The Next Warren Buffet? Bill Ackman and Howard Hughs (HHH)
Pershing square capital owner Bill Ackman has proposed a significant move to acquire a majority stake in Howard Hughes Holdings with the vision of it being the next Berkshire Hathaway.
When I first saw this news I didn’t understand it very well, from difficult to read financing to the actual acquisition itself. This made me think why would such a prolific activist investor want to takeover a faltering company that he has held for so long? Why not sell? There must be something that we cannot understand.
When Ackman invests in a company he takes a significant stake in the company and convinces its board members and investors to make changes, typically in the way the business is run making it more efficient and ultimately more valuable. The most prolific example of this can be seen through his Canada Pacific investment.
The Proposed Deal
Pershing Square, currently holding approximately 38% of Howard Hughes, and seeks to purchase an additional 11.8 million shares at $85 per share, representing an 18% premium over the recent closing price. This acquisition would increase Pershing Square's ownership to between 61% and 69%, effectively granting control over the company.
Ackman's vision is to leverage Howard Hughes' substantial real estate assets and cash flows as a foundation for a diversified conglomerate, mirroring Warren Buffett's Berkshire Hathaway. By utilizing Howard Hughes' balance sheet, Ackman plans to acquire controlling interests in various public and private companies, thereby creating a modern-day Berkshire Hathaway.
Implementation Plan
Leadership Structure: Ackman proposes to assume the role of Chairman and CEO of the new entity, while current CEO David O'Reilly would continue to lead the real estate operations under a subsidiary named Howard Hughes Corp. Master Planned Communities.
Financial Strategy: The plan includes a $500 million stock buyback to enhance shareholder value. Additionally, Ackman may invite a consortium of partners to participate in the deal, requiring a multi-year lockup agreement to ensure long-term commitment.
Acquisition Approach: Utilizing Howard Hughes' cash flows and balance sheet, the new conglomerate would seek to acquire controlling interests in various companies, diversifying its portfolio beyond real estate.
Market Reaction and Shareholder Considerations
Following the announcement, Howard Hughes' stock rose by approximately 9.5%, indicating positive market reception. However, some shareholders, such as Jonathan Boyar, argue that the offer undervalues the company, estimating its net asset value at $112.35 per share. Howard Hughes has formed a special committee to evaluate the proposal, and the deal's success will depend on shareholder approval and potential adjustments to the offer.
Balance Sheet Overview
As of September 30, 2024, HHH's balance sheet reflects:
Total Assets: Approximately $9.44 billion.
Total Liabilities: Around $6.76 billion.
Shareholders' Equity: About $2.68 billion.
This asset-rich position, with significant holdings in master-planned communities and income-generating properties, provides a solid foundation for Ackman's vision of transforming HHH into a diversified conglomerate.
Cash Flow Analysis
In the fiscal year ending September 30, 2024, HHH reported:
Operating Cash Flow: Positive $160.75 million, indicating improved operational efficiency.
Investing Cash Flow: Negative $328.70 million, reflecting ongoing capital expenditures and investments in development projects.
Financing Cash Flow: Positive $152.87 million, suggesting strategic financing activities, including debt management and equity transactions.
Key Financial Ratios
Debt-to-Equity Ratio: Approximately 1.98, indicating a higher reliance on debt financing relative to equity.
Current Ratio: Around 0.70, suggesting potential challenges in short-term liquidity to cover liabilities.
Return on Equity (ROE): Approximately 2.82%, reflecting modest profitability relative to shareholders' equity.
Valuable real estate holdings
The company's extensive real estate holdings, including master-planned communities in Columbia, Maryland, and Summerlin, Las Vegas, as well as valuable properties in Hawaii, offer significant opportunities for future development and revenue generation.
1. Master-Planned Communities (MPCs)
HHH owns several large master-planned communities, including:
The Woodlands, Texas: A premier residential and commercial area near Houston.
Summerlin, Nevada: A high-demand suburban development near Las Vegas.
Columbia, Maryland: A well-established community between Washington, D.C., and Baltimore.
Why They're Valuable:
Land Ownership: HHH owns thousands of acres of undeveloped land, which can be sold or developed over time, offering consistent cash inflows.
Controlled Development: By overseeing the design and development of these communities, HHH ensures quality, creating long-term demand and price appreciation.
Recurring Revenue: Revenue streams include land sales, property leases, and fees from residential and commercial developments.
2. Prime Commercial Properties
HHH holds a portfolio of high-value commercial properties, including office buildings, retail spaces, and entertainment venues. These include:
Properties in New York City, such as the Seaport District.
Downtown Columbia office and retail developments.
Why They're Valuable:
Strategic Locations: High-traffic areas and urban centers ensure strong demand for commercial leases.
Stable Cash Flow: Leased properties provide predictable, recurring income.
Potential for Appreciation: Prime locations typically see long-term value growth due to limited supply and increasing demand.
3. Development Opportunities
HHH actively invests in new development projects, such as:
Mixed-Use Developments: Projects that combine residential, commercial, and recreational spaces.
Collaborations: For example, the planned movie studio with Sony in Summerlin.
Why They're Valuable:
Value Creation: By developing raw land into high-demand properties, HHH increases the value of its holdings exponentially.
Diverse Income Streams: New developments diversify revenue sources, reducing reliance on any single asset class.
4. High Demand Markets
The markets where HHH operates are experiencing strong demographic and economic trends:
Population Growth: Areas like Texas, Nevada, and Maryland are seeing robust population increases, driving housing and commercial demand.
Business Relocation: Many corporations are relocating to states like Texas and Nevada due to business-friendly policies, increasing demand for office space.
Desirable Lifestyle: HHH’s properties often cater to affluent buyers and tenants seeking high-quality living and working environments.
Conclusion
Bill Ackman's proposal to acquire a majority stake in Howard Hughes Holdings reflects his ambition to create the next Berkshire Hathaway. By utilizing Howard Hughes' real estate assets and financial strength, Ackman plans to expand into various industries, aiming to generate substantial long-term value for its shareholders.