Howard Hughes: Pershing Square's Offer

I'm a couple days late on this post and turned into a bit of a "reply guy" on Twitter/X (you can follow me @ClarkinM) spewing some incoherent thoughts on the proposed Pershing Square offer, humor me a bit as I try to more intelligently spell out the current situation and where it might go from here.

On Monday, Bill Ackman's Pershing Square issued a letter to the Howard Hughes board outlining a proposed transaction that would see Pershing Square use the $1B they raised from outside investors at the management company level to buy 11,764,706 shares of HHH for $85/share in a tender offer.  Then simultaneously, HHH would issue an additional $500MM in debt to repurchase 5,882,353 more shares at $85/share.  As part of this transaction, Pershing Square would formally take over management of Howard Hughes Holdings and turn the company into a diversified investment HoldCo with Howard Hughes Corporation (the real estate business) as one of HHH's investments.  Pershing Square would charge a 1.5% base management fee for their services with no incentive fee.

To get it out of the way, Bill Ackman will probably get his way, maybe there's a bump, but this transaction has been teed up for a while (even the 2023 HoldCo corporate restructure in hindsight points to this being the end game).  I don't expect a third-party white knight to come in save minority shareholders, the best HHH shareholders can probably expect is a small bump in the tender offer and/or a discount in the external management fee.  Bill Ackman's fiduciary duties are to his management company investors and no longer HHH since he resigned from the board, he wants to keep this company public (rather than raise a fund privately to buy it) for a permanent capital vehicle that would justify the $10.5B valuation he raised capital at last year.  It's clear now, there's no scenario where he takes HHH fully private.

But here are my list of problems with this transaction:

1. Bill Ackman states, "When we filed our 13D on August 6th of last year, HHH's closing share price the previous day was $61.46 per share.  Including the market value of the Seaport Entertainment spinoff, this $16.62 increase represents a 35% total return over the last 14 years, or a 2.2% compounded annual return, and the Company has paid no dividend since its inception.  The Company's stock price performance is obviously extremely disappointing.."  Make no mistake about this, Bill Ackman founded Howard Hughes, it was his design in the GGP reorganization, he was the Chairman of the Board from the 2010 spinoff until April 2024 when he stepped down (presumably to setup this deal), not to mention he sat down for his infamous Forbes Baby Buffett article in 2015 touting HHH (HHC at the time) as the next Berkshire.  It's very disingenuous to now throw stones at the company with the solution being he needs to be brought back and paid handsomely to turn this around.  Why didn't he implement this strategy before?  The answer comes back to his management company is really the "next Berkshire" for him and not HHH.
2. This proposed transaction goes against HHH's two major strategic shifts in the last 4-5 years.  After the failed strategic alternatives process in 2019, Ackman got on a conference call and pledged to cut costs and refocus the company (even highlighted how the cost cuts should be capitalized and improve NAV).  This transaction clearly goes against this strategy as it will saddle the company with a significant G&A (~$60MM/annual) burden due to the external management fee.  The second strategic shift was the simplification of the business, becoming more of a pure play master planned community developer.  They've jettisoned almost all of their assets outside of their MPCs, sold the more cyclical and management heavy hotels within the MPCs, spun off Seaport Entertainment Group (SEG), all in an effort to simplify the business (and all those decisions were made while Ackman was the Chairman).  Ackman then files his original 13D/A a week after the spinoff, not giving HHH a chance to re-rate following the hiving off of the cash sucking Seaport business.  Now his plan is to allocate the free cash flow from HHC and invest in private businesses (hasn't he always been a public market investor?), going back on the Seaport spin rationale, just doesn't make sense and can't have it both ways.
3. The tender price is simply too low, management put out a "conservative" NAV of $118/share, in order to compensate remaining shareholders (any tender would likely be pro-rated) for the additional burden, the price needs to be higher than $85/share.  We've seen in the past, REITs that went to an external management structure, the asset manager directly compensates shareholders for the switch.  Here its indirect and insufficient.  Post transaction, the new externally managed HHH will trade at a significant discount to NAV.  Yes, the levered buyback will bump up NAV a bit since it will be done at a discount, but I would still anticipate an externally managed HHH to trade $70 or below in the current environment.  Could he bring in PIPE investors to backstop the tender?  Or some special dividend with a PIPE similar to biotech reverse mergers?  Something to show that outside investors at the HHH level are willing to go along with this transaction and not just investors in his management company.  When has an externally managed HoldCo actually worked?

The only other option for HHH would be to turn him down but given his ownership interest, he could bring in more friendly directors (presumably the board is already friendly) at the next annual meeting to get something done here.  Seems like the dye is cast, but doesn't mean its a feel good deal, feels a bit like Michael Dell and DVMT to me.  I'm still a little bitter about that one, guessing I will be about HHH for a while too.

Disclosure: I own shares of HHH

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

Howard Hughes: PSH Considering a Take-Private Offer

Just a brief news post, I'll use the comment section to update my thoughts as this situation develops.  Last night, 8/6, Pershing Square (37.5% owner) updated their 13D in Howard Hughes (HHH) ($3.2B market cap) disclosing the following change:

“The Reporting Persons are and intend to continue evaluating the possibility of various potential alternatives with respect to their investment in the Issuer, including a possible transaction in which the Reporting Persons and/or one or more of their affiliates (either alone or together with one or more potential co-investors) may acquire all or substantially all of the shares of Common Stock in the Issuer not owned by them and their affiliates and in connection therewith take the Issuer private (a “take-private”). Jefferies LLC began advising the Reporting Persons on August 6, 2024 in connection with this evaluation. The Reporting Persons may discuss their evaluation and the potential alternatives, including a potential take-private, with one or more prospective co-investors, which discussions are expected to be conducted on a confidential basis. In the event the Reporting Persons explore such a potential transaction, there can be no guarantee that an agreement regarding such potential transaction can be reached and/or consummated.

I find the timing rather odd so soon after the spinoff of Seaport Entertainment (SEG), the spinoff was designed to remove some of the complexity and cash burning assets from Howard Hughes, return it to a pure play master planned community developer story.  In theory, HHH then might re-rate closer to its NAV of $100+.  If the plan all along was really to dump Seaport Entertainment, come in to scoop up HHH on the cheap, why is Pershing Square backstopping the SEG rights offering?  Just strange to spend $30 million in cash expense to spin SEG, backstop SEG, and then take HHH private so soon after.  Should have just bought it before the spin and save the legal bills.

Possibly this is the result of Ackman pulling the IPO of his closed end fund after selling a stake in his GP raising expectations for growth, he could need an investment vehicle or non-securities assets to redomicile Pershing Square Holdings Ltd to the United States and avoid being under the 1940 Act.

