I will note here that I did reach out to the folks at Saibus last week and did manage to have a conversation last Friday about their piece. I had hoped that some of the errors contained here would be corrected but they have not. Since I continue to get questions on it, I'm obliged to respond…
The first issue that was brought up was valuation and it contains a critical flaw….
If Howard Hughes can continue its recent run of impressive growth, it could potentially achieve or exceed its prerecession highs of $548.7M in total revenues last achieved in 2006. Howard Hughes's recent growth in its strategic development asset base is impressive as is its Master Planned Communities segment but we believe that the company is trading at a rich valuation of 2.6X Book Value and 33X TTM operating income
Here is the flaw: Any company that holds real estate is required to hold it on its books at “the lesser of cost or replacement value”. That means a company like HHC is required to hold the value of the properties they inherited from GGP in its Chapter 11 at a small fraction of their true value.
Two examples:
As of 12/31 the South Street Seaport property that is going to be home to 360k ft of retail space (phase two will add another ~300k sqft) and two condo towers is being held on the books at $47M (2013 annual report pgs 103-104). Even a little cocktail napkin math tells us 660k sq ft at $200sq ft and a 5% cap rate (both VERY reasonable assumptions for waterfront NYC retail space) gives us a valuation for JUST the retail section there of $2B or so… a bit of a far cry from the $47M “book value” it is being held at . I'll also note here that we haven't even touched any potential value for the two waterfront condo towers or any additional development. Not sure how familiar you may be with NYC real estate, but those are gonna be worth more than a little bit. Finally, the $200sqftassumption for rent is going to prove grossly conservative once things get cranked up there. $400 sqft is wholly reasonable in which case we can say that the Seaport area development is worth ~85% of the current market cap of the entire company at that rent.
Honolulu:
Ward Center is 60 acres ocean front land HHC is approved to build 4,000 residential units (condo/apartment towers) and >1MM sqft office and retail space. It is being held at a “book value” of $370M. Let that sink in.
Sunk in?
The residential first tower, One Al Moana went on sale in December 2012 and sold out 204 units in two days for an average price of $1.6M. So, a property that will support another 3,796 residential units and >1MM sqft retail and office space just sold its first units and will bring at closing $326M of revenue….is worth $370M? ……. In order to be using simple book value on HHC you have to believe that is true…
Tower 2 and 3 are 80% sold out and Tower 4 has been approved….
We can do this easily…… what would a developer pay for 60 acres ocean front land in Honolulu approved for 4000 residential units plus a huge office/retail component? What would you sell it for? $370M? I didn't think so…
The second “risk” they state is oil. This seems to matter because HHC has been trading like an energy company in recent weeks…:
