Howard Hughes Corporation (HHC, Financial)
Howard Hughes Corporation was created by Pershing Square:
- Formed so that certain GGP assets, whose full value would not be realized in a REIT, could receive recognition in the public markets and appropriate management attention.
- Comprised of development assets, master planned communities and income-producing properties with significant upside potential.
- In a short period of time, management has designed and launched development and/or monetization plans for each asset.
- Residential land holdings and commercial investments within these communities make Howard Hughes Corporation well positioned to benefit from a housing recovery.
Howard Hughes Corporation trades at a substantial discount to the value of its assets.
Howard Hughes Corporation (continued)
Howard Hughes Corporation continued to enhance the value of its existing assets in 2015.
- Significant growth in NOI provides Howard Hughes Corporation with an increasing stream of recurring, high-multiple cash flows.
- Run-rate NOI increased from ~$47 million to ~$180 million since 2010.
- Strong growth of condo sales revenue and presales at condominium projects in Ward Village.
- Declining residential acreage sales at the Woodlands (Houston) MPC.
- Strong land sales at Summerlin (Las Vegas) MPC.
Recent share price declines reflect concerns about the impact of low oil prices on Howard Hughes Corporation’s asset value, particularly in Houston.
Substantial majority of Howard Hughes Corporation’s business and asset value is outside of Houston:
- Nearly all NOI and development assets.
- More than 50% of remaining MPC acres.
(Howard Hughes Corporation) expects to sell out remaining MPC land in Houston over many years, so a temporary decline in oil prices will not have a large negative impact on value even if it depresses near-term revenue.
Platform Specialty Products Corporation (PAH, Financial)
2015 was a challenging year for Platform:
- Mixed performance in underlying business results.
- Double-digit underlying EBITDA growth at MacDermid.
- Slight underlying EBITDA growth in Ag before cost synergies.
- Solid execution of cost synergies in Ag.
- Reduction in distributor inventories will pressure Ag Q4 results.
Strengthening U.S. dollar significantly reduced reported results.
- Adverse FX reduced reported EBITDA growth ~20%.
Departure of CEO (Dan Leever) and President and Ag CEO (Wayne Hewett).
Multiple reductions to initial 2015 EBITDA guidance:
- 5% reduction in August due to FX.
- 12% additional reduction in October due to FX and decline in Ag distributor inventories.
Financial leverage (~6x) currently elevated relative to long-term target (4.5x).
- Negative FX impact reduced EBITDA significantly more than debt.
- Alent (ALNT, Financial) acquisition financed with debt to avoid dilutive equity issuance.
Platform Specialty Products Corporation
Platform is working to address the challenges it faced in 2015.
Platform’s current collection of businesses benefits from long-term secular growth trends and have favorable competitive positions.
New CEO and new Ag president are seasoned executives with the appropriate skills to enhance business performance.
- CEO Rakesh Sachdev, former CEO of Sigma Aldrich.
- Ag President Diego Casanello, former Ag executive at BASF.
Recent acquisition of Alent provides opportunity for significant cost and revenue synergies.
Chairman Martin Franklin will further increase his involvement at Platform after the Jarden sale closes.
On June 1, 2015, Pershing Square invested $350 million in a private placement of Nomad shares at $10.50 in conjunction with Nomad’s acquisition of Iglo Group.
- Pershing Square’s Brian Welch joined the board of Nomad.
- Nomad purchased Iglo, Europe’s leading frozen food business, for €2.6 billion or 8.5x LTM EBITDA.
- In August, Nomad agreed to purchase the highly complimentary non-UK assets of Findus for ~ ₤500 million or 6x EBITDA post-synergies.
Nomad’s acquisitions of Iglo and Findus give it the leading branded frozen foods business in Europe, 2.5x the next largest competitor:
- Leading positions in UK, Italy, Germany, France, Spain and Nordic region.
- Stable, high-margin, strong cash-flow generation with low capex and cash taxes.
- LTM PF: revenue of €2.1 billion, €400 million EBITDA, €1.23 EPS ($1.35).
A consolidator in the global packaged food sector:
- Large, fragmented packaged foods industry.
- Nomad’s territorial tax domicile will be valuable if it acquires international assets.
Fannie Mae (FNMA, Financial) and Freddie Mac (FMCC, Financial) (GSEs)
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Fannie and Freddie continued to make positive progress in 2015.
Underlying earnings in core guarantee business continue to improve.
- Increase in g-fee rate and lower credit losses.
- Reported results volatile due to noncash accounting charges on derivatives used to hedge liquidating investment portfolio.