As for the potential price or structure, I'm prepared to be disappointed, NAV is likely well over $100 per share, but is unlikely to be realized in a transaction.  As a reminder for those newer to the company, back in 2019, Howard Hughes did run a full strategic process that failed to produce a buyer willing to pay the asking price.  Have things changed much since?  Brookfield (who notoriously don't pay fair value) was involved in the GGP restructuring and was an HHC shareholder for a while, but otherwise, Pershing Square might be the only buyer so I'm not getting my hopes up for a large premium.  The language in the 13D suggests a cash offer to go-private, that's preferable in mind than some convoluted structure where Howard Hughes shareholders trade discounted HHH shares for discounted PSHZF in some share-for-share merger.

Disclosure: I own shares of HHH and SEG 

Seaport Entertainment: Initial Form 10 Thoughts, Spinoff, Rights Offering

The first public draft of the Seaport Form 10-12 came out on Friday, I took a quick read of it, here are some initial thoughts that I'll likely come back to as the spinoff approaches sometime in Q3.  Howard Hughes Holdings (HHH) is going to be spinning four main assets into the newly created Seaport Entertainment (SEG) that will focus on "intersection of entertainment and real estate":

1. The Seaport District in Lower Manhattan, which includes the South Street Seaport itself, some neighboring buildings and the 250 Water St development site (which HHH/SEG recently won a lawsuit that sets the stage for construction), all of which Howard Hughes has sunk over $1B into over the last decade and is still bleeding cash (-$55MM in 2023).  Thus far, the Seaport has been a disaster (HHH took a $672.5MM impairment on the Seaport last year) and waste of capital, the project was started a year or two after Super Storm Sandy destroyed much of the old structure in 2012 and was underwritten at a 4-6% return on cost.  The development had many delays and hasn't come close to the original profitability projections a decade or so later, as a long term HHH shareholder, I blame the Seaport for much of the underperformance over the last 5-7 years (alongside the Ackman covid capital raise).  Maybe focused management can turn this around?  There are a total of 11 physical buildings at the Seaport, as a whole it is about 2/3rd's leased at this point.
2. 25% interest in Jean-Georges Restaurants that was acquired for $45MM (potentially an Ackman vanity investment) with the stated strategy to partner with Jean-George in the future as an anchor tenant in new developments (Jean-Georges leases the entire Tin Building in a JV with SEG for a food hall concept).  This investment reminds me of MSGE/Sphere's investment in TAO Group where they argued TAO's nightclub expertise could be used at the Sphere and other entertainment venues, TAO was eventually divested.  The Jean-Georges investment feels very non-core and could be sold to raise capital for their two big development projects (250 Water St and Fashion Show Air Rights).
3. The Las Vegas Aviators (highest revenue grossing minor league team), the Oakland A's AAA affiliate, and the corresponding newish Las Vegas Ballpark located in Howard Hughes' Summerlin master planned community.  The A's are moving to the Las Vegas strip (where the old Tropicana was located) in a couple years, the current plan is to keep the Aviators in Summerlin, but TBD on how that impacts attendance/revenue.  HHH did pay $16.4MM for the remaining 50% of the Aviators they didn't own in 2017 and the ballpark cost approximately $125MM in 2019.
4. 80% interest in the air rights above the Fashion Show Mall on the Las Vegas strip, which is located on the north end of the strip near Treasure Island and the Wynn hotels.  Howard Hughes has brought in Anton Nikodemus as the CEO of Seaport, his previous stop was as the President/COO of MGM's City Center in Las Vegas and before that he led the development of MGM's National Harbor and Springfield, MA casinos.  I go annually to a conference in the City Center and have visited the National Harbor property, both are impressive gaming resorts that are well run.  The Fashion Show Mall and the other 20% of the air rights are owned/operated by Brookfield Properties (which acquired General Growth Properties (GGP), the original parent of Howard Hughes).  There's been a significant increase in supply on the north end of the Las Vegas strip in the past year with the opening of Resorts World and the Fontainebleau (both of which post-opening are relative ghost towns).  But with Nikodemus onboard, it clearly signals that they intend to redevelop the Fashion Show Mall in the medium-to-long term.

Each of these are a bit difficult to value and don't quite fit into a typical public real estate company (although HHH/HHC will still be a bit of an odd ball public stock following the spin, it helps on the margins).  My question prior to the Form 10-12 release was how this company would be capitalized given it loses money and likely will for the near future, plus the plan is clearly to sink money into their development assets, that question was answered with disclosure that Seaport intends to conduct a $175MM rights offering with Ackman's Pershing Square backing it up plus cash from HHC, giving SEG roughly ~$200MM in cash at closing:

Seaport Entertainment expects to conduct a $175 million Rights Offering of equity to our stockholders following the distribution. In connection with the Rights Offering, the Company is in serious discussions with Pershing Square Capital Management, L.P. (“Pershing Square”), which through investment funds advised by it is HHH’s largest shareholder, regarding a potential backstop agreement which would be entered into prior to the distribution. Pursuant to that agreement, if finalized, Pershing Square would agree to (i) exercise its pro rata subscription right with respect to the Rights Offering at a price of $100 per share of our common stock and (ii) purchase any shares not purchased upon the expiration of the Rights Offering at the Rights Offering price, up to $175 million in the aggregate. The backstop agreement could result in Pershing Square’s affiliated funds owning as much as       % of our common stock if no other stockholders participate in the Rights Offering. Any capital raised through the Rights Offering would further strengthen our balance sheet. With over $      million of liquidity, primarily consisting of (i) $23.4 million of cash contributed by HHH pursuant to the Separation Agreement, (ii) expected proceeds from the anticipated Rights Offering and (iii) amounts available under the Revolving Credit Agreement (as defined herein), we believe we will have ample capital to invest in and drive internal and external growth opportunities in the leisure, tourism, hospitality, gaming, food and beverage and live entertainment spaces.

Rights offerings can often be juicy special situations (is this a Greenblatt special, spin + rights offering?), they come around rarely, but often signal an opportunity because the company is offering all shareholders the opportunity re-up often at a discount.  

Ackman clearly wants more exposure to SEG, by backstopping the rights offering where it'll likely not be fully subscribed, he's increasing his exposure in more shareholder friendly way than he did with Howard Hughes during covid with a private placement that minority shareholders couldn't participate.  His interest in Seaport Entertainment is a bit puzzling to me, Ackman tends to like higher quality companies, something SEG is not.  New York real estate plays have always been challenging to me, especially ones that rely on development, 250 Water St will take several years to build (with original cost estimates of $850MM in 2021, likely higher now) and who knows what the apartment and office leasing environment will be at that point.  Add that with the underwritten low cap rates, the margin of safety in NY development seems extra slim.  It is also worth noting that Ackman has left the board of HHH, this is after he was famously on the cover of Forbes as Baby Buffett for his role in Howard Hughes.  I've seen some speculation that it clears the path for Ackman to make a bid for HHH, unlikely, but who knows.

