HHC - Howard Hughes Corp

[Saluki]

When I looked at the JVs and out parcels that SRG and WPG sold off (which weren't the crown jewels) I thought there was a big disconnect between the cap rate that private parties were paying for these assets vs what they were being priced in the public markets.  I thought that they eventually the price would reflect that but I hadn't considered that might be permanently ugly like car companies or airlines.  (I am long HHC, SRG and JOE, all of which seem to have a lot of potential that the market doesn't want to recognize). 

[racemize]

My main objection to all of them is that I'd rather own BPY/BPR. 

[bizaro86]

I don't think public market real estate can be a permanently under valued sector unless private market RE prices follow it down.

 

Airlines and autos are not divisible entities. UA couldn't sell its Houston hub for 12x ebitda. I know fiat has done spin and sale transactions, but the core auto biz is still one business.

 

Real estate is exactly opposite. If you own 10 malls or 10 office buildings there isn't much of a scale advantage, and it'd be easy to sell one independently. In many cases individual assets are as easy to sell as portfolios. Maybe easier, because there are more potential buyers. In fact, on big assets you can even sell a partial equity interest in a property and get a reasonable price in the private market.

 

If the public-private market arbitrage opportunity stays open, more firms will either undertake it on purpose or face activists who try to make them do so.

[Spekulatius]

 

I am noticing that RE is starting to get broad stroked "cheap" treatment. Just like how every auto trades at 5-6x, I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV. Personally I prefer this not occur; as it could mean we are in for a longer dull period until the perception of what's causing this widespread sentiment changes. Much easier to change a few things with one company to get a better valuation than have to have an entire sector have something change.

 

Good points. Just curious, "I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV." Which high-quality ones are you referring to/interested in? Thank you.

 

VNO depending on the cap used for office space is pretty wildly undervalued, HHC supposedly trades at a massive discount, Griffin Industrial trades well below, FRP Holdings probably $20 per share below, Consolidated Tomoka $30 per share, Washington Prime trades 10 football fields away from the asset value...Probably a few more but these conditions have me wondering if the market at then moment is just planning to perpetually discount these things, much like we've seen in other sectors like auto and airlines. Which means they may not be as attractive as I've previously thought.

 

MAC and TCO trade at almost an 8% cap rate and own almost exclusively A- malls.

[peridotcapital]

The Seaport is really turning into a headwind for the stock, it appears, especially considering that one would have thought that the project would generate above-average returns given the uniqueness of the property. Including all of the G&A involved, HHC is going to sink over $1B into this thing, and will be lucky to earn $50M of annual NOI. And yet they keep buying parcels, even though the community challenges every single idea they have for development. I hope they sell this asset upon stabilization. It's unfortunate that they keep pushing back the stabilization date, and I was shocked when they disclosed last quarter that they are actually taking ownership stakes in many of the businesses, even running them internally. What does HHC really know about operating clothing shops, ice cream stores, and restaurants, and why on earth would they choose to be anything but the landlord? It really begs the question what the true rental demand is for their space. Nobody would have thought that in 2019 the Seaport would lose money...

[Sombunall]

We own the stock and I would agree... Their estimate of NOI for Seaport is $43m-$53m. I'm hoping that's really a sandbagged number, or this project doesn't look like it's anywhere near the rest of their stuff. (Hard to guess what Seaport's NOI could be... lots of variables, which makes me think they aimed low with their public guess... but we'll see). The other properties they own are doing very well. It is a surprise -- I wouldn't have guessed it, say, a year ago --- to say that Seaport is dragging things down, but it's true... I'm guessing management knows this already, and pressure is building on them about the stock price / NAV disconnect, so I wouldn't discount a sale of Seaport, or some other move... Having said all this, I still think the upside is great. It's just going to take some time to unlock...

[jsgcapital13]

Management compensated is heavily aligned with creating long term shareholder value, through a series of staggered warrants (IIRC but could be wrong), and I also believe they bought a lot of stock shortly after the spin in the open market. This was during the height of Ackman mania, and there were a lot of articles / videos on the HHC vision.

