Managing Partner of T2 Partners LLC and the Tilson Mutual Funds. Mr. Tongue spent 17 years on Wall Street, most recently as an investment banker at UBS, where he was a Managing Director and Head of Acquisition Finance. Before UBS, Mr. Tongue was at DLJ for 13 years, the last three of which he served as the President of NYSE-listed DLJ direct. Prior to that he was a Managing Director in the Investment Bank at DLJ, where he worked on over 100 transactions aggregating more than $40 billion. Glenn co-authored, _More Mortgage Meltdown with Whitney Tilson.
Howard Hughes Corp owns, manages and develops commercial, residential and mixed-use real estate across the U.S. HHC properties include master planned communities, operating properties, and development opportunities in 18 states. The development assetsā current cash flows do not reflect future potential. Thus, it is believed that HHC has undervalued, high-quality real estate assets in premier locations.
Stock price (7/11/11): $62.53
ā¢ Shares outstanding: 37.9 million
ā¢ Warrants: 10.7 million
ā¢ Market cap: $2.37 billion
ā¢ Enterprise Value: $2.41 billion
ā¢ Book value per share (12/31/10): $57.50
ā¢ P/B: 1.09
HHC has classic spin-off characteristics (recognized with the help of the book āYou Can Be a Stock Market Geniusā by Joel Greenblatt):
ā¢ Spun out of a re-organization situation
ā¢ No research coverage
ā¢ Underfollowed by the investment community
ā¢ Certain GGP investors are not able to own HHC
ā¢ HHCās assets are now the 100% focus of HHCās management, rather than overlooked assets within GGP
ā¢ Insiders are highly incentivized
ā¢ We believe many value-creating opportunities can be tapped
HHC has completely new capable management as Bill Ackman took a very good group of people for management who have a wealth of experience and a superb track record in managing, developing and investing in real estate.
Personal financial commitment: New CEO David Weinreb purchased $15 million of warrants; President Grant Herlitz purchased $2 million of warrants.
ā¢ In addition to the GGP distribution, the plan sponsors (Brookfield, Fairholme, Pershing Square, and Blackstone) purchased 5.25 million additional shares for $250 million.
ā¢ Major HHC shareholders: General Trust Company (17.3%), Brookfield* (15%), Pershing Square* (13.8%), Paulson & Co. (5.8%).
ā¢ Management and board have a wealth of experience and a superb track record in managing, developing and investing in real estate.
ā¢ Each asset will be examined to extract maximum value.
The company has hidden assets which we do not even know about. Moreover, even if housing prices goes down, it will not impact HHC too much since they do not need to sell assets to generate cash immediately.
We think HHC is worth double even using conservative estimates to calculate the value of each asset in the portfolio (Master Planned Communities (MPCs), Operating assets, and Strategic Developments).
MPC - Located in Las Vegas, Summerlin is a 22,500-acre MPC consisting of planned and developed areas. Currently there are ~40,000 homes occupied by ~100,000 residents. As of 12/31/10, Summerlin had ~5,995 residential acres and 906 commercial acres remaining to be sold.
Summerlin carrying value as of 12/31/10 is $887 million and Howard Hughes Heirs settlement valuation is at $460 million when according to the DCF method Summerlin is worth $900M to $1,500M and the total MPC is worth $1,200M to $2,250 million. Even though you can drive a trailer through that range of values, there still is a huge margin of safety when you add up all the assets together.
The operating assets are difficult to value but our analysis indicates that the carrying value significantly understates the future value of these assets. For example, performing a DCF to arrive at a present value of a potential future development of South Street Seaport, we arrive at $150-300M versus the current carrying value of $5M.
South Street Seaport has:
Three historic buildings and a pavilion shopping mall, located on the river in lower Manhattan.
ā¢ The redevelopment plan is expected to include hotels, condos, retail space and restaurants.
ā¢ One of the top five most visited sites in New York City
ā¢ South Street Seaport āā¦represents substantial redevelopment opportunityā¦ā - 2010 HHC CEO Letter
Similar to the operating assets, we believe that the carrying value of strategic development portfolio clearly understates the value of these assets. For example when considering the Fashion Show air rights, in 2007, the North Vegas Strip land sold for $34 million/acre. Wynn, Trump International, The Palazzo, and The Venetian, all have easy access to Fashion Show. We can say with confidence that this asset is worth much more than its carrying value of $0.
