When General Growth Properties (GGP, Financial) entered into bankruptcy in 2009, it reorganized into a more streamlined business, re-IPOing in 2010.
General Growth had expanded its property portfolio aggressively prior to the financial crisis, purchasing assets that were quite different from its core business. Part of the reorganization included the spinoff of a holding company that owned all of the disparate assets that didn’t quite fit into General Growth's focus. The result was Howard Hughes Corp. (HHC, Financial).
The spin was completed in November of 2010 at $35 a share. Since then, shares have exploded, reaching a high of $160 as investors realized that many of the marked-down assets were actually quite valuable. For example, the company holds an 80% ownership interest in the air rights above the Fashion Show Mall located on the Las Vegas Strip, comprising about 48 acres. While external analysts have valued this asset at $100 million to $200 million, Howard Hughes has it listed on its balance sheet at $0. This is just one example of the company’s extremely undervalued asset base.
Since the market turmoil began, Howard Hughes stock has fallen to just $94. Much of the company’s properties are in the Houston area, with oil fears potentially pushing down property values there.
Todd Sullivan, the manager at Rand Strategic Partners, has done a pretty straight-forward but reasonable valuation of Howard Hughes shares. In his presentation, he splits the company’s assets into its Master-Planned Community assets and its Operating Properties. In all, he values Howard Hughes shares at $247 to $257 per share (representing nearly 200% upside).
Sullivan’s analysis doesn’t seem that far off, either. As he mentions, even if you don’t include the MPC assets (which are notoriously difficult to model and contribute to the stock's current pullback), shares are still worth $175 to $185 per share. It would also make sense to include (as he does) the value of its tax assets, given the strong likelihood of their application, but it’s unclear if Sullivan used a discounted value (the assets will be used over years of operation and cannot be transferred).
Still, even if we are left with just the Operating Assets portion of the business, shares would still have a floor valuation of $150 to $170 per share. The leftover valuation looks to use reasonable discount rates, a cap rate that is hardly historically high and a NOI level that is likely to continue growing. At $90 a share, Howard Hughes is a rare value with plenty of both upside and margin of safety.