 

here is one from 2015:

https://www.forbes.com/sites/antoinegara/2015/05/06/bill-ackman-baby-buffett-howard-hughes/

 

and here is the comments from his letter earliest this year:

During 2018, HHC continued to make strong business progress. It recently reported the highest level of residential land sales in its master planned communities in HHC’s history. Sales of units in HHC’s Ward Village in Hawaii remained strong. Since the initial pre-sale launch of units in 2014, Ward Village has sold more than 1,900 condo units generating total proceeds of over $2.2 billion at projected 30% gross margins. In addition, HHC now has 50 million square feet of development entitlements within its existing portfolio and is nearing completion of the South Street Seaport development in downtown New York.

 

HHC’s share price decreased 26% in 2018 and rebounded 13% year-to-date in 2019. While HHC has now operated independently since 2010, it operated quietly, out of view from much of the investment community until 2017 when it had its first Investor Day. Despite HHC’s recent public facing efforts, the company is still not well followed or understood by the investment community which, in our view, is one of the reasons why the company’s stock declined in the fourth quarter. HHC tends to be grouped with homebuilding-related stocks, which declined in the fourth quarter as the market focused on potential housing headwinds.

 

Today, HHC owns a highly diversified portfolio of operating assets that generate consistent cash flows. We expect that over time, as other investors gain a better understanding of HHC’s business and appreciate that it has different and more favorable economic characteristics than a homebuilder, HHC will achieve a valuation that is more reflective of its intrinsic value that continues to grow at a rapid pace.

 

 

[Mephistopheles]

 

I am noticing that RE is starting to get broad stroked "cheap" treatment. Just like how every auto trades at 5-6x, I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV. Personally I prefer this not occur; as it could mean we are in for a longer dull period until the perception of what's causing this widespread sentiment changes. Much easier to change a few things with one company to get a better valuation than have to have an entire sector have something change.

 

Good points. Just curious, "I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV." Which high-quality ones are you referring to/interested in? Thank you.

 

VNO depending on the cap used for office space is pretty wildly undervalued, HHC supposedly trades at a massive discount, Griffin Industrial trades well below, FRP Holdings probably $20 per share below, Consolidated Tomoka $30 per share, Washington Prime trades 10 football fields away from the asset value...Probably a few more but these conditions have me wondering if the market at then moment is just planning to perpetually discount these things, much like we've seen in other sectors like auto and airlines. Which means they may not be as attractive as I've previously thought.

 

MAC and TCO trade at almost an 8% cap rate and own almost exclusively A- malls.

 

How did you get that high of a cap rate for Macerich? I am only getting 5%. I did market cap + debt - cash to get market value and revenues - expenses + depreciation to get the NOI.

[Spekulatius]

 

I am noticing that RE is starting to get broad stroked "cheap" treatment. Just like how every auto trades at 5-6x, I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV. Personally I prefer this not occur; as it could mean we are in for a longer dull period until the perception of what's causing this widespread sentiment changes. Much easier to change a few things with one company to get a better valuation than have to have an entire sector have something change.

 

Good points. Just curious, "I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV." Which high-quality ones are you referring to/interested in? Thank you.

 

VNO depending on the cap used for office space is pretty wildly undervalued, HHC supposedly trades at a massive discount, Griffin Industrial trades well below, FRP Holdings probably $20 per share below, Consolidated Tomoka $30 per share, Washington Prime trades 10 football fields away from the asset value...Probably a few more but these conditions have me wondering if the market at then moment is just planning to perpetually discount these things, much like we've seen in other sectors like auto and airlines. Which means they may not be as attractive as I've previously thought.

 

MAC and TCO trade at almost an 8% cap rate and own almost exclusively A- malls.

 

How did you get that high of a cap rate for Macerich? I am only getting 5%. I did market cap + debt - cash to get market value and revenues - expenses + depreciation to get the NOI.

