An Inside Look: How Howard Hughes Came Up With Its $2B List Of Assets To Liquidate
Several months ago, Wall Street analysts called Howard Hughes Corp.’s stock value underrated and hit hard on the developer’s New York Seaport District, blaming the project for dragging down the company's stock value with heavy capital requirements.
Fast-forward to this week, and the Seaport District is perhaps unexpectedly one of six assets expected to remain inside Howard Hughes’ portfolio as the firm enters into a 12-month restructuring phase that includes plans to possibly liquidate non-core assets such as the Monarch City development project in Allen, Texas; 110 North Wacker in Chicago; Cottonwood Mall in Salt Lake City (which already sold last month); West Windsor in Central New Jersey; Elk Grove in Sacramento; Outlet Collection at Riverwalk in New Orleans; Bridges of Mint Hill in Charlotte; and 85 South St. in New York.
How did Howard Hughes come up with its list of core assets to keep, and its plan for what assets to possibly liquidate in a massive corporate realignment that has already prompted the replacement of CEO David Weinreb and a corporate headquarters move to Houston?
The company’s chief financial officer, David O’Reilly, took Bisnow into the weeds Tuesday to understand the true nature and intent of the restructuring.
And while much of what occurred this week was not necessarily what stock analysts predicted several months ago, he said it fell in line with Howard Hughes' overall strategic mission.
Bisnow: Does being placed on the non-core assets list (with the possibility of a sale) necessarily mean that a property like Monarch City in Allen, Texas, will be sold off, or is that just a possibility right now?
O’Reilly: Everything is a possibility until it actually closes, but Monarch City has been ... a non-core asset of Howard Hughes for a long time. Our core assets are five master-planned communities and the Seaport District. Those communities include the Ward Village (Hawaii), Summerlin (Nevada), The Woodlands (Houston area), Bridgeland (Houston area), Columbia (Maryland) and The Seaport District (New York).
Those are the six core assets of the company. Everything else has been a non-core asset that we’ve looked to monetize and create value in over time. We are now at the point where we are trying to focus the company’s energy into all of those core assets that I listed earlier.
Bisnow: Why the decision to sell the non-core assets and what makes them non-core assets?
O’Reilly: Generally speaking, we identified these non-core assets because they share a lot of the same characteristics. They are located outside of the master-planned communities … and they don’t have the same competitive advantages and network effect that we see in our small cities.
Many of them, like Monarch City, have a meaningful capital requirement to develop and take substantial time and attention. So as part of our plan to become lean, focused and decentralized, recycling capital out of those assets into our higher-returning opportunities has become front and center.
Bisnow: What’s going to happen to the non-core assets?
O’Reilly: It’s very specific to each of the assets. Some of the assets are land with entitlements, like Monarch City, and some are raw land without entitlements and they can be sold as such. Some are operating assets with long-term leases like the MD Anderson Campus in The Woodlands. It all depends on the asset itself in terms of what is being sold and what the execution looks like.
Bisnow: How will you invest in the master-planned communities that you have and consider core assets?
O’Reilly: The two main uses of the capital that will be generated from the non-core asset sales will be to reinvest in our own business either through share buybacks or through accelerating development in our [master-planned communities].
And the developments that we are doing in these MPCs are really turning raw commercial acreage where we have large land holdings in The Woodlands, Summerlin, Columbia and Ward Village and converting that raw commercial acreage into income-producing assets by developing office, multifamily, retail, hospitality or even in some instances self-storage.
Bisnow: In The Woodlands, how much room do you have left to develop other acreage?
O’Reilly: Within The Woodlands, we have identified near-term opportunities … [including] 1M SF of office, 500K SF of retail, 1,000 multifamily units and over 600 hotel rooms. We have decades of development opportunity within The Woodlands ... we still have several hundred acres to go.
Bisnow: Brookfield has been named as a potential buyer of Howard Hughes or its related assets in the past. Who are some of the potential buyers of your non-core assets?
O’Reilly: I would say we have a lot of interest in these non-core assets already as a result of the strategic alternative process and what has already materialized in the sale of Cottonwood Mall, which closed in September of this year.
[O’Reilly added that he cannot comment on or speculate about future or potential asset purchasers.]
Bisnow: The Seaport District ended up as a core asset and within HH’s portfolio going forward. Do you envision selling it at a later date?
O'Reilly: I would say as the Seaport District gets closer to achieving critical mass of offerings, Howard Hughes will consider partnering with third parties to reduce our equity commitment.
Bisnow: Many analysts thought Seaport District might be sold because it was considered a drag on the company’s value and costly to develop. So why is it not on the current potential sale list?
O'Reilly: Seaport District absolutely remains an important part of the Howard Hughes Corp. As you highlighted there have been reports, and it is clear there are challenges with an asset that is as complex as the Seaport.
With that said, I still believe there is a clear near-term road map to unlocking value, and we will continue to execute on that road map within the next couple of years.
There are many near-term achievable steps that will unlock that value like completing construction and opening and stabilizing the Jean-Georges Food Hall in the Tin Building, which will drive a tremendous amount of traffic to the Seaport District.
Bisnow: You are closing the corporate office in Dallas and moving it to Houston; is there a reason why The Woodlands was selected as the future corporate headquarters?
O'Reilly: Part of what is driving this is shifting from what has been a holding company model of having a Dallas headquarters, which was necessary when the company was started and was just 34 disparate assets, and we needed that central location to house our human resources, IT, accounting and risk management. Over time, our regional offices ... have grown and matured and as a result there has become a redundancy between Dallas and all of those regional offices, and it made sense to consolidate that Dallas headquarters into one of the regional offices.