Howard Hughes: Overlooked, undervalued assets

With its large real estate holdings, this firm has attracted the interest of insiders and hedge funds.

By TheStockAdvisors Jan 23, 2012 11:12AM
Miniature home on sheet of percent signs© Comstock/Getty ImagesBy Ian Wyatt, 100K Portfolio

The Howard Hughes Corporation (HHC) is a premier real estate company that owns a collection of prized assets, including some that were purchased by Howard Hughes Jr. many decades ago.

I'm interested in the company's extensive assets that are overlooked by most investors, and therefore grossly undervalued. When The Howard Hughes Corp. was previously owned by General Growth, a huge company with 200 shopping malls, its assets were largely overlooked.

In the wake of the subprime real estate crash of 2008 and 2009, activist hedge fund manager Bill Ackman of Pershing Square led a corporate restructuring that allowed General Growth to avoid bankruptcy.

As part of that restructuring, some of the premier real estate development properties, master planned communities, and operating assets were put into The Howard Hughes Corp.

A number of large hedge funds -- including Brookfield, Fairholme, Pershing Square, and Paulson & Co. -- "sponsored" the spin-out of Howard Hughes from General Growth.

In conjunction with the spin-out, these funds together purchased an additional $250 million in Howard Hughes stock

In November of 2010, the company began trading on the NYSE and existing holders of General Growth received a share distribution.

As a reward for his shareholder activism efforts, Bill Ackman became Chairman of the Board of Howard Hughes. His hedge fund owns 3.5 million shares of the stock, currently valued around $150 million.

New management leadership at the company includes two former executives at TPMC Realty - David Weinreb and Grant Herlitz. These two executives each have made their own personal investments in Howard Hughes, to the tune of $15 million and $2 million, respectively.

As a group, the company's "insiders" collectively own 50% of the stock and warrants. This is a huge stake in the company, and means that their financial interests are very closely aligned with those of shareholders.

The new board of directors and management team appears to have a wealth of experience developing, managing, and investing in real estate.

With nearly $300 million in cash, Howard Hughes has a strong balance sheet that will allow the company to pursue multiple real estate development projects simultaneously.

Today, Howard Hughes owns a portfolio of real estate spanning 18 states. The properties occupy excellent locations and are high-quality assets. In many ways, the real estate held by Howard Hughes represents the best of the properties from General Growth.

A cornerstone of the company's portfolio is the large tract of land purchased by Hughes on the outskirts of Las Vegas in the 1950s. Named Summerlin, it is regarded as the best-selling master planned community in the U.S.

Since development began 19 years ago, the community's population has grown to 100,000 people living in 40,000 homes. Nearly 6,000 residential acres and 900 commercial acres remain to be sold.

Howard Hughes' Ward Center includes 60 acres on Ala Moana Beach in Hawaii. It's located just one mile from famous Waikiki Beach and Honolulu.

In 2009, the Hawaii Community Development Authority approved a 15-year master plan. That plan allows Howard Hughes to develop 9.3 million square feet of building space, including 4,300 residential units, five million square feet of retail, and four million square feet of office space.

Another of the prized assets of Howard Hughes is South Street Seaport at New York City's Pier 17 on the East River.

A redevelopment plan calls for hotels, residential apartments/condos, retail, and entertainment space. The site is prime real estate in Manhattan, and a ripe opportunity for development.

Valuing this diverse group of properties isn't an easy task. This is perhaps the reason why no Wall Street analysts choose to follow the company.

However, I got my hands on a presentation from hedge fund T2 Partners. The fund is an investor in Howard Hughes.

Back in May 2011, the analysts at T2 Partners published their analysis, showing a valuation range of $77 to $141 per share.

We see an opportunity for investors to buy the stock today at a compelling price. In many ways, Howard Hughes represents a "call option" on a rebound in real estate.

In addition to Pershing Square and T2 Partners, other major shareholders include Brookfield Asset Management (6.4%), Paulson & Co. (4.9%), and Morgan Stanley (4%).

I expect that shares of Howard Hughes can double over the next couple of years as investors become more comfortable with this non-REIT investment.

While Howard Hughes won't be paying dividends anytime soon, the company's share price could rise considerably as investors better understand the underlying value of the company's assets.

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