 

I calculated it indirectly from Morningstar, They state a $57 value/share at a 6.1% cap rate. Using $5.6B in debt and ~150M shares, I get and NOI of $866M, which translates into a  cap rate of 7.3%. I have  seen mid 7% cap rates in other analyst reports.

 

The JV make it difficult to calculate a cap rate, because the contribution and the debt in the JV is not consolidated , so once has to rely on either the company or analyst report (which probably get numbers from management).

[Mephistopheles]

 

I am noticing that RE is starting to get broad stroked "cheap" treatment. Just like how every auto trades at 5-6x, I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV. Personally I prefer this not occur; as it could mean we are in for a longer dull period until the perception of what's causing this widespread sentiment changes. Much easier to change a few things with one company to get a better valuation than have to have an entire sector have something change.

 

Good points. Just curious, "I am beginning to notice that a surprising number of high quality companies are trading at big discounts to NAV." Which high-quality ones are you referring to/interested in? Thank you.

 

VNO depending on the cap used for office space is pretty wildly undervalued, HHC supposedly trades at a massive discount, Griffin Industrial trades well below, FRP Holdings probably $20 per share below, Consolidated Tomoka $30 per share, Washington Prime trades 10 football fields away from the asset value...Probably a few more but these conditions have me wondering if the market at then moment is just planning to perpetually discount these things, much like we've seen in other sectors like auto and airlines. Which means they may not be as attractive as I've previously thought.

 

MAC and TCO trade at almost an 8% cap rate and own almost exclusively A- malls.

 

How did you get that high of a cap rate for Macerich? I am only getting 5%. I did market cap + debt - cash to get market value and revenues - expenses + depreciation to get the NOI.

 

I calculated it indirectly from Morningstar, They state a $57 value/share at a 6.1% cap rate. Using $5.6B in debt and ~150M shares, I get and NOI of $866M, which translates into a  cap rate of 7.3%. I have  seen mid 7% cap rates in other analyst reports.

 

The JV make it difficult to calculate a cap rate, because the contribution and the debt in the JV is not consolidated , so once has to rely on either the company or analyst report (which probably get numbers from management).

 

Thanks for this. The JV stuff is what I was overlooking. They actually detail the balance sheet and income statement for the JV in the 10-k (pgs 57, 80-84), and I'm getting a cap rate of 6.6% accounting for all of this. I'll start a new thread for MAC as to keep this one for HHC.

[BG2008]

The Seaport is really turning into a headwind for the stock, it appears, especially considering that one would have thought that the project would generate above-average returns given the uniqueness of the property. Including all of the G&A involved, HHC is going to sink over $1B into this thing, and will be lucky to earn $50M of annual NOI. And yet they keep buying parcels, even though the community challenges every single idea they have for development. I hope they sell this asset upon stabilization. It's unfortunate that they keep pushing back the stabilization date, and I was shocked when they disclosed last quarter that they are actually taking ownership stakes in many of the businesses, even running them internally. What does HHC really know about operating clothing shops, ice cream stores, and restaurants, and why on earth would they choose to be anything but the landlord? It really begs the question what the true rental demand is for their space. Nobody would have thought that in 2019 the Seaport would lose money...

 

I think the retail model has changed forever.  It's very different for locations that offers incredible foot traffic, i.e. Time Square, Fifth Ave, Seaport etc.  As a landlord, do you say "pay me $x in rent, if you do awesome then you get to keep everything above the fixed rent?"  Or do you say "Pay me a small fixed fee, and I get to keep a % of your revenue?"  The con is that HHC is trying out a new retail concept which I believe the entire retail landlord needs to.  The old model of signing 10 year leases is broken.  Landlord and tenants are more joined at the hip going forward.

