HHC: Estimating Overhang Removal and Mid-Term Upside

As commented earlier, Brookfield (BAM) has been selling its HHC stock since late 2012.  This was trackable via the 13D filings(for insider trading), which BAM was required to submit until March 1st.  As of that date, however, we have no way of knowing exactly when BAM has completely exited its position unless the company makes a public comment.  Why is this important? Because Brookfield's steady selling is likely causing a supply/demand imbalance that once removed could result in share price appreciation.

Admittedly, what follows is all speculation. BAM no longer needs to update us via 13D filings because it has reduced its position below 5% as at March 1st.  If BAM's share of dailing trading increased to 44%, it is possible that the overhang has disappeared as of last Friday's closing.  It is also possible that BAM was out of their position as early as March 6, as volume was unusually high that day (1.95 mm shares traded hands).  Further supporting the possibility that BAM has since completely exited its position is the fact that HHC's shares are up 8.2% since March 1st versus 0.1% for the Dow Jones.

However, if I assume that Brookfield's share of daily volume has stayed at 33% since March 1st, this would mean that they currently have ~460,000 shares remaining on their books (i.e. 4.2mm shares traded since then has allowed BAM to sell 1.4mm).  Extrapolating further, I can estimate that BAM's selling can be completed within 5 more trading days (BAM can sell ~100,000 shares per day based on average of ~304,000 average between March 4-22).

So what is the upside?  HHC trades at less than 1.5x book value vs. 2.2x for a few of its home-building related peers (LEN, BRP, DHI).  Should HHC trade up to 2.2x BV, this would result in 55% appreciation to $129.

Disclosure: I am biased - I own lots of HHC still!

 

Ackman spotted in Tokyo; Brookfield overhang may already be gone

Ackman was spotted in downtown Tokyo today with an entourage of four people.  What could he have been up to?  Rounding up more investors?  Or could Ackman have already have invested in his first Japanese activist effort?  As far as inefficiencies in overhead spending go, Japan should be ripe for an activist to go in and tear things apart. However, from what I've heard, there are good reasons why activists aren't too prevalent in Japan, one being that layoffs aren't an accepted practice.

On another note, it is possible that Brookfield has finished selling out of its HHC position.  This would explain the recent jump in share price.  If Brookfield in fact has shares remaining, it sure will be interesting to see what happens when overhang from BAM's selling finally lifts. 

HHC's Weinreb Presents at Harbor Conference; Brookfield Continues Selling

David Weinreb (CEO) presented in public for the first time (that I'm aware of) on HHC.  It was a great presentation - I highly recommend anyone interested in the company to listen to the replay, which can be accessed at www.howardhughes.com   I will give my two-cents once I have had the opportunity to relisten to it a few times.

Brookfield (BAM) filed a 13D (for insider selling).  It appears they sold ~410,000 between Jan. 25 and Feb. 11, representing approximately 33% of total volume.  If my information is correct that they had ~2.7 million shares remaining as at Feb. 11, my rough math shows that it would take another 13 weeks or so for BAM to completely sell off their position at the current rate.  So despite the big move today as a result of Weinreb's speech, I believe the stock will be somewhat "freed up" sometime in May when the selling pressure from BAM eases away.   My deep respect for the brains in Brookfield was one of my motivators for buying into HHC, so it's a shame to see them go.   But my conviction that HHC is still a multi-bagger from here has been solidified and won't go away anytime soon.

West Windsor

It appears I may have overreacted (article).  HHC expressed interest in doing a mixed used development, but for now just wanted to meet town residents and basically introduce themselves.  I think their approach is sensible: get a feel for want people want or don't want instead of asserting your plans.  The presentation contained no renderings of what the property could look like.

I could be wrong... it is actually quite likely that John DeWolf already knows exactly what he wants out of the acreage and is going through the motions of being stakeholder friendly. Either way, it is a win-win for everyone.  The property is an eye sore and I'm sure anything HHC does will be an improvement. 

