Should We Follow Howard Hughes' CEO Into the Company?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On June 2, David Weinreb, the CEO and Director of Howard Hughes (NYSE: HHC), spent nearly $1 million to accumulate 10,000 shares of the company he is managing at an average price of $99.56 per share. Howard Hughes has experienced a great run-up since the beginning of the year, from around $46 per share to more than $100 per share. Should we follow David Weinreb into Howard Hughes? Let’s find out.

$65-$125 per share in intrinsic value

Howard Hughes, the real estate company, operates in three main business segments: Master Planned Communities, Operating Assets, and Strategic Developments. Currently, the company possesses four master planned communities with more than 12,500 acres of land to be sold. Its Operating Assets segment has around 26 properties including 9 commercial mixed-use and retail properties, seven office properties, a 36-hold golf and a multi-family apartment building. The Strategic Developments segment has 21 properties under development.

The company believes that these properties would need substantial development so that they could achieve the best economic results. The Master Planned Communities segment generated the majority of profits, $91.94 million, while the Operating Assets segment contributed $19.5 million in operating income, and Strategic Developments produced a loss of $1.7 million.

Whitney Tilson, in the Value Investing Congress, presented Howard Hughes as one of his favorite ideas. There were several good areas including Summerlin residential in Las Vegas and Ward Center in Honolulu. Using the DCF approach, he came up with around $900 million to $1.5 billion value for Summerlin, based on management’s estimate of future cash flow in the next 28 years. Ward Center could be worth around $800 million-$1.6 billion, much higher than the current carrying value of around $350 million. For the whole company, he came up with an intrinsic value of $65 to $125 per share.

Bill Ackman was behind the spin-off of Howard Hughes

Howard Hughes was spun off from General Growth Properties (NYSE: GGP) at the peak of the financial crisis with support from activist hedge fund manager Bill Ackman. Currently, Bill Ackman is the company’s Independent Chairman of the Board. His fund, Pershing Square, held more than 3.5 million shares in the company, accounting for 3% of the total portfolio.

He also owns more than 74.7 million of General Growth Properties, representing as much as 14.8% of his total portfolio. General Growth could be considered the second biggest mall operating REIT, only after Simon Property Group (NYSE: SPG). While Simon Property has around 325 retail properties, with around 242 million square feet in total, General Growth ranked the second with 143 shopping malls, with the total size of around 135 million square feet.

Previously, Ackman had been quite an active matchmaker between General Growth and Simon Property. However, Simon Property did not show interest in acquiring General Growth. Consequently, in the beginning of the year, he decided to stop pushing for General Growth’s sale by selling the warrants to buy 18 million shares of General Growth to Brookfield Asset Management.

The market values Howard Hughes at 1.73 times its book value and 38.25 times its forward earnings. General Growth Properties, at $20.10 per share, has a total market cap of $18.9 billion. It is valued at 16.3 times its forward earnings and 2.24 times its book value. Simon Property is the biggest company of the trio. It is trading at $165.70 per share with a total market cap of $51.4 billion. The market values Simon Property at 17.8 times its forward earnings and as much as 8.85 times its book value.

My Foolish take

Howard Hughes could be a good investment in the long run with its continuous real estate development. The company intends to have more than 900 residential units in two condo towers and one affordable residential tower in the first phase of its Ward Village master plan. David Weinreb seems to be quite bullish about the company with his recent share purchases, as he believes in the potential value of many of the company’s core real estate assets. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of Howard Hughes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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