Is Howard Hughes Holdings the Next Berkshire Hathaway of Real Estate?
37% Undervalued: The Case for Howard Hughes Holdings in 2025
Buy land, they aren't making any more of it.
- Mark Twain
On August 6th, in a 13D filing, Bill Ackman's Pershing Square Capital made public their evaluation of options regarding the investment in Howard Hughes Holdings Inc. (HHH). They currently own 37.5% of the shares and are interested in exploring an acquisition of the remaining shares.
Howard Hughes Holdings has one main subsidiary, Howard Hughes Corporation (HHC). This is the real estate business and is expected to be completely unchanged after the proposed merger. Ackman believes that HHC's business has an intrinsic value far greater than the current share price and its management is doing a great job.
However, the holding company would become a diversified business. In a nutshell, any excess cash generated by the HHC, as well as other sources of company capital, would be invested by acquiring businesses and other assets. As Ackman said in his letter, "With apologies to Mr. Buffett, HHH would become a modern-day Berkshire Hathaway that would acquire controlling interests in operating companies."
Howard Hughes Holdings board formed a special committee of independent directors to assess any offers from Pershing Square and has yet to comment publicly about their proceedings. There is a strong argument that Ackman knows the company better than anyone outside of the current management from his time as chairman of the board from 2010 to 2024.
Since the news of Pershing's interest became public, Howard Hughes Holdings has raised guidance as a part of their Q3 earnings reporting, expecting net operating income to grow 5% to 8% annually for 2024.
Company Overview
Howard Hughes Holdings is a real estate developer specializing in master-planned communities. They own large tracts of land near major economic hubs and strategically develop places that are very desirable to own a home. The company sells empty lots to homebuilders at a profit while retaining commercial real estate assets to produce operating income; they are not in the business of building single family homes.
As homes are sold and new residents move in, Howard Hughes Holdings can generate more income from charging higher rents to businesses that want to occupy commercial spaces in their exclusive and growing communities. In turn, as more commercial amenities are available and conveniently located within these master-planned communities, the remaining acreage can be sold at a higher profit to homebuilders as they sell homes driven by even higher demand.
The slide above is from the Howard Hughes Holdings 2024 Investor Day presentation and details the increased demand for new homes since the 2008-09 financial crisis.
With a crisis of housing availability in the United States and an estimated deficit of 4.5 million homes, Howard Hughes Holdings team has assembled an irreplaceable collection of real estate assets and raw land upon which new homes can be built. The stock has been depressed for some time, offering what I find to be a significant margin of safety rooted in the growth of operating income and the value of real estate assets in their portfolio.
History
Howard Hughes Holdings is named in honor of an iconic American who inspired the character of Tony Stark in The Walt Disney Company's (DIS) Marvel Universe.
[Stan] Lee explained that Hughes was “one of the most colorful men of our time”, as he was “an inventor, an adventurer, a multi-billionaire, a ladies’ man and finally a nutcase”, which is pretty much what can be said about Iron Man. Howard Hughes was a business magnate, engineer, pilot, film director, and philanthropist... and his interest in aviation and aerospace travel, forming the Hughes Aircraft Company in 1932.
One lasting legacy of the business interests of Howard Hughes included 30,000 acres of land near Las Vegas, NV reportedly purchased for $3 per acre. This land eventually became the master-planned community of Summerlin, NV, and the basis of what we know today as Howard Hughes Holdings.
After two decades of spin-offs, acquisitions, and reorganizations, Bill Ackman's Pershing Square Capital and Brookfield Asset Management Ltd. (BAM) provided debt and equity capital to bring the company out of the 2008-09 financial crisis. Many non-core real estate assets were folded into the Brookfield empire and Bill Ackman served as Chairman of the Board in the company's formative years.
Howard Hughes Holdings has since purchased and developed several master-planned communities in Texas, Maryland, Arizona, and Hawaii in addition to the original real estate investment by Hughes himself in Nevada. The company moved their headquarters to The Woodlands, one of their master-planned communities, as a cost-saving measure in 2019.
Since moving the headquarters to The Woodlands, management has been able to stabilize costs related to running the business.
Recently having divested non-core assets including the South Street Seaport in NYC and the Las Vegas Aviators minor league baseball team as Seaport Entertainment Group Inc. (SEG) in 2024, the modern Howard Hughes Holdings is focused entirely on the development of their master planned communities.
Business Segments
Operating Assets
The operating assets of Howard Hughes Holdings represent the income from commercial properties in their master planned communities. On the Q3 earnings call, CFO Carlos Olea reflected on the recently updated guidance for net operating income.
...with the strong performance of our portfolio year-to-date, we now expect a record full year NOI of approximately $257 million at the midpoint, with growth in all property types. Our guidance contemplates some seasonality and modest cost increases in the fourth quarter, but overall represents a solid 5% to 8% year-over-year increase.