The Seaport spin is going to be a challenge to value, can't really do a cap rate based SOTP.  HHH trades for 1.1x book value at this point (despite holding a lot of land/buildings at historical cost), HHH is the higher quality asset, guessing Seaport will trade at a discount to book.

We don't know the spin ratio yet, but at 80% of book, Seaport is roughly worth ~$6-7 per HHH share prior to the rights offering, or about 10% of the HHH market cap.  That likely means we see forced selling, could be an interesting one to keep on the watchlist.

Disclosure: I own shares of HHH (fka HHC)

What I've Been Buying, Coronavirus Edition

I hope everyone is staying safe and healthy, but if you're interested, here are some thoughts on a few current positions where I've added in recent weeks, some I've bought above where we're trading today, some below.  I probably started averaging down in some of these too soon, eaten some humble pie and have slowed my activity down significantly.  I assume we'll have more opportunities as it'll take awhile for the new economic reality to work its way through our system, credit agreements will need to be amended, etc.  There will be pot holes and bankruptcies, one change from recent years is we're likely to start to see bankruptcy reorgs that are the "good business, bad balance sheet" type that have been rare lately.  Things will likely get worse, so treat this more as a watchlist than a buylist.

Howard Hughes Corporation (HHC)
I'm a long time HHC bull, my pride is hurting here at the moment, 4 of 5 of HHC's primary markets have significant near term challenges: 1) NYC is front and center of the pandemic in the U.S., likely further pushing back (I've lost count how many times now) the stabilization date of the Seaport development; 2) Houston is dealing with yet another crash in oil prices just weeks after HHC made what they describe as the "largest acquisition in the company's history" by buying Occidental Petroleum's office buildings; 3) Nevada casinos are closed indefinitely, that will have its ripple effects through the Las Vegas service based economy and slowing the development of Summerlin; 4) Similarly but maybe less impacted, Honolulu will see significantly less tourism in 2020 than it did 2019, but more importantly a fall in financial markets doesn't lead to more wealthy people purchasing vacation beach condos.  Only Columbia, MD is mostly spared due to its connection to government services jobs.

The stock has bounced back slightly, but for a while there was trading below $40 which is where it was following the spin-off from GGP almost a decade ago, I was able to add a bit there, but still find the shares incredible cheap around $50.  In early 2019, I pegged the value of the land at ~$2.35B after subtracting out land level debt using a straight line NPV approach with a 10% discount rate, sure the near term sales might be low, but the nature of raw land is long term and Nevada and Texas remain attractive states for corporate relocations due to low/no taxes and friendly regulations.  HHC has $1B in corporate level debt, so just the land portfolio is worth ~$1.35B or about $35/share, obviously this is a somewhat silly back of the envelope valuation exercise that doesn't include overhead, etc.  But sort of thinking about what has happened since the spin-off a decade ago, HHC lays out the development activity in aggregate since then in their 10-K:

We have completed the development of over 5.2 million square feet of office and retail operating properties, 2,516 multi-family units and 909 hospitality keys since 2011. Excluding land which we own, we have invested approximately $2.0 billion in these developments, which is projected to generate a 9.5% yield on cost, or $192.7 million per year of NOI upon stabilization. At today’s market cap rates, this implies value creation to our shareholders in excess of $1.0 billion. Our investment of approximately $444.9 million of cash equity in our development projects since inception, which is computed as total costs excluding land less the related construction debt, is projected to generate a 25.5% return on cash equity assuming a 5.0% cost of debt, which approximates our weighted-average cost. These investments and returns exclude condominium development as well as projects under construction such as the Seaport District. We exclude condominium developments since they do not result in recurring NOI, and we exclude projects under development due to the wider range of NOI they are expected to generate upon stabilization. In Ward Village, we have either opened or have under construction 2,697 condominium units, which have approximately 89.8% units sold as of December 31, 2019 at a targeted profit margin, excluding land costs, of 23.6% or $747.3 million.

If we go back to 2015 and early 2016 when oil collapsed from around $100, there was a lot of anxiety about Houston office space and HHC dropped from ~$150 to ~$80 in a few months, but in the aftermath of the drop, HHC's Woodlands sub-market performed fairly well, their last speculatively built office property (Three Hughes Landing) still hasn't reached stabilization 4 years later, but the bottom didn't fall out either.  Not to directly compare the two time periods, this oil route seems worse for U.S. producers as it coincides with a demand shock due to coronavirus, but Houston is a major metropolitan market (it's not say, Midland TX or OKC) and the economy will evolve over time.  The Occidental office property buy certainly looks like unfortunate timing, but the bulk of the purchase is centered in the Woodlands giving them additional control over the sub-market, the Houston Energy Corridor former OXY campus was only ~10% of the purchase price and not a significant drag if they can't sell it in a year or three.  OXY's equity is certainly in question, the company signed a 13 year sale leaseback with HHC when the transaction happened, but even a reorged OXY will need office space, and HHC recently leased some empty space in the second office tower in the Woodlands to OXY's midstream company, WES.  HHC is taking a portion of the remaining space for themselves as they move their corporate headquarters to Houston, so in reality, there isn't a lot of current vacancy in HHC's Houston offie portfolio.

I'm less worried about Ward Village in Honolulu or Summerlin in Las Vegas, Summerlin is likely to have a terrible year, coronavirus feels temporary to me when you take a longer view, whereas domestic oil production might not be viable for many years.  The Seaport has always been a bit of a clown show, it was former management's pet project, there might be more willingness now to part with it for a reasonable offer that eliminates much of the risk/earnings volatility from HHC results.

Par Pacific Holdings (PARR)
Similarly, owning a refining business is tough here, if we just had the supply shock due to the OPEC+ breakup then refiners might be sitting pretty with cheap crude and strong gasoline demand, but with everyone staying in their homes and not commuting to work or traveling, gasoline and jet fuel demand have dropped almost as much as hotel occupancy.

Quick recap, Par Pacific is part of Sam Zell's empire, he doesn't technically control the company or sit on the board, but he owns a significant stake and the PARR management team is made up of former members of his family office - Equity Investments.  Over the last several years they've bulked up their operation to include three refineries, related logistics and a growing retail presence, focusing on niche/isolated markets.  Following a small tuck-in acquisition, they're the only refining presence in Hawaii and thus exposed to their tourism market via jet fuel sales.  They've got a turnaround scheduled for later this year in Hawaii which could be a blessing in disguise as it takes supply offline in that market just when there is a lack of demand.  But in a normalized year, Par Pacific should have a current run rate of approximately $225-250MM (after the next 12 months, PARR won't have a scheduled turnaround for several years), below is the breakdown of EBITDA between their business lines and sort of a reasonable, more rational market multiple for each.  It could take us a while to get there, but management on their last call (guessing there will be a lot of cringing across many management teams when they play back their comments on Q4 earnings calls) said that PARR is "today" a $3/share free cash flow business.  Obviously it won't be this year, but that's how the owners/managers of the business think of the earnings power.

