Todd Sullivan
February 20, 2015
Todd Sullivan @ Rand Strategic Partners
www.about.me/toddsullivan

The Bull Case For Howard Hughes

The risk of oil prices to Howard Hughes is much overblown and its assets are worth double the current price  (HHC)
“Spin Co.”
Todd Sullivan, Rand Strategic Partners
1
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ls
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-
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. R
and
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-
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-
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2
•
The title refers to a collection of assets that
Simon Properties CEO David Simon once
called
“
[
expletive
]
Co.”
•
Contrary to Mr. Simon’s eloquent description
and timeless wit, these assets are incredibly
valuable and the stock at today’s prices
presents a compelling opportunity
•
The company, Howard Hughes (HHC), holds
these premier assets in
sought
-
after
locations
and is entitled to develop them on a massive
and currently unmatched scale
3
History
•
Assets originally owned by General Growth Properties
•
In 2009 GGP entered Chapter 11 bankruptcy protection
•
HHC was carved out into
a
new entity
,
as the assets did not fit GGP’s goal
of becoming a Class A regional mall operator post emergence
•
Fairholme
, Brookfield and Pershing
led
recap of entity and received
warrants
•
Spin was completed Nov 2010 at ~$35/share
•
Fairholme
/Brookfield warrants were repurchased by HHC in’13 for $81M
cash and 1.5M shares common. Transaction is breakeven for
shareholders long as the stock price is over $81/share in 2017. Due to
repurchase, existing shareholders immediately owned 10% more of
company.
4
History
•
Pershing has not yet sold its warrants back to the company
•
In
Nov
.
2010
,
David
Weinreb
and Grant
Herlitz
were hired as CEO &
President
•
Together
they
purchased
7yr warrants for $17M on 2.7M shares at $42.23
•
Warrants may not be sold or hedged in any way nor may the execs reduce
their net long exposure until Nov, 2016
•
In Feb
2011
,
Andrew Richardson
was
hired
as CFO
•
Purchased for $2M 7yr warrants on 179k shares at $54.50 under same
terms as
Weinreb
&
Herlitz
(except date differences)
•
Top management VERY aligned with shareholders as upon warrant
exercise they will be the largest individual shareholders in company
5
Unique Model
•
Typically
land
-
owning
companies have simply sold their land to developers
in a
one
-
off
event
•
HHC has done something very different. When they are not the sole
developer of a project, they do the following:
Summerlin
Apartments, LLC
On January 24, 2014, we entered into a joint venture with a national multi
-
family real estate
developer, The
Calida
Group (“
Calida
”), to construct, own and operate a 124
-
unit gated
luxury apartment development. We and our partner each own 50% of the venture, and
unanimous consent of the partners is required for all major decisions. This project represents
the first residential development in
Summerlin’s
400
-
acre downtown.
We will contribute a
5.5
-
acre parcel of land with an agreed value of $3.2 million in exchange for a 50%
interest in the venture when construction financing closes. Our partner will contribute
cash for their 50% interest, act as the development manager, fund all pre
-
development
activities, obtain construction financing and provide any guarantees required by the
lender
. Upon a sale of the property, we are entitled to our 50% share of proceeds and 100%
of the proceeds in excess of an amount determined by applying a 7.0% capitalization rate to
net operating income (“NOI”). The venture is expected to begin construction in the fourth
quarter of 2014 with the first units available for rent by the fourth quarter of 2015.
6
Share Price Since Spin
7
Ward Centers in
Honolulu
8
•
HHC owns 60 acres
of
ocean
-
front
property
•
Currently vastly underutilized with a series of
low
-
rise
retail, office and parking
structures.
Its
1.2M
sqft
produces ~$24M NOI
•
Entitled to build ~4,000 residential units and 1.9M
sqft
of retail and office space
(9.3M
sqft
total)
•
Tower 1 (Ala
Moana
) went on sale and sold out 206 units in 23 hours ($1,170
sqft
) with residents camping out at the sales center. Facebook CEO
Zuckerberg is rumored to be a buyer of “several
units
.