Consensus is emerging that the GSEs are irreplaceable.
- Lack of success in attracting private capital to the mortgage market.
- Recent publications from industry trade groups, policy analysts and general news media increasingly recommend maintaining the GSEs.
Favorable developments with shareholder litigation:
- Perry appeal from D.C. District Court received strong amici briefs, including from the former chairman of the FDIC and former Fannie Mae CFO.
- Fairholme discovery in the Federal Court of Claims has uncovered evidence that contradicts the government’s stated rationale for the net worth sweep.
- New lawsuit in Delaware Supreme Court from chief justice challenges legality of Third Amendment under Delaware law
Fannie Mae and Freddie Mac (GSEs) (continued)
Misinterpretation of the recently passed Jumpstart GSE amendment contributed to GSEs’ share price decline.
- Amendment prevents Treasury from selling or liquidating its $189 billion preferred stock for two years except with congressional approval.
- Market is likely misinterpreting the amendment as a precursor to a wind down of the GSEs.
Amendment doesn’t present a meaningful obstacle to recapitalization and positive reform of the GSEs.
- Only temporary limitation (expires in two years).
- Doesn’t prevent the GSEs from exiting conservatorship or raising external capital.
- Doesn’t prevent Treasury from converting its preferred into common equity.
Fannie and Freddie present a compelling risk-reward that offers the opportunity to make a large multiple of invested capital and is sized appropriately to limit downside risk to the portfolio.
Fannie and Freddie: Share price performance in 2015
The total return for Fannie Mae and Freddie Mac shares was -20% and -21% in 2015.
Fannie and Freddie: Share price performance since inception
Since we began accumulating our positions in October 2013, Fannie Mae and Freddie Mac stock prices have decreased 37% and 35% from our average cost.
Herbalife (HLF, Financial): It’s a pyramid scheme
All facts continue to confirm that Herbalife is a pyramid scheme.
Recently disclosed Herbalife video emphasizes recruiting and undermines the existence of retail sales:
- CEO Michael Johnson1: “It’s the recruiting, meaning bringing new distributors into our company, which is the most vital part of our bloodstream. We bring new distributors in – we grow. It’s that simple. It’s that simple. And the company has built its whole reputation, its whole life, on recruiting."
Regulatory investigations ongoing:
- Herbalife has not changed its disclosure about the Department of Justice seeking information from the company, certain of its members and others about its business practices.
- In its latest 10Q, HLF’s total expenses for defending itself were $11.2 million in the quarter. Expenses related to “responding to governmental inquiries” increased from $5.8 million in Q2 to ~$7.6 million in Q3.
Still no proof of retail sales:
- Through Sept. 30, 2015, Herbalife had spent ~$101 million defending itself but still refuses to collect retail sales information.
Herbalife: It’s a pyramid scheme.
Vemma Complaint provides a potential road map for Herbalife.
- Herbalife could not survive if the courts applied the same restrictions to Herbalife which they have imposed upon Vemma. Pershing Square has published a detailed side-by-side comparison on our website – FactsAboutHerbalife.com – showing that Vemma and Herbalife are substantially similar.
State action by New York state Sen. Jeff Klein ramps up pressure on Herbalife.
- New York state Sen. Jeff Klein, in conjunction with Public Advocate Letitia James and Make The Road New York, released a highly critical report on Herbalife1 which concludes that Herbalife distributors are “running an illegal pyramid scheme” and proposes New York State legislation that would amend the New York State General Business Law.
Recent financial results have been weak
Financial results inflected in 2015; 2016 doesn’t look much better.
Revenue declined low-double-digits 2015 YTD as weak organic growth was met with substantial FX headwinds. China was – and continues to be – the single bright spot in Herbalife’s financial performance.
- Local currency net sales1 increased 1.2% while reported sales declined 11.9% for the nine-month period ended Sept. 30, 2015. Excluding China, local currency net sales declined 3.2%.
- Management has guided to mid-single-digit 2016 revenue growth but negative adjusted EPS growth2; the U.S. dollar has continued to strengthen since guidance was issued.
Herbalife’s 2016 EPS guidance of $4.35 to $4.75 compares to Wall Street projections in mid-2013 of $7.00-plus in 2016 earnings.
Herbalife continues to point to “changes to the business model”3 as the reason for a “temporary reset.”
Herbalife: Recent events
- Despite weak operating performance, robust multiple expansion drove significant share price appreciation in 2015.
Herbalife: Performance since short inception
- From the inception of our short position on May 1, 2012, Herbalife stock has increased 3%* from our average cost.