 

Developing in NYC is tough, what a shocker?  That's like saying water is wet and fire is hot.  Why do you think stabilized assets in NYC commands 3.5-4.0% cap rates?  It's because it is so hard to build anything.  People fight you every step along the way.  The general rule of thumb for real estate development is that "if it's easy for you to develop, it's easy for your competitors to develop.  If it's hard..."  Not sure if they will hit, $40, 50, or 60mm of NOI.  Is suspect that the first generation rent will be much lower than second generation rent as the place build some buzz.  This is why they only sign 5 years agreements with Heineken, Chase, etc.  They want more money for the 2nd gen.  Either way, the market assigns the Seaport zero value today.  Any stabilized cashflow will be a positive to the thesis. 

[peridotcapital]

 

I think the retail model has changed forever.  It's very different for locations that offers incredible foot traffic, i.e. Time Square, Fifth Ave, Seaport etc.  As a landlord, do you say "pay me $x in rent, if you do awesome then you get to keep everything above the fixed rent?"  Or do you say "Pay me a small fixed fee, and I get to keep a % of your revenue?"  The con is that HHC is trying out a new retail concept which I believe the entire retail landlord needs to.  The old model of signing 10 year leases is broken.  Landlord and tenants are more joined at the hip going forward.

 

Developing in NYC is tough, what a shocker?  That's like saying water is wet and fire is hot.  Why do you think stabilized assets in NYC commands 3.5-4.0% cap rates?  It's because it is so hard to build anything.  People fight you every step along the way.  The general rule of thumb for real estate development is that "if it's easy for you to develop, it's easy for your competitors to develop.  If it's hard..."  Not sure if they will hit, $40, 50, or 60mm of NOI.  Is suspect that the first generation rent will be much lower than second generation rent as the place build some buzz.  This is why they only sign 5 years agreements with Heineken, Chase, etc.  They want more money for the 2nd gen.  Either way, the market assigns the Seaport zero value today.  Any stabilized cashflow will be a positive to the thesis.

 

I would not have a problem with them charging a low base rent and a high percentage rent, but I think owning and operating businesses is far removed from that, and it increases risk (and therefore reduces the multiple investors will pay in general).

 

If i felt confident that I was getting the Seaport for free, that would help, but I don't know if the rest of the assets are worth the current E/V of nearly $7.5B.

[Sombunall]

Down almost 5% today on news of... financing for Seaport? I suppose the market is concerned about delays and red ink at Seaport. But seems severe. Was there some other news today?

 

 

 

 

[peridotcapital]

Down almost 5% today on news of... financing for Seaport? I suppose the market is concerned about delays and red ink at Seaport. But seems severe. Was there some other news today?

 

They keep saying how they are fully funded for all pipeline projects with current cash and liquidity, so adding more debt is certainly unexpected and begs the question why...

[Jcmeg35]

Down almost 5% today on news of... financing for Seaport? I suppose the market is concerned about delays and red ink at Seaport. But seems severe. Was there some other news today?

 

They keep saying how they are fully funded for all pipeline projects with current cash and liquidity, so adding more debt is certainly unexpected and begs the question why...

I may be conflating the whole Seaport with just the Pier, but my memory was that in the past they had said they expected to take out financing for it at some point in the future..

[Spekulatius]

Down almost 5% today on news of... financing for Seaport? I suppose the market is concerned about delays and red ink at Seaport. But seems severe. Was there some other news today?

 

They keep saying how they are fully funded for all pipeline projects with current cash and liquidity, so adding more debt is certainly unexpected and begs the question why...

 

Note that the interest rate on this loan is fairly high at 6.1%. Maybe that’s the going rate for construction loans.

[adhital]

Quick Back of the envelop valuation. Please correct me if I'm way off here..

 

MPC : land undiscounted value $5 Billion.  land value increase as MPC matures, so we may not need to discount this. However, for margin, lets discount by 30%. MPC value $3.5Billion.