”
•
Towers 2 (
Waiea
) and 3 (
Anaha
) are 75% sold out (493 total units)
•
Waiea
construction began 11/2014 and Towers 4 and 5 have been approved
•
Tower 5 will feature the largest Whole Foods in Hawaii
•
Hawaii currently is facing a housing shortage and the University of Hawaii
Economic Research Organization (UHERO) estimates the area needs 4,000
units/year until 2020 to help alleviate it
•
There is tremendous embedded demand for HHC’s
offerings
9
10
Anaha
&
Waiea
Tower
Locations
What Ward Centers Will Look
Like
At
F
ull
B
uild
O
ut
....
11
Houston
•
Fastest growing metropolitan area in US
•
60% of new residents to Houston
move
to
Harris
County
,
home
of
HHC’s
Bridgeland
MPC (broke ground in spring 2014)
•
Bridgeland
will deliver 17,600 finished SF lots on 11,400 acres plus
retail/office/hotel/multi
-
family space
•
~20% of new residents
move
to Montgomery
County
,
home of
HHC’s
The
Woodlands
MPC. Montgomery County’s 500k pop is expect to
double over next
25
years
•
Exxon is building a campus adjacent to
T
he
Woodlands and bringing
10k
employees. Ha
s
already signed leases
w
ith
HHC
for >700k
sqft
of space
12
•
The
Woodlands
'
28,000 acres make it larger than Manhattan
•
In 2014 HHC bought ~
1
,
800
acres just north of The Woodlands for
$67M with plans for > 4,600 residential lots & 161 acres commercial
(Hendricks Land). Even if we assume a 30% discount on lot price vs
The
Woodlands
, the purchase still represents a min. $600M revenue
opportunity only on residential lots assuming no price increases and
ignoring all commercial development
•
HHC is also building Embassy Suites and Westin hotels which
it
will
operate. There is a luxury tower being built next to the Westin
•
There is ~2M
sqft
currently under development in
T
he
Woodlands
with a significant portion of that opening in ’15
•
There are still 2,000 lots to sell (approx.
3
yrs
worth) and lot prices
increased 19% in
T
he
Woodlands (30% in
Bridgeland
) in 2014
13
Grand Parkway
•
Segment connecting
T
he
Woodlands
and
Bridgeland
scheduled
to open by the end of 2015
•
Will further boost growth in the area
•
The Katy section that runs from
Rt
10 to
Rt
290 opened in Dec
2013 and demand for housing in the area has jumped with 15k
new homes already planned for the next 10
yrs
and more coming
•
Katy’s population has now topped 300k (the size of
Pittsburg
h
)
•
The Grand Parkway will open the entire area around
Bridgeland
to development and grant easy access to
T
he
Woodlands from
the West 45 miles to
Bridgeland
14
Grand Parkway
15
Oil Risk?
•
Much has been written about the price of oil and
its effect on Houston and its housing market
•
The risk to HHC is overblown
•
The basic thesis is born from Houston’s
experience
during
the
1980s
when falling oil
prices (from $112 to $31) caused a regional
recession and housing/commercial
real estate
saw
price declines.
•
People erroneously assume oil prices are today
the sole driver
of
Houston’s
housing market
16
Differences Between
1980s
and Today
•
From 1979 to 1981 Volker raised the Fed funds rate from 11.2% to 20.5
%
,
which
caused
a national recession in ’81
-
’82. Today the Fed funds rate is
.1% and a recession is nowhere on horizon
•
In 1985 oil and gas exploration was 21% of Houston’s
economy;
it
is 11%
today
•
In the
1980s
Houston homebuilders built >100k homes without signed
contracts and continued to build as the region shed 200k
jobs
; this
practice
is almost non
-
existent today and Houston has added 480k new jobs since
the end of the recession
•
In the early
19
80s
developers added 71.7M
sqft
of office space as
employment dropped and companies were declaring bankruptcy. Today
there is just 16M
sqft
under construction and 56% of that is pre
-
leased
17
Does The Most Recent “Oil Crash”
Gives Us A Better Perspective?