Ward: Approximately 60 acres located near Waikiki, Hawaii. The site currently consists of a mall and entertainment complex. In 2009, the Hawaii Community Development Authority approved a plan for a residential and commercial development encompassing up to 9.3 million sq. ft. for the area.
In addition to the current retail and entertainment complex, there is an approved plan for significant mixed-use oceanfront development in Honolulu
Residential towers, retail and entertainment, commercial developments, industrial uses, parks and public facilities
ā¢ Performing a DCF to arrive at an estimated present value of the property, we arrive at a range of $800-1,600 million.
In June 2007, land adjacent to Ward Center sold for $18 million per acre.
ā¢ The nearby Ala Moana Center is one of the most profitable malls in America with sales per square foot of greater than $1,000.
HHC-South Sea seaport is not worth 100 million like on the books, no one in the world thinks that, but it did not fit in with GGP as a mall operator. Now HHC only tries to develop these properties. Each time is prioritizing, but GGP had hundreds of malls, which were their bread and butter. There was no management team in HHC; it was a collection of GGP junk. HHC went from no management to great management.
ā¢ We arrive at a range of values of $77 to $141 per share
ā¢ Attractive risk/reward
ā¢ Multiple free options
ā¢ Downside protection
ā¢ Inflation hedge
ā¢ Non-recourse leverage
ā¢ Opportunity to increase returns by applying appropriate leverage
ā¢ Development announcements
ā¢ Asset/land sales
ā¢ Hidden assets uncovered
ā¢ Housing market begins to recover, especially in Las Vegas and/or Houston
ā¢ Analyst coverage
Risks:
ā¢ Housing market worsens for an extended period of time
ā¢ Unable to access financing to fund developments
ā¢ Time
ā¢ Execution
Conclusion:
ā¢ Opportunity to purchase a minimally levered, diverse mix of high-quality assets near the bottom of the market
ā¢ Safe: Strong balance sheet and attractive assets provide downside protection
ā¢ Attractive risk/reward with multiple free options
ā¢ World class management team and board, with interests aligned with shareholders
Question/Answers:
Q: If interest rates increase what will happen?
A: We think that world class real estate does the best in an inflationary environment.
Q: Will cost to buyers go up if interest rates go up?
A: They own the equity, so the demand for what they own will go up.
Disclosure: None
http://www.valuewalk.com/
Howard Hughes Corp owns, manages and develops commercial, residential and mixed-use real estate across the U.S. HHC properties include master planned communities, operating properties, and development opportunities in 18 states. The development assetsā current cash flows do not reflect future potential. Thus, it is believed that HHC has undervalued, high-quality real estate assets in premier locations.
Stock price (7/11/11): $62.53
ā¢ Shares outstanding: 37.9 million
ā¢ Warrants: 10.7 million
ā¢ Market cap: $2.37 billion
ā¢ Enterprise Value: $2.41 billion
ā¢ Book value per share (12/31/10): $57.50
ā¢ P/B: 1.09
HHC has classic spin-off characteristics (recognized with the help of the book āYou Can Be a Stock Market Geniusā by Joel Greenblatt):
ā¢ Spun out of a re-organization situation
ā¢ No research coverage
ā¢ Underfollowed by the investment community
ā¢ Certain GGP investors are not able to own HHC
ā¢ HHCās assets are now the 100% focus of HHCās management, rather than overlooked assets within GGP
ā¢ Insiders are highly incentivized
ā¢ We believe many value-creating opportunities can be tapped
HHC has completely new capable management as Bill Ackman took a very good group of people for management who have a wealth of experience and a superb track record in managing, developing and investing in real estate.
Personal financial commitment: New CEO David Weinreb purchased $15 million of warrants; President Grant Herlitz purchased $2 million of warrants.
ā¢ In addition to the GGP distribution, the plan sponsors (Brookfield, Fairholme, Pershing Square, and Blackstone) purchased 5.25 million additional shares for $250 million.
ā¢ Major HHC shareholders: General Trust Company (17.3%), Brookfield* (15%), Pershing Square* (13.8%), Paulson & Co. (5.8%).
ā¢ Management and board have a wealth of experience and a superb track record in managing, developing and investing in real estate.