An interesting snippet is that Wyeth sold the 658 acres to Rouse Corporation (which was acquired by GGP and subsequently some properties spun out into HHC) in 2004 for $35 million; that works out to ~$53,000 per acre.  In the original spinout prospectus from 2010, West Windsor's net book value is listed at $20.5 million (~$31,000 per acre), implying that a big write-down was taken on this property.   Now, a sceptic would say that land can be worthless.  But again, I'd be willing to bet that when the 60 buildings are cleared and ready for development, each of those acres will have a market value in excess of 10x what Rouse paid for them in 2004.  

Let's assume the land on which my house resides is worth $175,000.  Assuming my lot is around 1/7 of an acre, this would imply that the market value of an acre in my district (which by the way is very middle class) is ~$1.2 million which equates to 22x what Rouse paid and 39x the net book value per acre on the balance sheet.

HHC is an investment that necessarily requires patience.  I made the mistake of taking a 30% gain on some of my stock in 2011 and reinvesting the winnings in low quality companies that tanked thereafter.  At 1.2x book value (and an extremely understated one at that), I still think that a new investor stands to do well in this name. 

Weinreb presenting at Harbor Investment Conference: On Feb. 13th, Dave Weinreb (CEO) will be giving a presentation.  Hopefully this will be available afterward via webcast.   Other than his shareholder letters and comments in press releases, he has remained pretty much a mystery. I realize this is his first gig as a public company CEO and look forward to seeing him open up a bit more.  But... of course there is no hurry.    

Another Instance of Emerging Value - West Windsor?

HHC will be meeting with residents on Jan. 30 to discuss development plans for the 658 acre, former site of American Cyanamid across from the mall on Quakerbridge Road in New Jersey.
What could be going on here? My speculation is that plans for some kind of multi-family, mixed use property will be announced... I say this because there is already a 1.1 million sq. ft. shopping center across the road.

Here is an example of a free option in the stock.  Currently, I just slap $100,000 against each acre for a value of $66 million ($1.46/share on a fully-diluted basis).  But I am quite sure that if recent events are even loosely relevant precedents, investors will soon see some of the hidden value in this thing.  For example, take a look at slide 30 in the investor presentation on the website: 4.8 acres was contributed into a JV at a value of $15.5 million to build 314 condo units for Millenium Phase II in the Woodlands. This equates to $3.2 million per acre!  Now, flip to slide 41 and you will see that land was contributed into another JV to build 375 condo units in downtown Columbia at 6.7x book value ($20.1 mm vs. $3mm book value).  So regardless of how much less you think the New Jersey land is worth relative to the examples listed above, I am quite confident that my $100,000/acre (remember, this isn't farmland) will prove ultra-conservative.

From the Howard Hughes website:

West Windsor is a former Wyeth Agricultural Research & Development Campus on Quakerbridge Road and U.S. Route One near Princeton, New Jersey. The land is comprised of two large parcels on Quakerbridge Road that are bisected by Clarksville Meadows Road and a third smaller parcel. The approximate 352 acres north of Clarksville holds the former Wyeth Campus and the 300 acres south of Clarksville is largely vacant land. The third parcel (approximately six acres) is separated from the balance of the land by an adjacent rail line. Across Quakerbridge Road is the Quaker Bridge Mall, a two-level, 1.1 million square foot regional shopping center owned by Simon Property Group. The mall is anchored by JCP, Macy's, Lord & Taylor, and Sears. The property opened in 1975 and has over 120 stores.

Full disclosure: I still own lots of this stock!!!  And I have never met an employee of the company.  I just like puzzles, and HHC is the most interesting puzzle I have ever looked at.

Zuckerberg Bought HHC Condo Units

So it appears FB's Zuckerberg got himself several condos in ONE Ala Moana (article here).  Good choice Mark!  :)

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.