Laying the Financial Foundation for New Cities

With a combination of financial analysis and improving investor relations, The Howard Hughes Corporation’s CFO David O’Reilly plays a critical role in the planning and funding of communities across the country

A new downtown has emerged in the city of Summerlin, Nevada, soon to include a premier ballpark for Minor League Baseball’s Las Vegas 51s that will be a capstone of the booming retail and entertainment district. It’s the creation of real estate developer The Howard Hughes Corporation, a publicly traded company with a unique business strategy.

David O'Reilly The Howard Hughes Corporation
David O’Reilly, The Howard Hughes Corporation

Howard Hughes has a large, geographically diverse portfolio that focuses on three distinct business segments—master planned communities, strategic developments, and operating assets—and affords competitive advantages. With the country’s preeminent portfolio of master planned communities, Howard Hughes invests in residential and commercial properties, retaining ownership, and operating multifamily and commercial buildings.

The company also sells land to homebuilders for single-family residences and constructs multifamily and commercial buildings such as retail, office, and hotels within the same developments. “No other public company in the nation constructs whole communities on this type of scale,” explains David O’Reilly, Howard Hughes’ CFO. “We are developing, in essence, small cities—communities with thousands of residents that are essentially their own ecosystems.”

O’Reilly plays a key role in the development of places such as Summerlin, obtaining sound financing deals, spearheading investor relations, and driving critical financial analysis of investment opportunities—all of which are vital to the developer’s success.

When it comes to something such as the Las Vegas 51s ballpark, success can be defined both quantitatively and qualitatively, O’Reilly says. The cost to build the venue, about $115 million, is relatively easy to price out. Estimating annual income in this case—$7.2 million from operations, including ticket sales—takes more nuanced estimations, but can be calculated with reasonable certainty.

While the impact on quality of life for the community is more difficult to quantify, Howard Hughes is committed to investing in such forward-thinking community amenities, with the new Las Vegas ballpark reflecting the burgeoning national trend of professional sports facilities serving as catalysts for accelerated economic growth and cultural development.

Increasingly, O’Reilly says, people are looking for extras when they choose a place to live. “When you build landmark destinations like entertainment venues, people can have great experiences without traveling,” O’Reilly says. That makes the community more attractive, thereby boosting demand and property values. By how much, though, is nearly impossible to determine. That’s where O’Reilly’s expertise comes in.

O’Reilly is one of the company’s top decision-makers, along with the CEO, president, and other corporate officers. Together, they are responsible for choosing how and where to invest capital in new ventures. The company has regional leaders who pitch ideas for new opportunities to O’Reilly and other top executives, and it’s up to them to evaluate the proposals.

“Our business plan revolves around selling land to homebuilders and using that capital to fund commercial amenities—office, hotel, and retail,” O’Reilly explains. “This makes land more valuable, which creates a virtuous cycle of value creation.”

The current booming economy also makes for a target-rich environment for investing. “We have more opportunities than we have capital for,” he says. “My job, along with others in upper management, is to decide how to allocate capital where we are going to have the highest risk-adjusted return.”

Since he joined The Howard Hughes Corporation in 2016, O’Reilly has also focused on garnering better deals in capital markets to reduce the cost of borrowing. In July 2018, his efforts paid off with a one-notch upgrade on the company’s credit rating from Standard and Poor’s, as well as a positive outlook for another upgrade. That reward mainly came from reaching out to the credit rating bureau to provide increased transparency and communication about the company’s business model, goals, and results. Though the upgrade may only yield a modest benefit during this strong economic period, it could pay off handsomely in the future.

“There are points in the business cycle, such as now, where the incremental cost of capital for a double-B company versus a triple-B company, for example, may only be five basis points,” O’Reilly says. “But in a credit market like that of February 2009—a much more challenging market—the difference between a double-B company and triple-B can be 250 or 350 basis points. As a CFO or risk manager, you need to be planning for those harder times.”

Boosting credit ratings and educating investors also helps to make the company more flexible with regard to its capital strategy. “It gives us better access to different types of capital that could be cheaper,” O’Reilly says.

When O’Reilly first joined the company, Howard Hughes’ leadership team charged him with crafting a more robust investor relations program. With a unique business strategy, that effort is a tougher challenge than it would be at a typical public company.

“We’re a company without a true public peer,” O’Reilly says. “This makes us unique in the investment community and therefore harder for folks to readily understand because we’re not one of several. We’re one of one.”

On the investor relations front, O’Reilly has two chief areas of focus. He’s implemented a more aggressive outreach strategy—including quarterly earnings calls, conferences with investors, nondeal roadshows, and simplified but expanded financial disclosures—to allow for more transparent communication so that investors can better understand the story of Howard Hughes.

Experience in the investment industry, including an eight-year stint at Lehman Brothers, has also aided in those efforts. O’Reilly began his career in civil engineering, working for an engineering firm that specialized in revamping vacant buildings in Boston. “I learned how to creatively problem-solve, and that has served me well,” he says. Later, O’Reilly took a management role overseeing construction and operations. As he became more involved with financial aspects of this work, he developed an interest in the finance field and earned an MBA at Columbia University.

Next to selecting the right areas to stake out a new planned community and designing it, how to fund development is a close second in importance to Howard Hughes’ success because even a well-planned investment can be derailed by the wrong financing strategy. Part of O’Reilly’s job is to anticipate what could go wrong and work to reduce risk, which he refers to as “constructive paranoia.”

Today, though, Howard Hughes has a thriving business with a successful formula. O’Reilly will continue to work tirelessly to get the word out about that and to make the right investments so that residents have the amenities they want within the company’s mini-cities. It’s all aimed at keeping that virtuous cycle in motion.

Photo: Jane Kratochvil