One of the Top Billionaire Investors Owns 37% of This Real Estate Company – and I Can't Believe It's This Cheap
Matt Frankel, The Motley Fool
5 min read
Billionaire investor Bill Ackman is best known for his large stakes in companies like Chipotle(NYSE: CMG) and Restaurant Brands International(NYSE: QSR), but there's one stock in the portfolio of Ackman's Pershing Square hedge fund that could be the most interesting investment of all.
I'm talking about Howard Hughes Holdings(NYSE: HHH), which is one of the most unique real estate companies in the market. Pershing Square owns about 18.8 million shares worth $1.6 billion at the current price, which gives Ackman and his investors a 37% stake in Howard Hughes.
Since this company isn't exactly a household name, here's a quick overview of what it does, some of the reasons why Ackman might like it so much, and what to keep in mind if you decide to invest.
What does Howard Hughes Holdings do?
Howard Hughes Holdings' primary business is developing master-planned communities, or MPCs. These are large-scale developments that could be more accurately describes as small cities, rather than the smaller neighborhoods you might think of when you hear the term "communities."
Some major examples of the company's MPCs include The Woodlands and a couple of other communities in the Houston area with over 140,000 residents. There's the 22,500-acre Summerlin community in Las Vegas. And the oldest of the group is Columbia, Maryland, which is located between D.C. and Baltimore.
Howard Hughes' business model is designed for long-term value creation. The company acquires a large piece of land (such as the 37,000 acres it acquired in the Phoenix area a couple years ago), and sells a small portion of it to homebuilders, who develop residential communities. The presence of these homes creates demand for commercial assets like offices and retail properties, which Howard Hughes builds and collects rental income from. These commercial amenities make the surrounding land more valuable to homebuilders, so they sell some more land. This cycle can continue for decades.
In addition to its master-planned community business, Howard Hughes has a few other businesses. It owns the Seaport in New York City, owns a minority stake in Jean-Georges Restaurants, owns a Triple-A baseball team in Las Vegas, and more. It plans to spin off the non-MPC parts of the business, perhaps later this year.
Tons of long-tailed potential
As of the latest information, Howard Hughes owns 6.8 million square feet of office properties, 2.6 million square feet of retail space, nearly 6,000 multifamily housing units, and has about 35,000 acres of developable land remaining. The company believes it can increase its NOI bv nearly 40% from 2023 levels from stabilizing its current portfolio (especially offices), with even more to come from assets under construction.
When it comes to developing commercial properties, Howard Hughes is in perhaps its most active development period ever. It currently has 1.7 million square feet under construction and expects to spend $1.8 billion on development. The company sees near-term development opportunities of 1.8 million square feet in The Woodlands, over 2 million square feet in Summerlin, and a massive opportunity to add office, retail, and multifamily properties in Downtown Columbia.
The Ward Village MPC in Hawaii could be a big future revenue generator. There are four new condo towers either under construction or in pre-sales, and these represent $2.6 billion in future revenue by themselves, with four more buildings planned from 2027 through 2030.
The Phoenix-area MPC represents a massive and decades-long opportunity. The first village in the community is under development now, and the company aims to build the MPC (known as Teravalis) into a community of 100,000 homes, 300,000 residents, and 55 million square feet of commercial space.
Finally, the spinoff of the non-MPC assets could help unlock value. The Seaport in NYC is an iconic development that is just starting to realize its full potential. There's a new high-rise mixed-use development about to start construction that will have 547,000 square feet of space.
A great business at a huge discount
Howard Hughes could be an amazing deep value play for patient investors. At the company's 2023 Investor Day in September, management made the case for a $129 per-share net asset value (NAV), more than twice the current stock price. And as interest rates start to come down, NAV could grow significantly as borrowing costs decline and commercial real estate valuations rise.
Having said that, it's important to understand that if you buy shares of Howard Hughes Corporation, it's important to understand that it is designed with ultra-long-term value creation in mind. It's a difficult business for the market to value, and it can be rather volatile over short periods.
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Matt Frankel has positions in Howard Hughes. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Howard Hughes. The Motley Fool recommends Restaurant Brands International. The Motley Fool has a disclosure policy.
