Thursday, February 25, 2016

The Howard Hughes Corp. (HHC) - 64-page Slide Deck (2/25/2016)

Link to slide deck: HHC Slide Deck - 2/25/2016

4 comments:

  1. I have one word to define this presentation.... RESPECT! This is the best current overview of the company with conservative valuations and realistic assumptions on cap rates and future growth. The overreaction to the Texas assets (Woodlands, Bridgeland, Hughes Landing, ect) is creating a very unusual opportunity for those looking for that significant margin of safety that is hiding in plain sight. I personally believe that the next 5 years at the current share price will yield more value than the last 5.

    I did have perhaps something to add. The South Street Seaport asset is a premier asset to the HHC portfolio (or will be soon). While you outline 3 projects there are technically four. HHC won an auction for 33 Peck Slip for $38+M and closed late last month. The property is around 6200sq ft. To put that in perspective of the “Seaport Assemblage” being sold to Oceanwide, 80 South was 8,128sqft and 173 Front Street was 6,552 sqft. The lot is big enough for a value added project especially considering the price paid. It doesn’t seem like a big deal but what was unusual was that 2 days after winning the auction the company “caved” to creating the bigger tower at New Market Building for a smaller one. My guess is because of the new plot they had the opportunity to split development and save hundreds of millions in the “community upgrades deal” via new school infrastructure and such.

    Other questions?

    While hard to quantify because it is an intangible what is your view of management quality? So far as the short time HHC has operated I’ve been greatly impressed with their capital allocation skills. Examples: Buying Morgan Stanley’s stake of Woodlands at the absolute right time, warrant reduction from sponsors at end of 2012, the assemblage sale at the Seaport for a tidy profit, ect.

    What are your views of a possible REIT spinoff over the next few years? While it adds value do you believe it “kills” off a self-funding source via land sales, which gives HHC such a competitive advantage over the competition?

    Much appreciated and thanks again for the slide presentation. Your website will be one of my daily stops going forward!

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    1. Thank you for the positive comments. I appreciate the addition of 33 Peck Slip, which could (hopefully) add additional value for HHC. As you mentioned, HHC won this auction for $38.3 million - which is a Best Western Seaport Inn with 72 keys - following the Ch.11 bankruptcy of 33 Peck Slip Acquisition LLC.

      In regards to your other questions, I think management is pretty solid. They were handpicked by Bill Ackman, these guys ran their own capital and investments in RE prior to joining HHC, they invested ~ $20m in warrants, stock that could not be hedged in any way prior to 2016/17. The purchase of the remaining ownership from Morgan Stanley in 2011 was perfect timing, and what it did was genius - created a monopoly of any future development (commercial or residential) in The Woodlands. As I mentioned that there is currently about 8.0m SF of office under construction in Houston, there is zero in The Woodlands now that 1725/35 Hughes Landing and 3 HL is complete. HHC chooses the supply capacity going forward, and for a community and asset like The Woodlands, it was a fantastic move. This leads me to your question on the REIT topic. I've talked to HHC plenty of times, have met with some of their management multiple times. The benefit of the REIT conversion is obvious. What is overlooked is that they still have a pipeline of potential development assets that could add tremendous value over the next 5, 10, 15 years. Becoming a REIT and moving the other assets to another company would diminish their competitive position in their geographies. Imagine having to all of the sudden have to compete with another developer in The Woodlands in their build out of potential 7-8.0m SF, or Columbia of potential 13m SF. My take, and after talking to them, is they may wait to become a REIT until more has been developed in their areas in which they have a strong position.

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  2. Hi Value Seeker. Thanks for the response to my comment. I honestly did not think about HHC technically competing against the newly formed company in their current geographies. You are so right in that regard.

    So the new 10-K came out for HHC as you surely know. Nothing earth shattering and it seems like business as usual (which I love to see). While I believe the management to be very transparent in most respects, they leave SO MANY pieces missing.

    1) By now you’d think that the potential $390M Oceanwide agreement would be material enough to put in the 10-K if it did exist. Not a word or even hint on selling the Seaport Assemblage.

    2) Not a word about Peck Slip, but sure enough if you look at the Exhibit 21.1 page 5 there it is … “33 Peck Slip Holdings”.

    3) The Elk Grove Asset has moved along considerably and close to the 50% lease requirement to begin construction on phase 1. Again … nothing … but found information a few weeks ago before the annual report came out.

    Yet while mentioning absolutely none of the above, management felt beholden to shareholders in reporting another 61 acres will be added sometime in 2016 to the Conroe site for $2.5M (page 4). I mean really!?! :-/

    Obviously the share price is significantly discounted even under conservative estimates. While continued excellent performance on the business front will close the gap, what is your view in regards to instituting a buyback? I’m a little dividing personally but I feel at these prices vs capital spending on new projects you can’t go wrong with a buyback sub 100. I’m also extraordinarily surprised it hasn’t been instituted yet with Ackman as chairman being the financial engineer that he is.

    Reasons why management does not do a buyback.
    a) The company wants to keep the balance sheet looking strong. What better way than a lot of cash?
    b) Management wants the company to be flexible and have the opportunity to bid on assets that may arrive from the oil fall out and general opportunities that present themselves in their various markets.
    c) Management may want to do new projects with less leverage.
    d) This is the most insidious reason. I believe Pershing Square’s survival is tied directly to Valeant. If the VRX trade goes sour the redemptions have a possibility of imploding the fund. Certainly Howard Hughes will trade lower in that scenario but will have the financial flexibility to buy out his position in full. A buyback in that magnitude would be transformative for the company considering the discount they could get the shares at and the sheer amount.

    Very curious on your thoughts. Thanks again!

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  3. Love this company and appreciate your commentary and insights! I spoke to HHC at ICSC Vegas and super friendly and willing to talk with me.

    33 Peck Slip is going to be converted to Mr. C's, a boutique hotel owned by Cipriani family (one in Beverly Hills and Miami I believe).

    No REIT for a while - you may have mentioned but they need the operating NOI to fund development. Plus they have $255mm NOL's to offset income

    Elk Grove had recent news about casino development so hopefully that drives more leasing.

    Targeting coverage by 2 bulge firms this year, one down w/ Citi!

    I thought the CFO retirement was a big deal, but they didn't act like it was anything but him moving on to do other things. I think he's still pretty tied to the company with his warrants so I was surprised he wouldn't at least stay until he was able to cash those in.

    I would love a mgmt buyback but as discussed I think they are long-term focused and need cash for all the strategic developments. Interesting point about Ackman - I don't think his HHC stake is big enough to save Pershing if Valeant goes down though.

    Thanks again for the great presentation!

    Good luck all and long HHC!
    Zach

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