Billionaire Bill Ackman Owns 37% of This Company That Most Investors Have Never Heard Of
Although he runs a hedge fund with about $18 billion in assets, Bill Ackman only owns seven stocks through his Pershing Square hedge fund. Many are well-known and large-cap companies like Alphabet and Chipotle.
However, there’s one under-the-radar stock that stands out from the rest, and Pershing Square owns 37% of it. It’s real estate developer Howard Hughes Holdings (NYSE: HHH).
In recent years, most of Ackman’s portfolio has done remarkably well, but Howard Hughes has been an exception. The stock is down 15% in the past year alone, underperforming the S&P 500 by nearly 40 percentage points.
But Ackman doesn’t appear to be discouraged. On the contrary, he’s added to his stake several times over the past few years. Why is Ackman so confident in this company?
What does Howard Hughes Holdings do?
Howard Hughes Holdings is a developer of master-planned communities, or MPCs. While that term gets thrown around often by real estate developers, Howard Hughes’ MPCs are on the scale of small cities. The Woodlands, in the Houston area, is an example of a Howard Hughes MPC, as is Summerlin in Las Vegas.
The basic idea is that Howard Hughes acquires a massive plot of land, such as the 37,000 acres it recently bought in the Phoenix area. It then sells some of the land to residential builders, who develop neighborhoods.
This creates demand for commercial assets, which Howard Hughes develops and leases to tenants. It then sells some more land to homebuilders, creates more commercial amenities, and so on. This cycle of self-sustaining value creation can last for decades.
In addition to its core MPC business, Howard Hughes also owns the NYC Seaport development, the Ward Village condominium community in Hawaii, the Las Vegas Aviators minor league baseball team, and several other assets.
Why has the stock been beaten down?
The short answer is that the market doesn’t place as much value on certain types of real estate assets as it did before the Fed’s rate-hike cycle started. At its annual investor day presentations for the past few years, Howard Hughes’ management has provided net asset value, or NAV, calculations. Here’s how they compare from April 2022’s estimate to the latest one from September 2023.
Item
April 2022 Presentation
September 2023 Presentation
Operating assets
$3.093 billion
$1.234 billion
MPC assets
$5.195 billion
$4.880 billion
Ward Village
$1.403 billion
$1.174 billion
Seaport
$0.942 billion
$0.961 billion
Other
($1.688 billion)
($1.872 billion)
Total
$8.946 billion
$6.377 billion
Per-Share NAV
$170
$129
Source: Howard Hughes Holdings investor presentations. Chart by author.
Story continues
These are the company’s own estimates but are designed as a conservative analysis. With that in mind, there are a couple of important things to unpack.
First, notice that nearly all of the NAV decline is from the “operating assets” category, which refers to the commercial properties that Howard Hughes owns. The simple explanation is that real estate asset valuations generally decline when interest rates rise, especially when it comes to office properties — which make up a large portion of the company’s assets.
Commercial properties are generally valued by a metric called the “cap rate,” which is the initial yield on a property, compared to the price paid. Office cap rates have risen from 4.27% in 2021 to an estimated 7.39% this year (lower is better), and the cap rates of other property types have all trended upward, as well.
Other parts of the business are holding up quite well. The MPC assets (land yet to be sold or developed) is down modestly in value, as is the Ward Village condo development. The NYC Seaport has increased in value. But the commercial real estate values are the main drag.
Another thing to notice is that the lower estimated NAV of $129 per share is still about 82% more than Howard Hughes Holdings’ current stock price. So it still trades at a deep discount to management’s “conservative” valuation.
Reasons to be optimistic
The obvious reason things could start to turn around is interest-rate normalization. After some encouraging inflation data, the median expectation is for three Fed rate cuts this year and another three or four next year. This could help boost property values and also help Howard Hughes’ borrowing costs.
There’s also the pending spinoff of the company’s entertainment assets, which are collectively known as Seaport Entertainment. Expected to take place in the third quarter, this will spin off the NYC Seaport, Las Vegas Ballpark, the company’s interest in Jean-Georges Restaurants, and several other assets. This is expected to result in a significant economic benefit for the remaining business and could help unlock long-term value.
Even with the reduced valuations of certain property types, like office real estate, Howard Hughes’ management team conservatively estimates the net asset value (NAV) of the business to be about $129 per share — about 80% more than its current price. Not only are there lots of value-creation opportunities in the coming years, but the stock appears to be trading for a steep discount.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Matt Frankel has positions in Howard Hughes. The Motley Fool has positions in and recommends Alphabet, Chipotle Mexican Grill, and Howard Hughes. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman Owns 37% of This Company That Most Investors Have Never Heard Of was originally published by The Motley Fool
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