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Sydnee Gatewood
Sydnee Gatewood
Articles (3566) 

Bill Ackman Comments on Howard Hughes

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August 28, 2020 | About:

The Howard Hughes Corporation (NYSE:HHC)

The pandemic initially had a draconian effect on HHC. Rent collections declined dramatically, lot sales came to a halt, and buyers of assets that HHC had been marketing for sale walked away from contract negotiations, and/or reduced bids dramatically. When the pandemic hit, HHC was in the process of arranging non-recourse financing to replace a bridge loan that had been drawn to fund the closing of the Anadarko corporate campus in the Woodlands, a highly strategic asset for HHC, from Occidental Petroleum. The dramatic decline in oil prices and its effect on Oxy's share price and perceived creditworthiness (Oxy leased back 100% of one of the two Anadarko towers) led to the withdrawal of CMBS financing that had been arranged to fund the replacement of the bridge loan.

In response, management and the board took aggressive steps to stabilize the company's balance sheet by raising $600 million of equity on March 27th. Pershing Square committed $500 million of capital in the offering to protect our existing investment, and to position the funds to benefit from an eventual recovery of HHC's stock price. HHC's stock price has declined 54% year to date.

The company's recently announced second quarter results reflect a rebound in residential land and new home sales in May and June, and the beginnings of a recovery in its income-producing operating assets. Summerlin and Bridgeland, the company's master planned communities ("MPCs") with the largest remaining value of unsold land, have both seen new home sales recover rapidly since bottoming in April. New home sales are a leading indicator of future lot sales. For the first half of the year, new home sales across the company's MPCs totaled 1,248, only three fewer homes sold than during the same period in 2019. Based on the company's recent sales experience, we believe that underlying demand for residential land in the company's MPCs will remain robust, as the MPC's numerous amenities and wide-open spaces are more appealing than ever to new homeowners as a result of the pandemic.

Rent collections for HHC's office and multi-family assets remained in the high 90% range throughout the quarter and in July, consistent with prior year performance. Because of government stay-at-home orders and closed operations, the company's retail and hospitality assets and its Las Vegas ballpark faced a much more challenging environment. Retail rent collections have steadily improved from 44% in April to 60% in June, and 64% in July. HHC's hotels, which were closed for the majority of the second quarter, began selectively reopening in June. By the end of June, 54% of rooms returned to service. As states reopen and the economy continues to recover, we expect HHC's net operating income to eventually normalize to historical levels.

In Ward Village, HHC's Hawaiian vertical MPC, HHC is experiencing strong sales momentum in its two towers currently under construction, and in pre-development sales for a new tower. Since beginning a virtual-only marketing campaign in mid-March, the Ward Village sales team has sold 21 homes. The current pace of sales, even under far from ideal marketing conditions, reaffirms strong demand for HHC's condo projects.

The Seaport has been closed since March to comply with New York City guidelines. The company has taken this opportunity to review and refine changes to the Seaport's plans including permanently closing 10 Corso Como, and entering into a culinary management agreement to outsource its restaurant operations. The Seaport remains the company's most challenging asset as its success depends largely on a full recovery in restaurant, entertainment and retail, activities that remain limited in New York City.

We believe the impact of the pandemic on HHC's assets is, for the most part, transitory, and has largely overshadowed the significant progress the company has made on its transformation plan announced last October. Management has taken meaningful steps to reduce overhead expenses and transition to a more decentralized operating model focused around its core MPCs. These actions have enabled HHC to react more nimbly and efficiently in the current environment. We expect the company to reengage on its plan to dispose non-core assets when market conditions stabilize.

On June 25th, HHC announced that its CFO, David O'Reilly, will expand his duties to become President. David has been an exceptional CFO and leader over the past four years, and we welcome his growing role in driving value at the company.

From Bill Ackman (Trades, Portfolio)'s Pershing Square 2020 semiannual shareholder letter.


Rating: 4.0/5 (2 votes)

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