Friday, November 22, 2024

Howard Hughes: Updated Thoughts After Investor Day

I wanted to bring Howard Hughes Holdings (HHH, fka HHC) ($4.1B market cap) back up front as they just had their investor day this past Monday where they laid out a $118/share NAV and its been 3.5 months since Pershing Square filed their 13D without much of an update.  I believe it is likely that Ackman takes it private at somewhere between $95-$105/share.

Below are management's NAV slides:


Note the use of the phrase "conservative sum of the parts" in the second bullet. I'm sure lawyers took a close look at this deck before it was published and the company will need to justify a discount to this number in a private sale transaction (which they can and will, not suggesting it'll go for $118).


The bulk of the NAV is in the land, which is a little squishy and unlikely to be valued properly by public market investors, it's not often that land banks trade at NAV.  However, as the below slide shows, most of their land value is located in Summerlin outside of Las Vegas, where land sales to homebuilders have been strong for some time and the MPC long reached critical mass.


The nascent MPC of Floreo in Arizona, where the land value is least stress tested, is only 7% of the MPC NAV.  Additionally, mortgage rates remain stubbornly high despite the Fed starting to ease short term interest rates, it doesn't seem like we'll get a quick snap back to where existing home inventory jumps back to normal levels in the near term.  Leaving the only game in town new inventory.

However, if you look under the hood (below), about 1/3rd of the MPC NAV is commercial acreage:

Howard Hughes has noticeably pulled back on development in last year or two due to near zero office demand and increased construction costs, but there's been minimal change to the asset value of their commercial land real estate, that doesn't quite add up.  Additionally, they've only just started their first office building in Bridgeland, commercial properties are years (decade?) off in Teravalis/Floreo, it's hard to square that math in my head even with healthy discount rates.

They also bumped up their Hawaii (and now also Woodlands) condo price per square foot up significantly as they've recently announced the last two buildings (located near the beach, would replace part of the land occupied by their sales center at the IBM building) as ultra luxury.  Just a few years ago, this price per square foot would seem unattainable, high rise development is a risky endeavor, keeping the discount rate constant while bumping up the price 60% doesn't immediately scream "conservative sum-of-the-parts" valuation to me.  But they've done extraordinarily well in Ward Village, breezed through several potential economic headwinds since development there started over 10 years ago.

For the operating assets, they do appear to be on the conservative side.

Their office assets are primarily located in growing desirable areas without some of the headaches of large gateway markets and their occupancy levels show that at 88%.  The lagger in their portfolio is Hughes Landing in the Woodlands, they're moving their headquarters once again, this time just inside the MPC from the Town Center to Hughes Landing in order to focus on it (there's also a luxury multi-family asset being built there) and free up the premium space they previously occupied in the OXY buildings.

So net-net, operating properties are probably a little undervalued, the commercial land and condos slightly overvalued given the timing of those cash flows and risks involved in development.  We know that Ackman can't pay $118/share, he's a fiduciary to his own investors who would be backing the deal, somewhere between $95-$105 seems right to me (no hard math, just a guess).  He owns 37.5% of the company, while there's likely a process ongoing to identify other bidders, its hard to imagine another bidder willing to pay more (otherwise they would have back in 2018-2019 when then HHC ran a similar strategic alternatives process, presumably without Ackman has a bidder since he didn't update his 13D at the time).

Ackman has an attachment to Howard Hughes (he's essentially the company's founder and has added to his ownership stake along the way, during Covid and through a 2022 tender offer more recently) that I think the market is underestimating, his Forbes cover is often mocked, but the byline to the 2015 article is about how he's going to turn Howard Hughes (not Pershing Square) into his version of Berkshire Hathaway.  He's been an outspoken supporter of President-Elect Donald Trump and Republicans in the 2024 election, with the red sweep he's likely confident in the economic climate going forward, possibly bulled up on animal spirits wanting to secure a big win.


In his fund's quarterly update call yesterday, he said, "..we don't think that Howard Hughes is going to develop a real franchise today as a public company."  He's really the only one who can change that with his ownership level and the structure of HHH, he'll take it private within 1-2 months and do well with it.

Disclosure: I own shares of HHH and some calls on HHH

14 comments:

  1. Something which is not clear to me, but I am not an expert of 13D requirements, is why Ackman has said that they might take HHH private. Should he not be in a better position to make an offer keeping his intentions a little hidden? Or can it be a way to support the share price of HHH and the NAV of Pershing Holdings? Thank you

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  2. I know I’m being unreasonable but Ackman and his conduct on X makes me really not want to do any business with him.

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    1. His behavior is a bit bizarre, but I also think that might be part of the opportunity that the market is discounting is ability to close this deal.

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    2. Plays into the perpetual discount too and the reason it needs to be privately owned (like most MPC companies).

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  3. It strikes me as a little strange that they came out with a NAV of $118. Honestly, I thought they'd suggest $100 & let bill come in at $90. I think it's a screaming buy below $80 & I'm kicking myself for not going for the jugular in the 60's. I think if it gets done & above $90 I'd be pretty pleased.

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  4. Hi MDC, any thoughts/updates on CKX? Think drift is tax selling or emblematic of deal doubts?

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    1. I don't know, I'm a little nervous as well, probably have too big of a position given the average daily volume in that thing, if a no-deal happens, could be a rush to the exits so I understand people getting nervous given the drawn out timeframe there.

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  5. HFRO exchange offer for preferred is pretty interesting. A new preferred will be issued but it is identical to a preferred currently outstanding. So I would assume it’ll trade at a similar price. Some pressure on the preferred after the announcement of the exchange offer so could be $1-2 higher.

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  6. Hi MDC have you looked about SPRB? It looks like a clean shell trading well below cash.

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    1. I did take a look, came up with about a $0.50-$0.55 liquidation value. The language around the strategic review is a bit weird, but I think it still points to a full white flag:

      The Company plans to evaluate a full range of strategic options in addressing diseases with serious unmet need for patients. In the interim, the CAHmelia-204 and CAHptain-205 clinical trials will be discontinued, and the Company will be winding down its investment in tildacerfont for the treatment of CAH.

      I do like that Radoff is the largest shareholder, but the absolute value of the cash pile is a bit low, limits the options a bit, but still could be attractive.

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    2. I thought the verbiage sounded like management wants to continue on with the polycystic ovary syndrome PCOS and major depressive disorder MDD (which a partner is paying for) studies. Some venture term loan from SVB still outstanding while they've had a solid cash balance isn't a great signal.
      Any views out there on BIOA? The trial failures happening most recently seem like they're triggering extra harsh sell-offs, probably some extra tax selling pressure.

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  7. I like bioa a lot - it's trading at about half cash and has a lot of absolute cash. They do have some preclinical assets they may try to continue on with. Would be nice to see them announce a big RIF. I think SPRB is decent/worth a nibble too.

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    1. Just looked at this one, pretty remarkable that they blew up so shortly after this late Q3 IPO. It does look interesting, but they haven't declared a strategic alternatives process, no RIF announcement yet as you suggest, still mention announcing a plan for azelaprag in Q1 and advancing their development pipeline. I wonder if its too soon after the IPO to fully raise the white flag if you're the management team?

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    2. They just inked a new collaboration research deal with Novartis-

      Under the terms of the agreement, BioAge will receive upfront payments and research funding of up to $20 million, plus up to $530 million in future long-term research, development, and commercial milestones. Novartis and BioAge each have the right to advance novel targets discovered under the collaboration and are each eligible to receive reciprocal success milestones and tiered royalties.

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