 

Operating asset

$321mm NOI stabilized in the next 5 years. $200mm as of 2019 and $121mm in the next 5 years (or ~$100mm discounted @ 10% based on company's yearly projection). $1.7 Billion debt. with 6% CAP = OP asset equals $3.1 Billion net. Bill said they deserve higher CAP, perhaps 4/5?

corporate -$757mm debt

 

 

North waker $0

Sea port $0

hawaii condo $0

 

 

Share outstanding 43MM

 

BV/share = 3500+3100-757 = $135/share

 

I don't know why anyone needs to really care about seaport for what it is selling for today.

[Foreign Tuffett]

Quick Back of the envelop valuation. Please correct me if I'm way off here..

 

MPC : land undiscounted value $5 Billion.  land value increase as MPC matures, so we may not need to discount this. However, for margin, lets discount by 30%. MPC value $3.5Billion.

 

Operating asset

$321mm NOI stabilized in the next 5 years. $200mm as of 2019 and $121mm in the next 5 years (or ~$100mm discounted @ 10% based on company's yearly projection). $1.7 Billion debt. with 6% CAP = OP asset equals $3.1 Billion net. Bill said they deserve higher CAP, perhaps 4/5?

corporate -$757mm debt

 

 

North waker $0

Sea port $0

hawaii condo $0

 

 

Share outstanding 43MM

 

BV/share = 3500+3100-757 = $135/share

 

I don't know why anyone needs to really care about seaport for what it is selling for today.

 

NPV of their corporate overhead?

[adhital]

Quick Back of the envelop valuation. Please correct me if I'm way off here..

 

MPC : land undiscounted value $5 Billion.  land value increase as MPC matures, so we may not need to discount this. However, for margin, lets discount by 30%. MPC value $3.5Billion.

 

Operating asset

$321mm NOI stabilized in the next 5 years. $200mm as of 2019 and $121mm in the next 5 years (or ~$100mm discounted @ 10% based on company's yearly projection). $1.7 Billion debt. with 6% CAP = OP asset equals $3.1 Billion net. Bill said they deserve higher CAP, perhaps 4/5?

corporate -$757mm debt

 

 

North waker $0

Sea port $0

hawaii condo $0

 

 

Share outstanding 43MM

 

BV/share = 3500+3100-757 = $135/share

 

I don't know why anyone needs to really care about seaport for what it is selling for today.

 

NPV of their corporate overhead?

 

2018 10K says $100 million/year administrative cost. I think we can live with that given $0 given to Hawaii, NY or Chicago strategic initiatives and lets not discount the organic NOI growth.

[Sombunall]

Agree, as you show Seaport could be a doughnut and HHC still works.

[BG2008]

I personally would rather own Beyond Meat than HHC.  At least Beyond Meat is working.  What's HHC done in the last 5-6 years? 

[Spekulatius]

I personally would rather own Beyond Meat than HHC.  At least Beyond Meat is working.  What's HHC done in the last 5-6 years?

Here is the answer:

https://youtu.be/Y7tvauOJMHo

 

Bought a few today. The selling seems a bit too much.

[Saluki]

I added some today too. Seems oversold to me and I had planned on owning it for another 2 or three years so I don't mind the dip. I would've bought more but, until I sell something else, I'm fully invested except for some spare change in the sofa cushions. 

[adhital]

I’m all in as well :)

[Gregmal]

I bought some this morning as well. However my concerns are across the board.

 

Specifically, how can you say this is "cheap" when frankly, every real estate company(barring a few like O, NNN) I look at these days is optically "cheap" or "trading at a discount"? This is how stealth(or not so stealth) sector wide multiple contractions occur. If even the best ones trade at discounts, I dont think its proper to base buying a company on the fact that it trades at a discount.

 

How these guys execute is a short-medium term risk. But I think value can even be destroyed here(as others mentioned) and from $92 one still makes out well if your horizon is 5+ years.

 

Its funny though, all the talk of a bubble... real estate investors would die for even fair valuations on their holdings...Like seriously? how can we be in a bubble if you can't even get NAV minus 10% for some of the best companies in the sector?