•
The
2008
-
09
oil crash
had
a muted effect on Houston’s housing
market
and
also
featured several other characteristics that make
the “oil will cause Houston housing to collapse” meme questionable
•
From June’08 to Feb ’09 crude oil fell from $143 to $43/
bbl
•
What happened to housing?
•
The median annual home price in Houston entering 2008 was
$
153,630
;
the median annual home price for ’09 was $153,000
•
From
pre
-
to
post
-
recession
(’06
-
’11) the median home price rose
from $149,100 vs $153,900
18
2008 vs 2014
-
15
•
In
2008
-
09
Houston entered the oil price collapse/recession with ~
6
mos
supply of homes for sale. Today it has
2.5
mos
(record low and 1/2 US
number)
•
In 2008
annualized
GDP
fell
-
8.2%
and
-
5.4% in Q3/Q4. Today GDP is rising
~3%
•
From
2007
-
09
7.5 million American’s lost their jobs. In 2014 2.2 million
obtained jobs
•
During the “great recession” US home prices fell ~25%. In 2014 they rose
5.6% and are forecast to rise another 4%
-
5% in 2015
•
Despite hitting record high prices in Dec 2014, the median home price in
Houston is still 9% below the US average &
30
-
60
% below other large metro
areas (Miami, Boston, LA, San
Fran
c
isco
). This affordability is driving a
steady stream of young and educated new residents to the
area
19
•
Even
the most pessimistic projections call for only 40k energy related job
losses in
2015
, equal to only 1.3
%
of the ~3M people employed in Houston
Metro (4.5% unemployment rate vs 5.5% US)
•
Despite those losses Houston is still expected to add ~50k net jobs in 2015
and 125k new residents. These people will be looking for housing in an
severely undersupplied market
•
Houston is now home to the world’s largest medical center and the #1
export port in the US. “Health and Education” have been leading the area in
employment gains the last decade (~2x oil and gas sector)
•
Over the past decade Houston’s population of “college educated residents”
has grown 40% and in total numbers more than Boston, San Francisco,
Silicon Valley and
Chicago
.
Houston
has added over 400k foreign born
nationals, second only to NYC and
3
x
the
#3 city,
LA
20
Conclusion
•
The Houston housing market will not suffer material declines due to the oil
price fall
•
Historically low residential and commercial inventory, increasing national
and regional GDP, a decreased reliance on the energy
sector
,
and
increasing employment and population all provide significant tailwinds
•
However, oil and gas are still significant contributors to the area.