It currently trades for $7-8/share, so that looks like a silly price and maybe it is because things are really different this time.  PARR also has ~$1.5B in NOLs that should shield it from ever paying cash taxes in the foreseeable future (not that it'll be an issue this year) and a stake in a natural gas E&P, Laramie Energy, but I mentally wrote off that investment a long time ago.  Given the natural gas price environment, Laramie has no active rigs, is reportedly cash flow positive and won't require additional investment from PARR to keep it a going concern, so we can sort of sidecar it.

PARR is a small cap and thus only has a relatively short term option chain with the latest expiration being in September.  Moving up market cap, Marathon Petroleum (MPC) is a similarly constructed downstream business with refining, midstream and retail operations that has January 2022 LEAPs available.  Marathon has been under pressure from activist investor Elliott Management to abandon their conglomerate structure and separate into three businesses: 1) retail (which operates the Speedway brand of gas stations/convenience stores); 2) midstream (which is publicly traded as MPLX, MPC owns 63% of MPLX and owns the general partner); 3) and the remaining refining operations.  The company recently rejected the idea of converting MPLX into a C-Corp and spinning MPC's MPLX units out to investors, but they are still committed to separating the Speedway retail business off by year end.  Convenience store 7-Eleven's owners, Seven & i Holdings, recently scrapped a deal to buy Speedway for $22B citing coronavirus and valuation concerns.  If you assume a $15B valuation for Speedway and back out the MPLX shares and consolidated debt, the remaining refining business is something like a $9B EV (with no value given to the MPLX GP) for a ~$5B EBITDA business in normal times.  There's also reason to believe (well maybe) that MPLX is undervalued as well as they're exploring selling their gathering and processing business segment for $15B which represents 1/3 of EBITDA.  The EV of MPLX is ~$34B, and the remaining logistics and storage business should fetch a considerably higher multiple.  I threw some speculative money at out of the money calls, maybe by early 2022 the world is a little more sane, until then I don't really plan on following the day-to-day swings in MPC's share price.

Five Star Senior Living (FVE)
Five Star is debt free (besides a small mortgage on the owned facilities), has a significant net cash position for its size and receives what should be a reliable management fee off of revenue.  Even if we do see small changes in occupancy (for morbid corona related reasons), FVE isn't as exposed to the high fixed cost structure of owning the senior living properties or leasing them.  FVE shares are trading below where they sold off when it was dumped following the distribution to DHC shareholders.  While there is certainly some operational or reputation risk associated with operating senior living facilities during such a high-risk time for the elderly, if Five Star can avoid a Kirkland WA style outbreak, their business should be positioned well and is extremely cheap.  We're still dealing with swag proforma estimates from management as the new structure is only a few months old, but at the EBITDA midpoint of $25MM, that should generate somewhere in the neighborhood of $14MM in FCF for about a 6.4x multiple at the current price of $3, plus you get the owned real estate and $30+ million of cash on a $90MM market cap company.

Wyndham Hotels & Resorts (WH)
Wyndham Hotels generates sales primarily on franchise fees based on hotel revenues (93% of their business) compared to their upscale hotel brand peers like Marriott (MAR) or Hilton (HLT) which have significant hotel management businesses where they get paid a percentage of hotel level profits and employ the workforce.  During good times, the management company model is better but during bad/terrible, I'd rather have the franchise model, hotel revenues will certainly be a fraction of what they were last year, but they won't be negative like profits.  Wyndham's typical hotel is an economy or midscale hotel with limited business or convention business and less reliance on food & beverage -- convention/conference business might take a while to recover as people stay cautious on large events, and if business travel does pick back up, maybe business travelers move down in hotel segment for a period of time.  Additionally, the typical Wyndham branded hotel owner is a mom or pop who owns just the one hotel, they likely got their financing from a local bank or the SBA who might be more willing to work with them on amendments/forbearance versus a large syndicate of lenders like the larger lodging REITs.  They do have a financial covenant of 5x EBITDA that is at risk, maybe other credit folks could chime in here, but I imagine by the time the TTM month EBITDA trips that covenant we might be back on the other side and WH could work with their creditors.  I did buy a little bit of shares, but also calls as to limit my downside if things do go south with their balance sheet.

My watchlist - quick blurbs, maybe turn into full posts if I buy:

• Exantas Capital (XAN): This is the former Resource Capital (RSO) that I owned for a couple years after C-III took over the management, cut the dividend, and reorganized the assets to a cleaner mortgage REIT.  XAN funds its assets in two ways, one is through repurchase agreements and the other is through CRE CLOs.  CRE CLOs are term financing and not mark-to-market, however the repurchase facilities are mark-to-market and Exantas failed to meet margin calls on their CMBS portfolio this week, sending the preferred and common cratering.  I'm maybe too optimistic on the commercial real estate market (HHC bull) but I think a lot of these loans get amended and Exantas might find its way out of this mess, however it won't be without some pain.  The CRE CLOs might end up tripping their OC tests and shutting off cash flows to the junior notes and equity which is owned by Exantas, so I'm on the side lines for now.  Additionally, like most CRE CLOs, these are "transitional loans" meant to fund a development project, say renovate an apartment building and move it up market, something like that.  So if the market shuts down, the borrower might not be in a financial position to complete said project or refinance into longer term financing, sticking XAN with the exposure longer than expected.
• iStar (STAR): I want to revisit another former holding in iStar, their SAFE ground lease business has grown far larger than I imagined (although likely very overvalued), taking SAFE at market value you could make a case that the legacy business that I originally liked is very cheap.  But they do have a CRE finance arm similar to XAN, but more concentrated on construction lending in major markets (NYC and Miami IIRC) that could be a problem.  Worth looking into given the SAFE stake and the management contract associated with SAFE.
• NexPoint Residential Trust (NXRT):  Another former REIT holding of mine, this is one that sort of got away, I'll get the exact numbers wrong but it spun off from a closed end fund at ~$11 and I sold somewhere around $22, not too far from where it is trading today at $25, a few months ago it was $52.  I love the strategy, they acquire garden style Class B apartments in the sun belt, put a little money into them to move up market a touch, maybe "B+", this investment is very high return on invested capital and then they'll sell, recycle the funds and do it all over again.  Sure their tenant base might have some credit issues in the next year, but demographic trends are still in the sun belt's favor, working class people will need reasonably affordable housing in the future, supply is relatively constrained, and this management team (it is external) has proven they can execute on their strategy.

