S&P Global Downgrades Howard Hughes’ Credit Rating

Howard Hughes’ credit rating was downgraded by S&P Global Ratings, which cited weaker performance — including its unprofitable Seaport development — and rising debt at the Texas-based real estate firm.

S&P said it expects Howard Hughes’s credit metrics to deteriorate in the next year, given weaker operating performance and higher debt levels to fund development. It lowered the firm’s credit rating to B from B+.

Both of those are below investment grade and in a category S&P calls “speculative,” which is common for real estate developers.

The credit downgrade means the company, headed by CEO David O’Reilly, will have to pay higher interest on its debt to compensate investors for the increased risk that Howard Hughes will not pay them back.

However, S&P Global said Howard Hughes’ outlook remains stable and that it sees a potential recovery in the developer’s master-planned communities segment and improved cash flow from higher condo deliveries in 2024.

The ratings firm said the office sector’s challenges and potential liquidity concerns could affect the company’s credit metrics.

Economic factors caused by the Federal Reserve’s interest rate hikes have been a drag on Howard Hughes’ earnings and an inflator of its debt. The firm’s headwinds include soft housing demand and higher mortgage rates.

But S&P Global said Howard Hughes’s stability in the operating assets segment mitigates volatility in others, and a tight supply of homes for sale means less competition for those built by the developer.

The company enjoyed 5.2 percent growth in net operating income in the second quarter, driven by rent increases in its multifamily assets and lease termination fees in its office segment. Howard Hughes anticipates 1 percent to 4 percent net operating income growth in fiscal 2023, with its stabilized asset portfolio providing consistent cash flow.

However, remote work will continue to plague the office sector, which could affect occupancy, rent growth, and margins at Howard Hughes’ commercial buildings. S&P Global said it is highly unlikely to raise Howard Hughes’ credit rating in the next year.

The company did not respond to a request for comment.