in one area. Unlike most developers, Hughes isn’t focused in one area of real estate, which puts it in a position to take advantage of a large-scale recovery.

If you’re bullish on housing and the U.S. economy in general, take a look at the Howard Hughes Corp. It is a play in the housing and real estate sector through a low-risk company that has been flying under the radar. 

mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of Howard Hughes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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