Disclosure: I own shares of HHC, PARR, FVE, WH (and calls) and MPC 2022 LEAPs

Howard Hughes: Updated Thoughts 2019 Version

It's been about three years since my last post on Howard Hughes Corporation (HHC) and I wanted to updated my mini-model and walk through some updated thoughts on their progress.

Howard Hughes is a real estate development company that was originally spunout of GGP during its restructuring to hold the master planned communities and non-core assets of GGP.  Since the spin, close to 9 years ago now, HHC has focused its efforts on five key markets: Houston, Las Vegas, Honolulu, Columbia MD, and the Seaport District in New York City.  Their story is pretty well known by now in the investment community but HHC shares still provide a compelling long term value for a few primary reasons:

1. Howard Hughes is a real estate company that is not a REIT and does not pay a dividend, also because of its mixed portfolio, doesn't screen well or fit into any easy to value bucket.  Additionally, much of its value is in land and large assets that aren't currently producing any cash flow (for example, the Seaport).  A counter to this, many REIT funds are including non-REIT real estate companies, for example, Vanguard's switched its mandate from a REIT fund to a real estate fund and included HHC in the process.
2. Much has been written about the lack of new home construction since the financial crisis, one day this will normalize and HHC will be well positioned, their master planned community ("MPC") assets are highly sought after, providing the raw material homebuilders need and because of their maturity (hundreds of millions have been spent previously on infrastructure), feature high cash margins.  HHC uses these cash flows to self fund commercial construction (office, multi-family, retail) in these MPCs that HHC holds for investment.
3. NOI (and thus NAV) should continue to grow at a fast clip without needing to raise any equity capital, additionally the company has further growth levers it can pull via several under appreciated assets outside of their core markets that could have significant value.

The easiest way to value the company is to run an net present value calculation on the land sales in the MPCs and the condo sales in Honolulu and add it to a NAV of the current operating properties and strategic developments minus any remaining construction costs and debt.

Master Planned Communities
The company publishes an undiscounted and unappreciated value of their land holdings in their 10-K, this is simply the average recent selling price of their land multiplied by the remaining acres, it doesn't account for the time value of money or any future appreciation in pricing as the remaining acreage should get more valuable over time as Howard Hughes builds out the amenities.  I took those numbers and simple ran an NPV using a 10% discount rate assuming a straight line selling pace until the sell out date with no price appreciation built into it.  Note: I just used book value for The Summit, which is an ultra-luxury community in Summerlin that's being developed with a JV partner, it's been a big success and likely worth more than book.

In 2018, the MPC assets generated EBIT of ~$200MM, this roughly equates to a 10-11x EBIT multiple for the land business if you value it at $2.3B, which seems reasonable to me.  Using roughly the same framework for the condo development business in Honolulu, ~$1300 square foot average selling price and costs of $1100/square foot and running an NPV using a 10% discount rate until the 2028 sell out date equates to about $833MM in remaining value.  This doesn't account for the retail transformation that will happen over that time, just the condos, which the company has mentioned they'll be increasing their pace of tower construction as they have found a niche in smaller pre-furnished units in Oahu's highly supply constrained market.

The company also provides a lot of detailed disclosure on their operating property and strategic developments segments making an NAV calculation fairly straight forward.  Below, sorry its small, but I've taken each property, assigned a cap rate and deducted any property level mortgages or remaining construction costs on the unstabilized properties.

Office Properties

HHC's office portfolio was heavily weighted towards Houston 2-3 years ago, they clearly made a mistake in overbuilding ahead of the oil rout in 2015 and several of the office assets in Houston remain unstabilized years later.  However, since then they've been focusing office construction on Columbia, MD and in Las Vegas, most of these properties are new in the last three years.  Another asset that didn't get much attention until recently is 110 N Wacker, it was a four or five story building that covered an entire city block along the Chicago river, it was previously the headquarters of GGP and was recently demolished.  HHC along with JV partners (HHC owns 33% now, mostly just contributing their land) have commenced construction with a projected finish date in the back half of 2020.

110 N Wacker - 3/29/19

Bank of America will be the anchor tenant, leasing activity was brisk enough that two additional stories were added to the building to meet demand.  It's a prime location on the river and near transportation, despite the building boom in the Loop, I can't imagine them having difficulty fully leasing the building upon completion.  At that point, I'd expect them to sell their stake as it is non-core in that they don't control any properties or land around it, but anyway it's an asset that was an after thought in NAV models until recently, HHC has a couple others that could be even more significant that I'll touch on later.

Retail Properties

The biggest piece to the retail portfolio is the Seaport District located on the East River in Lower Manhattan, it was a tired yet popular tourist attraction until Superstorm Sandy destroyed it in 2012.  Since then, Howard Hughes has been working on redeveloping the area, it has taken longer than originally expected and gone through a few strategic changes (notably switched from a "regular mall" to more of an experiential shopping experience).  I don't like commenting too much on the Seaport's value as I'm not a New Yorker like many in the investment community who might have stronger opinions on the asset, but I mentioned in my year end post that a similar property in Chelsea Market was sold for over $2.4B.  Chelsea Market is roughly twice the square footage as the Seaport, giving rough credit to the $1.25B value I'm putting on the Seaport before the remaining construction costs.  HHC also bought a parking lot for $180MM near the Seaport that it plans to redevelop, likely into multi-family, as the Seaport stabilizes and increases demand around the neighborhood.

Multi-Family, Hotel, Other

They've heavily invested in multi-family properties in recent years, mostly successfully, less successfully on the hotel properties which are located in the Woodlands and were built right before the oil rout, similar to their office portfolio there, these properties have taken longer than anticipated to stabilize.

These are the random other assets that Howard Hughes owns including the new AAA ballpark they built in Summerlin, a ground lease beneath the Vegas Golden Knights practice facility and the marina in Honolulu.

Two of these other assets that I think are interesting and carried at little value on the balance sheet but could be significant drivers of NAV growth over the next 2-5 years are the Fashion Show air rights and Monarch City.

Fashion Show Mall - Las Vegas

HHC owns 80% of the air rights above the Fashion Show mall on the Las Vegas strip across the street from the Wynn and adjacent to Trump Tower on one side and TI on the other side.  Back in 2017, there were rumors that the company was reaching out to design and construction firms for a potential casino resort development, but nothing more has really come of it and Las Vegas is in a mini-slowdown right now.  The mall was owned by GGP, but Brookfield bought GGP last year and likely makes a more natural development partner for the project as Brookfield's stated strategy is to redevelop many of the acquired malls into mixed use properties. It may be another few years before anything happens here, but it's another potential driver of NAV that isn't included in my model or any that I've seen put out by analysts.