Houston
‘s
growth rate may be cut in half
in
2015
•
Even at these
levels
,
Houston
's
GDP will grow more than NYC, Chicago,
LA and Washington DC and it has a much lower current housing inventory
than all of
them
•
Further, HHC has only 2,000 lots left to sell in the Woodlands (3yrs)
and
Bridgeland
is centered in the
fast
est
growing county in Houston
21
•
HHC has been restraining sales in
T
he
Woodlands via auctions to
maximize
price
s
•
Activity in
T
he
Woodlands now is focused on retail and office space to
support the needs of existing residents
•
The area is considerably underserved on both fronts and demand is
very strong (people want to work and shop near where they live)
•
While the fall in oil prices will slow the rate of home price appreciation in
the Houston Metro area (10.6% in 2014), given the lack of available lots
and large influx of workers and residents to the area in 2015, I think
HHC sees a minor if any impact to its
two
MPCs
•
Should oil prices settle significantly <$40 for a prolonged period of time
(1yr), this thesis would have to be
revisited
•
Houston assets make up < 30% of total valuation
22
South Street Seaport
•
Redeveloping Pier 17
•
Will have 362k
sqft
of retail space, roof
amphitheater (4k people) and hi
-
tech movie
theatre (
iPic
) in Phase I and another ~700K
sqft
in Phase II
•
Phase I scheduled to open Q4 ’16
•
Leasable space will rise
4x
from
current 88k
sqft
•
Rents should rise to in excess of $200/
sqft
23
Proposed
P
lan
24
Additional aspects include:
•
Restoration of
the
Tin
Building
•
Marina
•
~400ft hotel/residential tower
•
Food market
•
Acquired 80 S. Street pre
-
approved for a 1,000
ft
Tower
•
Acquired 85 S. Street
25
Summerlin
•
HHC is largest private landowner in Vegas and 2nd
largest
after
Fed
government
•
Summerlin
is a
22,500
-
acre
MPC
•
Permitted for an additional 20k homes
•
One of the most affluent communities in Vegas
•
Currently 100k
resident
occupy the
MPC
, which
is
expected to double
•
Lot prices increased 73% in 2014
26
Downtown Summerlin
•
1.6M
sqft
retail/office opened in Oct 2014
•
124
-
unit
luxury condo tower being built along with 200k
sqft
office
tower
•
Occupies ~106 acres of
400
-
acre
site
•
Red Rock Casino and Resort sits next to Downtown
Summerlin
and
sees >1M visitors per year
•
$1B of retail sales leak from
Summerlin
annually
•
Retailers reporting sales “well above” expectations
•
~$40M normalized NOI from just retail component currently open
27
•
28
Other Assets
•
West Windsor, 658 acres near Princeton
NJ
:
expect
redevelopment plans to be revealed late
2015
-
16
•
Outlet Collection at
Riverwalk
, New
Orleans
:
r
enovated
and
reopened 2014, 250k
sqft
•
Landmark Mall, Alexandria
VA
:
planning commission has
approved redevelopment proposal
•
Fashion Show air rights on
the Las
Vegas
strip
•
Columbia,
MD
:
redevelopment underway
;
HHC just added 700k
sqft
of office/retail space
there
and
now control
s
the majority of
the office space in Columbia
29
Columbia, MD
HHC is redeveloping and adding ~13M
sqft
o
f
office,
retail,
multi
-
family
30
Landmark Mall
Current state: “Dead Mall”
31
Phase 1 calls for 280k
sqft
retail and ~400 apartments
32
Phase 7 includes condos, hotel and office space (5.5M
sqft
)
33
Hotel
Properties
Coming Online
•
Embassy
Suites
:
205
rooms
•
Westin
:
302
rooms
•
Woodlands
Resort
:
440
rooms
(
opened
Q4
2014)
34
Residential Properties
Coming Online
in
2015
•
Columbia
D
:
817 units
•
Summerlin
Apt
s
:
124 units
•
Columbia
C
:
437 units
•
One Al
Moana
:
Sold out in 24
hrs
•
One Lakes
Edge
:
390 units
•
Metropolitan Downtown
Columbia
:
380 units/14k
sqft
retail
35
Office/Retail Coming
Online
in
2015
•
Tech Forest
Drive
:
95k
sqft
, $2.1M NOI
•
Creekside
Village
:
75k
sqft
•
One Lakes
Edge
:
22k
sqft
•
Three Hughes
Landing
:
324k
sqft
•
Hughes Landing
Retail
:
83k
sqft
•
Exxon I &
II
:
~650k
sqft
, ~$10.7M NOI
(
rises
to $14.5M if Exxon exercises
option for 150k more
sqft
)
•
One
Summerlin
:
200k
sqft
•
Columbia
D
:
76k
sqft
•
Columbia
C
:
31K
sqft
•
Recently acquired Columbia
office/retail
:
700k
sqft
36
2016 and Beyond
•
Ward Centers: More
t
owers
and significant additional retail/office space
•
Waiea
condos:
171 units
•
Anaha
condos:
311 units
•
Ward Workforce
Tower:
424 units
•
Tower #5 Hawaii
•
Columbia
Parcels
•
Lakeland Village
Center
:
84k
sqft
office
•
South
St
.
