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Bill Ackman Is Buying Howard Hughes Again

On Dec. 2, Bill Ackman (Trades, Portfolio) bought 1,000,000 shares of The Howard Hughes Corp. (NYSE:HHC) for a price of $115 per share, according to GuruFocus Real-Time Picks, a Premium feature. The trade impacted the equity portfolio of Ackman's Pershing Square Capital Management by 1.8% and nearly doubled the guru's stake in the company compared to the end of the third quarter. This brings Pershing Square's ownership of Howard Hughes common stock back up to 5.08%.


To sell or not to sell

In June, Howard Hughes announced it was considering spinning off some of its assets and selling out to another company, which caused a spike in the share price as investors sought to profit off of a buyout. The company hired Centerview Partners to explore alternatives to a sale of the company. Investing writers speculated that a larger real estate conglomerate such as Blackstone Group (NYSE:BX) would be the most likely buyer.

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On Oct. 22, Howard Hughes announced it had completed its review and decided not to pursue a sale, instead choosing to enact a transformation plan. It aims to sell approximately $2 billion in non-core assets and cut costs by $50 million. Effective as of the announcement, Paul Layne will be the new CEO, and both former CEO David Weinreb and President Grant Herlitz will step down from the company.

Once the price drop from the no-sellout announcement reached its low point towards the end of November, Pershing Square took advantage of the good entry point and bought more shares, sending a positive signal for what the investor expects the company to achieve in the future.

Howard Hughes made a 33.3% gain year to date as of Aug. 13. According to GuruFocus calculations, Pershing's investment in the real estate company's common stock has returned a total of approximately 61.48%.

History

Ackman has served as chairman of the board for Howard Hughes ever since it spun off from General Growth Properties at the end of 2010. General Growth Properties had only just recently exited Chapter 11 bankruptcy at the time, so the share price of Howard Hughes at the time of the spinoff, $31 per share, provided a valuable growth opportunity in the asset-rich real estate industry.

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Ackman began his tenure as chairman with 3,568,017 shares of Howard Hughes common stock, increasing to a maximum of 4,704,534 shares in the second quarter of 2017. During 2018 and the first quarter of 2019, Pershing Square sold approximately 3,500,000 shares of common stock, bringing its holding to a low of 1,194,793 shares at the end of the first quarter of 2019. Investors speculated a wide range of reasons for the reduction, from the need to buy back the investment fund's own shares to a lack of faith in the real estate company's ability to turn a profit.

Maintaining a stake

It is important to note that Pershing has maintained more than a 10% economic stake in the company through the use of total return swaps and forward purchase contracts. After Pershing began reducing its common share holdings in Howard Hughes, its total economic stake decreased from 23.4% to 17.6%. As of Dec. 2, its stake in the company is at 14.8%, consisting of 2,194,793 shares of common stock and 4,189,446 shares underlying forward purchase contracts.

In his December 2017 letter to shareholders, Ackman explained the sale of common stock and purchase of other financial stakes in the company as a way to give Pershing more flexibility to address the the discount to its net asset value. In early 2018, shares of Pershing were trading at a 20% discount to net asset value. After consecutive successful quarters, the fund's NAV was up 45.3% in the first half of 2019, though it went back down to a 28% discount by June 30.

Ackman attributes the hurting share price of Howard Hughes to a misunderstanding about the way the company operates. Below is an excerpt form his 2019 semiannual letter to shareholders regarding the matter:


"In addition to residential land sales, HHC has a significant, under-appreciated profit opportunity in the commercial development of its MPCs [master planned communities]. As MPCs reach a tipping point of residential density, demand arises for retail, office, multi-family and hospitality development in HHC-owned MPC town centers. Over time, the stable and recurring real estate cash flows (net operating income or NOI) from these properties will represent a growing percentage of HHC's value. We believe that HHC's current NOI represents only a fraction of the long-term opportunity, and expect the company to continue to capitalize on its decades-long commercial development pipeline."



A look at the financials

On paper, it is clear the share price for Howard Hughes follows the news more than it follows earnings. The share price went into a period of decline right when the company marked record revenues and increased due to speculation when revenue dropped in the third quarter.

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Howard Hughes has a market cap of $4.97 billion as of Dec. 10. It has a GuruFocus financial strength score of 3 out of 10 and a profitability score of 6 out of 10. Its price-earnings ratio of 44.09 is higher than 91.37% of industry competitors, and it has a cash-debt ratio of 0.19. Nearly all (39 million out of 43 million) of its shares are owned by institutional investors, and 4.29% of shares are owned by insiders.

Conclusion

Although Pershing Square's buying and selling have not always been 100% attributable to the fund's expectations of where its share price will go next, it is the fund's longest-held position currently and one of only eight stocks in its equity portfolio. Since the buy comes in the wake of Howard Hughes' decision to remain an independent company and transform itself for future profitability, it bodes well for the company's ability to create value for shareholders in the future.

Disclosure: Author owns no shares in any of the stocks mentioned.

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This article first appeared on GuruFocus.