Promotional Deck for Monarch City

Another under followed asset that HHC owns is 280 acres of land in Allen, TX on the corner of two highways that was recently renamed Monarch City and has plans for over 9 million square feet of mixed use development.  To put that scale in perspective, HHC has 14 million square feet of entitlements (only a small fraction of which are currently built) in Downtown Columbia, but Monarch City is still large enough be a significant asset and potentially a 6th core market for HHC.  Allen is an attractive market, it is a suburb north of Dallas and right in the heart of a big housing development corridor, fellow long time holding of mine Green Brick Partners (GRBK) is active in the area with several ongoing communities being built within a short drive of Monarch City.  The Dallas metro area is very popular with corporate relocations given its low taxes, Howard Hughes is likely waiting for a big relocation opportunity to anchor the development before breaking ground or publicizing the asset further, if they're able to sign one, Monarch City is large enough to be a nice call option that's not currently factored into the stock price.

Adding it all up, I get a reasonably conservative "today" price of HHC around $140 per share.

Other Thoughts:

• HHC likes to point to their control of the markets they operate in and the reinvestment opportunities available to them within those tightly controlled locales.  It potentially limits the risk of oversupplying a market (although they did that to themselves in Houston), plus it gives them an advantage when non-HHC owned assets come up for sale.  They've recently purchased underperforming properties in The Woodlands and Columbia that they didn't previously own and have added them to their redevelopment pipeline, creates some synergies and continunity.
• Three years ago I got some feedback that Ward Village was unsustainable because of Chinese buyers, similar to the impacts Vancouver has seen, but HHC discloses the types of buyers in Ward Village and Chinese make up a low single digit percent, essentially a non-factor, most of the buyers are locals, Japanese and mainland second homes as you'd expect for that market.
• Mentioned this previously, but one thing I do like about Bill Ackman recruited senior management is he insists on skin in the game, with HHC, CEO David Weinreb put up $50MM out of his own pocket (one could argue he's rolling his previous warrant payday over, but I think the message is still the same) to buy a warrant package with a strike price at $124.64 expiring on 6/15/22.  There's still plenty of time, but the stock price hasn't moved much despite all the activity over the last five years, I think management will do whatever they can to close the gap between the share price and their perceived NAV (which is much higher than mine) over the next 4 years.  The CFO and COO are under similar incentive packages, but they put up significantly less money, $2MM and $1MM respectively.
• HHC has started publishing an AFFO metric, it was $5.41 for 2018, for approximately a 20x multiple which given the NOI growth path over the next 5-10 years seems cheap compared to many popular REITs.
• A similar company that I follow (but don't own) is Five Point Holdings (FPH), it's a developer of three master planned communities in California.  It was created out of a partnership with Lennar (LEN) and is much earlier in its life cycle than HHC, but it has a similar plan to develop/sell lots to homebuilders and then build commercial development for investment once demand occurs.  FPH is a broken IPO, trading about half its IPO price from a year or two ago, if anyone has thoughts on them I'd be grateful and interested to hear.

Disclosure: I own shares of HHC

Howard Hughes: Houston Concerns Creating an Opportunity

Howard Hughes Corporation (HHC) is a real estate development company that was spun-off of General Growth Properties (GGP) in 2010 as part of GGP's restructuring following bankruptcy.  Howard Hughes was essentially all the "cats and dogs" assets that GGP held that didn't cleanly fit into a mall focused REIT or assets that required significant capital investment that doesn't lend itself to the REIT structure since they can only retain 10% of their taxable income.  The company is structured as a C-Corp, not a REIT, doesn't host quarterly conference calls, and generally doesn't screen well making it a enigma in an industry that likes pure play real estate sector stocks.  It's not as simple as taking their FFO and slapping a REIT sector multiple on the stock.  The majority of their assets are long dated and fit more of a private equity like mold rather than a public company.  Their primary assets are centered around five locations: Honolulu (Ward Village), Las Vegas (Summerlin), Houston (The Woodlands), New York City (South Street Seaport), and Columbia, Maryland.

Sorry for the length of this post, but with the recent drop in the stock price I wanted to do a deep dive into each asset and determine if the market is unfairly punishing the company for it's exposure to the energy sensitive Houston market.  Some of my Excel screenshots don't lend themselves to the limitations of Blogger, so just click on them for a better view.

Honolulu - Ward Village
Howard Hughes owns Ward Village, which is a few blocks of miscellaneous retail real estate situated along the ocean just west of Waikiki Beach and Ala Moana Shopping Center (which GGP owns) in downtown Honolulu.  There's currently 678,000 square feet of shopping, restaurants, etc. generating $24.1MM of net operating income, most of these are small unique shops that appeal to the local population and not the brand name stores you'd expect to see at nearby Ala Moana Shopping Center.  It's a bit old and tired looking in its current form.  However, Ward Village is in the beginning stages of being redeveloped into a new master planned community where Howard Hughes will construct 15+ towers with a total of 4,000 condominium units and other mixed use retail/entertainment/office properties.  The development will take about another decade to fully complete.

Pacific Ocean is just below the map

Obviously Oahu's land is relatively limited, there's been limited new residential construction in recent years and Howard Hughes likes to point to the University of Hawaii Economic Research Organization's data point that "Oahu needs to produce approximately 4,000 units annually simple to meet existing demand."

There are currently two towers being constructed (Waiea and Anaha) and 4 others that are in the pre-sale process.

• Waiea & Anaha Towers: There will be 485 units in the combined two initial towers, both condo units and townhouses on the lower/terrace levels with additional retail on the street level.  About 90% of the units are under contract, buyers put a deposit down on the units which Howard Hughes is using as initial funds for construction and then tapping a $600MM construction loan for the two towers.  The estimated cost for the development is $804MM or a cost per square foot of ~$980, they're selling the units for about ~$1,450 a square foot for a total expected sales of $1.2B in revenue.  Waiea is expected to be done by the end of 2016 and Anaha in the first quarter of 2017.
• Additionally they have four towers that are in various pre-sale stages:
• Ae'o Tower: This used to be "Ward Block M" in their previous filings, it will feature small units (average of 836 square feet) and try to appeal to the local population.  Additionally the ground floor will feature a Whole Foods, the type of high quality tenant they're trying to attract to Ward Village going forward.  As of October 20, 2015, 167 of the 466 units were under contract, they're expected to break ground in March and finish construction in 2018.
• Gateway Towers (2):  These will be the priciest of the early development and no timeline has been given on when they'll be constructed.  There will be 236 units and an additional 20,000 square feet of retail.
• Ke Kilohana Tower: As part of the development plan, Howard Hughes needs to set aside a certain number of workforce units reserved for qualified Hawai'i residents.  This tower will have a total of 424 units, 375 of which are workforce housing starting in the $300,000's.

Ward Village is essentially one of their master planned communities, just instead of land sales to home builders and other developers, Howard Hughes is doing the construction themselves.  Valuing the condo build out takes on a lot of assumptions, I'm going to use the basic economics of the Waiea and Anaha towers, as far as I know them, knock them down a peg to account for the workforce housing aspect and then project out what the sales could look like in the future.  For safety, I'm going to assume that after these initial towers are built, Oahu goes into a recession and nothing gets built for a few years, that's probably unlikely, but just to cover the ups and downs of long dated real estate development.