Seaport
:
380k
sqft
retail and Phase II retail
•
South
St
.
Seaport
:
Tower and 80 and 85 South Street Towers
•
Creekside Village
:
1000
units and 225k
sqft
retail
•
Landmark
Mall
:
400 units and 280k
sqft
retail/office
37
Looking Forward
•
Results
should
begin
to show
material
improvements in
Q4 2014
(reported
at the end of this month)
•
MPC land sales will get a ~$27M bump from
Bridgeland
sales closing in
Q4 (vs $3M in 2013) and builders playing catch up to demand in
Summerlin
bringing new neighborhoods online (supply restricted sales in
2014
)
•
NOI will increase significantly due to the Shops at
Summerlin
, Two
Hughes Landing
,
Columbia
Regional Building, Creekside Village, Al
Moana
, Tech Forrest Drive,
Riverwalk
and Millennium Woodlands
II
, which
all
open
ed
in the second half of 2014 (these will positively impact Q1 and
Q2 2015 comps also)
•
Q1 2015 gets an additional boost from Columbia C&D (retail (100k
sqft
)
and residential (1,200units)), and Hughes Landing Retail opening
38
•
The company will see a material rise in NOI from the current
$70M annually to a $200M
-
$250M run rate in 2016
•
Post
2017
,
the
still
-
rising
NOI and decreased land available
for sale
(
The
Woodlands/
Bridgeland
almost
sold out) will put
pressure on current “C
corp
” status
•
Look for some type of change to REIT status either via
corp
orate
change or
a
spin
-
off of certain assets
to
shareholders at some point
•
Cash flow in 2017 and beyond becomes significant to the
point acquisitions/share buybacks are unavoidable
39
Valuation
:
MPC
Available acres for
sale
•
The
Woodlands
:
1,000
acres
•
Bridgeland
:
4,500 acres
•
Summerlin
:
5,200 acres
•
Columbia
:
103 acres
•
TTM revenue of $338M vs $228M
•
Using DCF model for future land
sales and
a
n
11% discount rate
gives us a value of $2.4B ex debt
or $56/share
(
using
43M fully
diluted
shares
)
40
Operating Properties
•
South St Seaport
•
Woodlands Properties
•
Columbia Properties
•
Shops at
Summerlin
•
Al
Moana
•
Ward Condos II and III/CRE
•
Smaller and non
-
income
producing assets
•
TTM NOI of $65M vs $46M
•
Shops will add ~$37M NOI
annualized in 2015 plus
additional properties online
•
Using a DCF on CRE
development of 12% and
giving operating assets a
5.5% cap rate gives us a
$7.6B valuation
(
excluding
debt
)
or $176/share
•
The value of tax assets, after
cash tax flow, option/warrant
exercise & net
corp
cash (0)
comes to $15
-
$25/share
41
Valuation
Land
Sale/MPC:
$
56
Operating properties
:
$
176
Other
:
$
15
-
$25
Value:
$247
-
257/share
(Even
if we
value Houston
assets
at $0 due
to oil,
HHC shares are still worth $175
-
$185 value, a
premium to their current
price)
42
Model Excludes
•
Seaport Towers (80 & 85 S.
Street) and Phase II of
retail
•
Towers 4 and 5 in Hawaii
•
Recent purchase of 700k
sft
retail/office in Columbia
•
Hendricks Land outside
Woodlands development
•
West Windsor
development
(
658 acres near Princeton
)
•
Fashion show air rights
•
Landmark Mall
redevelopment
•
Currently unannounced
future development
•
Share repurchases
43
Q & A
44
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