Howard Hughes Holdings has consistently grown their operating income across all segments since 2021. An example of this success is Sony Group Corporation and Howard Hughes Holdings' partnership to build new film studios at Summerlin near Las Vegas, NV, capitalizing on the tax benefits for studio employees relative to filming in California or New York.
Offices, retail, and multi-family real estate rents are included in the Howard Hughes Holdings net operating income. In addition to providing income, these real estate assets grow the value of the land in each master-planned community by growing amenities and employment opportunities nearby.
Residential Land and Condominium Sales
Howard Hughes Holdings takes a long-term view for developing value across their communities; they are looking to sell residential parcels and condominiums but grow the value of their remaining acreage at a greater pace than the value of sales annually. This gives management significant cash flow generation for further investment in growing their communities, debt reduction, or share repurchases.
In addition to the operating assets inside the master-planned communities like the Amazon.com Whole Foods at Hughes Landing providing jobs and operating income for Howard Hughes Holdings, there is significant demand to build employment hubs near communities like The Woodlands, so workers can have easy access to housing opportunities and amenities. Exxon Mobil built a 385-acre campus right next to The Woodlands for upwards of 10,000 employees.
Howard Hughes Holdings management has proven adept at managing the value cycle of their real estate assets for significant returns on their investment and accelerating the pace of land value growth since the global pandemic.
Balance Sheet
In the 2024 Investor Day Presentation, management detailed how their debt service and general administrative expenses.
A portion of long-term debt tied to the investment in new condominium units will be paid down as those units are sold. According to the Q3 earnings report, 86% of debt is either fixed, capped, or swapped to lower the impact of interest rate volatility in the future.
Valuation
Net Asset Value
In their investor day presentations, Howard Hughes Holdings provides a calculation of net asset value derived from the capitalization rate of operating assets and the value of land for homes as well as condominiums in their master planned communities based on recent sales.
Management calculates this NAV per share to be $118 per share, roughly a 37% discount to the current share price.
Adjusted Operating Cash Flow
At the 2024 Investor Day, management introduced a new guidance metric of adjusted operating free cash flow that incorporates the cost of debt and general administrative expenses against the currently reported net operating income as well as sales of land for homes and condominiums.
This new metric gives investors and analysts a more simplified way to measure the performance of the business and future growth. While adjusted free cash flow metrics for a REIT do not include the sales of real estate assets, Howard Hughes Holdings includes these types of transactions as they are expected to occur every year. Including these transactions and their profitability makes the adjusted operating cash flow a clearer picture of the company's profitability and growth.
The guidance to $541 million in adjusted operating cash flow is for the remainder of 2024, and we should have a confirmation of the metric looking back at the trailing twelve months as well as guidance for 2025 on the Q4 earnings report expected in February.
I selected a sample of real estate peers operating across the U.S. to find a reasonable multiple for Howard Hughes Holdings that includes office, multi-family, and retail holdings:
$541 million with a 16x free cash flow multiple would equate to $8.66 billion in market capitalization. With this valuation model, the shares look to have a significant margin of safety and a fair value of roughly $175 per share with an implied discount of 56%.
Risks
While Howard Hughes Holdings has been able to cover their operating expenses and debt service with operating cash flow in recent history, there is a risk that their costs could grow faster than income.
On the income side, management is relying on completing the construction of operating assets and new condominiums. If those projects face delays, that could impact the timing of new
From the cost side, while management has been able to stabilize the costs of operating the business, cost overruns for the construction of new assets or other investments could impact profitability in the future. Higher interest rates could also impact the cost of floating rate debt, currently sitting at 31% of total debt.
Operating income and cash flow have been fairly stable for Howard Hughes Holdings, but it is possible that economic uncertainty could impact the sale of condominiums and lots for new homes in their master-planned communities. This would inhibit profitability and management's resources for further investment in developing their master-planning communities.
Takeaways
The land purchased by Howard Hughes for $3 per acre near Las Vegas, NV is currently selling to homebuilders at an average price over $1 million per acre according to the Q3 earnings report. This long-term investment has reached a mature stage and is very profitable for the company bearing the Howard Hughes namesake. Additional master-planned communities in Texas, Maryland, and Hawaii are well on their way to similar long-term results and the newest investment in Arizona provides a long-term runway for continued growth and profitability.
Howard Hughes Holdings appears to be significantly undervalued after a close examination of their operating assets, land remaining for sale or development, and the expected growth of both for creating shareholder value. I believe there is significant value in these irreplaceable assets with strong drivers for growth from the demand for new housing and a fundamentally strong long-term business model of developing master-planned communities.
Pershing Square's interest in a potential takeover of Howard Hughes Holdings could provide a short-term catalyst in the share price, but my bullish outlook on the stock is driven by the growth of operating income and the long-term value of the real estate assets held by the company.