Maybe it's too simplistic, but I think it's hard to argue that the condo pipeline doesn't have a net present value of at least $1 billion.  Additionally, Ward Village still is an active operating property generating over $24MM in NOI, at a 6% cap rate, that's worth roughly $413MM (minus the debt on it), but I have all the operating properties listed out further down the post.

Las Vegas - Summerlin
Summerlin, named after Howard Hughes' grandmother, is a large master planned community located on the western edge of Las Vegas.  Howard Hughes Corporation currently owns 5,300+ acres that are entitled for further residential and commercial development in Summerlin.  The housing bubble hit Las Vegas especially hard with construction coming to a standstill in the years immediately following, however the situation has improved greatly there with Summerlin land prices essentially doubling in 2015 compared to 2012.

In 2014, Downtown Summerlin was constructed, the company says its the only large retail development to open in the United States since the economic downturn.  General Growth Properties poured a significant amount of money into the project prior to 2008-2009, it was mothballed during the recession, and then restarted by Howard Hughes in an effort to create a central commercial/retail hub for the master planned community.

The current retail/office build out is within the green arrows, the design to the east of it is 200 acres of future development opportunities including the relocation of the NY Mets triple-A baseball affiliate the Las Vegas 51s which is half owned by HHC.  The approved plan entitles HHC to build 2.8 million square feet of commercial space and 4,000 residential units on the site.  The first Downtown Summerlin residential project is under construction, dubbed The Constellation, which HHC entered into a JV with a developer where the company only contributed land but is a 50-50 partner in the venture, it's a popular model for them and retains some of the upside.

Outside of downtown, they also entered into another joint venture, this time with Discovery Land Company, to build 270 luxury homes ($2-10MM price range) where Howard Hughes contributed about 553 acres at $226,000 per acre, or $125MM into the joint venture.  The land had a book value of $13.4 million, a consistent theme in a lot of these deals highlighting the disconnect between book value and the market value of their holdings

Farther down below I group Summerlin with the other master planned communities and simply attempt to NPV the land sales moving forward.  But that understates the potential value of the MPC as Howard Hughes will do a lot of the development themselves or in joint ventures, but there are too many assumptions involved to accurately project out that growth.

Houston - The Woodlands, The Woodlands Hills, Bridgeland
So here we get to what I believe is the market's concern, Houston, from the 10-K:

"Both MPCs benefit from their locations north and northwest of Houston in an area that is known as the Energy Corridor."

And then from the risk disclosures: "Continued lower oil prices compared to average oil prices over the past several years may have significant negative effect on the future economic growth of, and demand for our properties in certain regions where we have asset concentrations that are highly dependent on the energy sector."

The Woodlands is the company's main master planned community north of Houston, it was started by fracking pioneer George Mitchell before being sold a few times and ending up in the hands of The Rouse Company, which was purchased by General Growth Properties (and spun out and now sold again).  It is in the later stages of its development, most or the residential lots are sold out and Howard Hughes has been infilling dense commercial development into the Town Center and their newer development, Hughes Landing.

By my count they've built 7 new office buildings with over 1.5 million square feet, over 1,000 apartment units, 900+ hotel rooms, and over 200,000 square feet of retail space since being spun-off in 2010.  It's likely safe to say the pace of construction is going to slow significantly in the coming years as energy companies (Exxon, Chevron, Anadarko, Huntsman, Baker Hughes, Keiwit Energy are all major tenants in The Woodlands) pull back their growth in North American in response to oil low prices.

In my model I've bumped up cap rates on all their Houston operating properties 0.5-1.0% and assuming 0 land sales are going to take place in the next two years at The Woodlands.  Howard Hughes isn't a leveraged oil and gas exploration company that has no choice but to keep pumping despite low prices in order to service debt.  The company has the luxury to be able to sit on their land holdings and wait for the supply/demand to stabilize, they control most of the remaining development locations in The Woodlands and don't need to rely on other market players to return to sanity (like energy).

One property to keep an eye on is Three Hughes Landing, it's a 324,000 square foot class A office building that Howard Hughes built on spec without a tenant.  As of their latest filing, it was scheduled to be completed in the fourth quarter of 2015 and was still without a tenant.

Additionally the company owns two other master planned communities in Houston - Bridgeland which is to the northwest of the city and The Woodland Hills (f/k/a Conroe) which is north of The Woodlands.  Both of these are rather new representing additional growth opportunities, but that growth is probably pushed out a few more years now that Houston has slowed to crawl.

Columbia, Maryland
Downtown Columbia, Maryland is one of Howard Hughes' more under the radar developments, but it should start accelerating to the forefront in 2016.  The company currently has over 1 million square feet in office space in Downtown Columbia (between Baltimore and Washington) which they plan to redevelop over the next several years.  Fort Meade, a U.S. Army base, is located 11 miles from Columbia and is a major employer as the headquarters of the United States Cyber Command, National Security Agency, and Defense Information Systems Agency.  These are in demand, high paying, secure government jobs.

Their approved redevelopment plan includes up to 5,500 new multi-family units, 1.2 million square feet of retail, 4.3 million square feet of commercial office space, and 640 hotel rooms.  Extrapolating their current NOI per square foot in Maryland (which need redevelopment), the full plan could add another $180MM in NOI annually.

Further Reading:
http://www.baltimoresun.com/news/maryland/howard/columbia/ph-crescent-property-planning-board-story.html
http://planhoward.org/downtown_columbia_plan.pdf

Net Present Value of MPC Land Sales
For the purposes of valuing the master planned communities I've assumed that all land will be sold to third parties at the weighted averaging selling price per acre since 2012 (hurts Summerlin for instance) and tried to simulate a couple economic cycles for the longer lived communities (Bridgeland and Summerlin).  I also assumed no land sales at The Woodlands, used a discount rate of 15% for each MPC, and a 2% inflation/appreciation rate.

To save you a click, I valued the MPC land at $1.4B, which should be a conservative view as they will add company owned new build construction to their pipeline over time.

New York City - South Street Seaport
The company's most important, most valuable asset is the South Street Seaport in Manhattan, it was a neglected structure that was falling apart before Superstorm Sandy, and then was nearly completely destroyed by the storm in 2012.  Pier 17 is currently under construction, scheduled to be completed in 2017, and will have 362,000 square feet of retail, entertainment, and restaurant space.  The company has poured a lot of money into marketing the property, go here for a lot of sharp renditions of what it will look like when fully completed.

Additionally, Howard Hughes has been adding to their real estate assets around the Seaport.  Their current proposal to the city includes approximately 700,000 more square feet of development including the Tin Building next door to Pier 17 which would feature a seafood market and possibly a mixed use high rise building, although that's faced some push back from local residents.

Some back of the envelope math on just Pier 17 shows it could generate $80MM annually in NOI, putting a 5% cap rate on that would make the property worth $1.6B.  Then you could extrapolate that for the additional 700,000 square feet too if you want to be greedy.

Sum of the Parts on the Operating Assets
Click on the below to expand, but I pieced out each of the operating assets and those that are far enough along in construction to estimate an NOI and cap rate.

To summarize, I'm estimating NOI of $283MM (probably 2017-2018 number) based on the current activity for a combine value of $4.7B, which net of associated debt and additional construction costs is worth $2.0B to HHC equity.

Miscellaneous Assets/Other Strategic Developments

Below is a list of the company's other assets, most of these will be redeveloped one day into mixed-use assets, but their potential is too unknown, as a result I'm just marking them at cost/book.

Additionally, Howard Hughes does have a small $109 million NOL tax asset that is shielding some tax liability, once this is used up I'd expect either they would convert to a REIT or spin out the operating properties into a REIT to maintain tax efficiency.

Management
Bill Ackman, of Pershing Square, is the Chairman of the Board, he's obviously controversial and Howard Hughes might get lumped into some selling pressure when the market goes after Pershing Square's holdings but Ackman has made it clear that he has the most reputationally at stake with HHC compared to his other holdings (hard to believe based on his actions at VRX and HLF but he has pseudo control here).

Senior management do have warrants that they paid $19 million out of pocket for when joining the company in 2010.  The strikes range from $42.23 to $54.50 and are exercisable starting in November 2016 and expire in February 2018.  I'd be surprised to see management exercise early.

Adding It All Up

To recap, the above doesn't include:

• New retail at Ward Village - doubling their square footage and significantly upgrading tenants.
• Columbia, MD redevelopment which should start in 2016, 13MM square feet of entitlements (office, retail, multi-family).
• Tin Building renovation and additional development plans at South Street Seaport beyond Pier 17.
• Additional unannounced HHC developed/owned commercial build out of Downtown Summer, Woodlands, Bridgeland.
• Any additional value above book for the miscellaneous Strategic Developments.

Risks:

• Significant "execution risk", these are complicated developments, I'm sure there are a lot of bureaucratic hoops to jump through (especially in NYC and Honolulu), politicians and unions to please, leases to negotiate - a lot can go wrong from entitlement of a project to it being fully stabilized.
• These are long dated developments, each of their markets is likely to go through a cycle or two before they're fully completed.  Markets can also change dramatically from when ground is broken to when construction is finished.  Two of HHC's main markets are New York City and Honolulu, prices are high and "always go up" there, need to be careful of anything that "always goes up".
• Houston really struggles and Howard Hughes' assets and land holdings there are permanently impaired.

I probably should have taken a closer look when the share price rose to $160 and noticed how much additional growth the market was pricing into the company.  In one of Howard Marks' recent memos he wrote, "If you look longingly at the chart for a stock that has risen for twenty years, think about how many days there were when you would've had to talk yourself out of selling."  That's kind of how I think of Howard Hughes, long term holding that's going to see a cycle or two but is quite attractively priced now.

Disclosure: I own shares of HHC

Mid Year 2014 Portfolio Review

In my year end 2013 portfolio review,  I planned to do this quarterly, but I don't think I'll have enough commentary or trades to give a full update each quarter.  Going forward, I'll do a portfolio performance review semi-annually.  Onto the results (there were no deposits or withdrawals into the blog portfolio during the period):

The first half of 2014 has been great, just about all of my ideas have been working, but I don't have any visions of this continuing at the current pace.

However, a lot of value investors get too caught up in the macro picture, trying to outsmart the market by holding large cash positions, tweeting links to examples of excess in the market, and attempting to call a market top.  It always sounds clever to be bearish and pessimistic, but it's not productive unless you're trying to build followers.  I'd rather focus on finding a handful of mispriced securities than constantly worrying about when the next market correction is going to happen, it will at some point, but for smallish investors it leads to bad decision making.

Current Portfolio

 Positions Closed

You'll see I disposed of the thrift/mutual bank conversions, I still like the strategy and will continue to highlight conversions I find attractive, but for now I'm going to pass until I increase the size of the portfolio or macro conditions change.  I'm finding too many other opportunities available that don't have 2-3 year opportunity costs like a thrift conversion.  I also work for a large bank and I'm fully aware of the headwinds facing the entire industry, especially those highly weighted towards net interest margin like small community banks.

There are so many spinoffs happening right now it's hard to keep them all straight.  Despite the value creation being fairly well known at this point, spinoffs still outperform as a group.  I'm going to try to identify a few that I find interesting in the back half of the year.  Then exploiting them either by buying a call option if I believe the spinoff is actually the more attractive asset (like OIS/CVEO), or wait until regular trading occurs and buy the spinoff if its the orphaned business that gets sold indiscrimately.  I also like the REIT conversion trend, curious to see if these conversions and tax inversions acquisitions will finally spark some corporate tax reform in Washington.

Position Thoughts/Updates

Howard Hughes Corporation
Lots to like at Howard Hughes Corporation, they're aggressively investing in their "strategic assets" which will make their way into operating asset bucket over the next few years.  At some point in the future, it doesn't make sense to have these stabilized operating properties in a C-Corp structure, so another REIT spinoff could be in the offering once the NOLs are used up.  I like this company as a long term compounder, they have quite a few levers to pull and a capital allocation/shareholder focused management.  At a recent investor presentation, management quipped that an analyst's $200 price target was too low, I would agree.

MuniMae
It's balance sheet has uncovered most of the hidden real estate value due to accounting consolidation rules already creating a quick gain.  The question is what's next?  I like the share repurchase program, but that doesn't really help the fact that they're too small to be a public company, and they're only breaking even on an operating basis.  MuniMae has an incredible amount of NOLs, they should be initiating a rights offering and buying an operating business that throws off taxable income.  It's no longer a screaming buy, but I'm going to hold and let the situation play out more.  However, it's towards the top of the sell list if I need cash for a better idea.

Ultra Petroleum
The Uinta Basin purchase is a nice bridge asset, its going to be cash flow positive right away and gives management and analysts something to focus on while waiting for natural gas to resume its climb up.  There's still a huge spread between natural gas prices in the United States and what it fetches in foreign markets.  Given the recent news about oil exports being allowed for the first time in 40 years, more LNG export terminal approvals might be in the offering as well, long term this spread should narrow.

Disclosure: Table above is my blog/hobby portfolio, its a taxable account, and a relatively small slice of my overall asset allocation which follows a more diversified low-cost index approach.  The use of margin debt/options/concentration doesn't represent my true risk tolerance.