ā¢ Each asset will be examined to extract maximum value.
The company has hidden assets which we do not even know about. Moreover, even if housing prices goes down, it will not impact HHC too much since they do not need to sell assets to generate cash immediately.
We think HHC is worth double even using conservative estimates to calculate the value of each asset in the portfolio (Master Planned Communities (MPCs), Operating assets, and Strategic Developments).
MPC - Located in Las Vegas, Summerlin is a 22,500-acre MPC consisting of planned and developed areas. Currently there are ~40,000 homes occupied by ~100,000 residents. As of 12/31/10, Summerlin had ~5,995 residential acres and 906 commercial acres remaining to be sold.
Summerlin carrying value as of 12/31/10 is $887 million and Howard Hughes Heirs settlement valuation is at $460 million when according to the DCF method Summerlin is worth $900M to $1,500M and the total MPC is worth $1,200M to $2,250 million. Even though you can drive a trailer through that range of values, there still is a huge margin of safety when you add up all the assets together.
The operating assets are difficult to value but our analysis indicates that the carrying value significantly understates the future value of these assets. For example, performing a DCF to arrive at a present value of a potential future development of South Street Seaport, we arrive at $150-300M versus the current carrying value of $5M.
South Street Seaport has:
Three historic buildings and a pavilion shopping mall, located on the river in lower Manhattan.
ā¢ The redevelopment plan is expected to include hotels, condos, retail space and restaurants.
ā¢ One of the top five most visited sites in New York City
ā¢ South Street Seaport āā¦represents substantial redevelopment opportunityā¦ā - 2010 HHC CEO Letter
Similar to the operating assets, we believe that the carrying value of strategic development portfolio clearly understates the value of these assets. For example when considering the Fashion Show air rights, in 2007, the North Vegas Strip land sold for $34 million/acre. Wynn, Trump International, The Palazzo, and The Venetian, all have easy access to Fashion Show. We can say with confidence that this asset is worth much more than its carrying value of $0.
Ward: Approximately 60 acres located near Waikiki, Hawaii. The site currently consists of a mall and entertainment complex. In 2009, the Hawaii Community Development Authority approved a plan for a residential and commercial development encompassing up to 9.3 million sq. ft. for the area.
In addition to the current retail and entertainment complex, there is an approved plan for significant mixed-use oceanfront development in Honolulu
Residential towers, retail and entertainment, commercial developments, industrial uses, parks and public facilities
ā¢ Performing a DCF to arrive at an estimated present value of the property, we arrive at a range of $800-1,600 million.
In June 2007, land adjacent to Ward Center sold for $18 million per acre.
ā¢ The nearby Ala Moana Center is one of the most profitable malls in America with sales per square foot of greater than $1,000.
HHC-South Sea seaport is not worth 100 million like on the books, no one in the world thinks that, but it did not fit in with GGP as a mall operator. Now HHC only tries to develop these properties. Each time is prioritizing, but GGP had hundreds of malls, which were their bread and butter. There was no management team in HHC; it was a collection of GGP junk. HHC went from no management to great management.
ā¢ We arrive at a range of values of $77 to $141 per share
ā¢ Attractive risk/reward
ā¢ Multiple free options
ā¢ Downside protection
ā¢ Inflation hedge
ā¢ Non-recourse leverage
ā¢ Opportunity to increase returns by applying appropriate leverage
ā¢ Development announcements
ā¢ Asset/land sales
ā¢ Hidden assets uncovered
ā¢ Housing market begins to recover, especially in Las Vegas and/or Houston
ā¢ Analyst coverage
Risks:
ā¢ Housing market worsens for an extended period of time
ā¢ Unable to access financing to fund developments
ā¢ Time
ā¢ Execution
Conclusion:
ā¢ Opportunity to purchase a minimally levered, diverse mix of high-quality assets near the bottom of the market
ā¢ Safe: Strong balance sheet and attractive assets provide downside protection
ā¢ Attractive risk/reward with multiple free options
ā¢ World class management team and board, with interests aligned with shareholders
Question/Answers:
Q: If interest rates increase what will happen?
A: We think that world class real estate does the best in an inflationary environment.
Q: Will cost to buyers go up if interest rates go up?
A: They own the equity, so the demand for what they own will go up.
Disclosure: None
http://www.valuewalk.com/
