Sunday, 13 January 2013

HHC: A few speculations

With the news of Ward Village in October, announcement of recontinuing construction of the Summerlin Centre in September, and Seaport news in August of last year, some of the most anticipated headlines regarding HHC's key development properties have already come to pass. In none of these instances did the stock move materially on the day of annoucement. 

Perhaps HHC was waiting until all these press releases were published before offering to buy back the warrants from Blackstone, Fairholme, and Brookfield.  But another part of me is thinking that the warrants have been on Weinreb's mind since the spin-off.  Here is a purely speculative statement: Weinreb believes the MPC revenues will begin shooting up soon (maybe we'll even see it in the Feb. reporting) and wanted the warrants cancelled now before it would be significantly more expensive to do so. Assuming the stock hits my 2 year target of $100, this would save shareholders $67.5 million (or $1.50 per share) on just the buyout of Blackstone's/Fairholme's 2.25 million warrants alone.

Here's another way to look at it: It cost HHC $30 to cancel each of the warrants.  Blackstone/Fairholme held 2.25m warrants combined, so HHC outlayed $67.5 million.  The $30 buyout price also implied a $80 breakeven price ($30 + $50 strike), which also happened to be ~10% above where the stock closed on the day of the announcement (Dec. 10).  So assuming that the same 10% premium would have applied had the deal been struck later, this would imply that at $100, Blackstone/Fairholme would have demanded $60 for each warrant ($110 minus $50 strike). 

At a $60 buyout price for the warrants, HHC would have to pay Blackstone/Fairhome $135 million (2x the settlement in December). In other words, when the stock price hits $100, this would mean that Weinreb and Herlitz (or maybe it was Richardson who was behind the negotiations) doubled shareholders' money on the cancellations. If this happens by December 2014, the 2-year compounded return would be 41% - difficult for the company to beat any other way.

But still, I'd like to "use the force" here...and speculate that either the next quarterly reporting will be excellent, or will include additional news about deals made recently. The news flow regarding commercial property development has been deathly quiet since October, save the few announcements in December about a few tenants signing on.  It is likely that management is holding back everything possible because of the bad optics that would result if positive news were to be published shortly after the warrant cancellations. If I look back to the buyout of Morgan Stanley's portion of the Woodlands, it took about 4 months until 3 Waterway Square was announced. Now, I'm not suggesting that there was assymetric information in those negotiations, but rather that the silence after the conclusion of such an agreement can be a hint of things to come.

No comments:

Post a Comment