Texas And Hawaii Condo Pre-Sales Will Fuel Future Development

Key Takeaways

• Strong demand for new home construction and condo pre-sales is expected to boost revenue from land and condo sales significantly.
  
• Innovative financing acts to improve liquidity and reduce debt costs, supporting sustained earnings and growth prospects beyond current projections.
  
• Reliance on external financing amid tight credit markets and fluctuating revenue streams from condo sales and tenant dynamics present both short-term risks and long-term uncertainties.

Catalysts

Develops and operates master planned communities (MPCs) in the United States.

• Howard Hughes anticipates strong demand for new home construction in 2025 due to tight existing home inventory, high resale prices, and attractive incentives from builders. This is expected to drive higher revenue from residential land sales in their MPCs.
  
• With strong pre-sales in condo projects across Hawaii and Texas, the company projects significant future revenue from condos that are 87% presold, valued at over $2.6 billion to be recognized between 2025 and 2028.
  
• Strategic development and delivery of high-demand, high-value projects like Riva Row multifamily and Bridgeland's Village Green retail are expected to increase NOI, contributing positively to earnings growth.
  
• Improved liquidity from innovative financing strategies, such as accelerating MUD receivable collections and successful refinancing, is expected to reduce debt costs and increase net margins by lowering interest expenses.
  
• The potential for additional entitlements in Ward Village, approved by Hawaiian government amendments, is expected to increase NAV, supporting future condominium development projects, thus driving revenue and earnings growth beyond 2030.

Howard Hughes Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Howard Hughes Holdings's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.3% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $295.8 million (and earnings per share of $6.19) by about May 2028, up from $285.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from 11.8x today. This future PE is lower than the current PE for the US Real Estate industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.19%, as per the Simply Wall St company report.

Howard Hughes Holdings Future Earnings Per Share Growth

Risks

• The tight credit markets in 2024 and reliance on $860 million in financings, including significant condo construction loans, imply risks related to dependence on external financing, which could impact liquidity and net margins if interest rates rise or financing becomes less accessible.
  
• Potential short-term reduction in NOI due to ongoing tenant upgrades in Downtown Summerlin and tenant vacancies, particularly in Columbia, may affect overall earnings stability. Long-term improvement is anticipated, but short-term risks to net operating income remain.
  
• The company’s guidance for adjusted operating cash flow reflects a reduction from $535 million in 2024 to $350 million in 2025, largely due to the absence of expected condo profits, indicating fluctuations in revenue streams and dependency on condo sales for profitability.
  
• Continued viability of new condo projects in Hawaii hinges on external variables such as regulatory approvals and market demand in the luxury segment, which could affect future revenue and earnings.
  
• Anticipated challenges in retail due to nonrecurring prior year reserves and an ongoing shift in tenant mix may lead to temporarily weaker retail revenue performance, impacting overall NOI growth.

Valuation

• The analysts have a consensus price target of $90.667 for Howard Hughes Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $105.0, and the most bearish reporting a price target of just $82.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $295.8 million, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of $67.47, the analyst price target of $90.67 is 25.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.