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Amidst the turmoil of 2009, my alma mater hosted a small gathering for its alumni working on Wall Street. Typically, these events involve a fair amount of drinking, active networking, soliciting of donations and the inevitable token ‘brief’ remarks from someone in the industry. That evening’s guest of honor was none other than Bill Ackman, head of activist hedge fund Pershing Square, who was fresh off of a licking from Target’s (TGT) shareholders. Having met Mr. Ackman previously, I was rather excited to hear from him as he is always both entertaining and insightful. Instead of running through some prepared remarks, he opened the floor to questions and promised a reply to everything he could ‘legally answer’. The crowd was happy to oblige and we peppered him with questions ranging from his background, experiences with Target and his overall thoughts on the economy. Finally, someone fired off the question that was in the forefront of everyone’s mind – ‘so, what are you looking at now?’
There was a brief pause, but his answer of course was General Growth Properties (GGP), also known as the REIT which filed the largest real estate bankruptcy that April. As he laid out his investment thesis about why this was no ordinary bankruptcy, I quickly checked the ticker on my phone – the stock was trading at around a dollar. Fast forward a year and a half which included a raucous bidding war between Simon Property Group and Brookfield/Fairholme/Pershing and GGP is ready to emerge from bankruptcy while sitting at over $17 per share. Not bad.
Adding to the intrigue is the company’s plan to spin out some of its properties into another company when it emerges from bankruptcy (expected Nov 8th). The spinoff will be called the Howard Hughes Corporation, named after the renowned recluse with ties to one of its properties. According to the 2009 Annual Report Letter from the CEO (worth reading) the plan is for the parent to own “largely stable, income-producing shopping mall properties and other assets” while the other company “will own a diverse portfolio of assets with less near-term cash flow but attractive longer-term growth prospects.” As a result of its different strategy, the new company will not be structured as a REIT.
With General Growth retaining ownership of roughly 180 malls (#2 in the country), which properties will end up in the Howard Hughes Corp portfolio? Included in their holdings is a 22,500 acre master-planned community in Las Vegas, New York City’s South Street Seaport shopping center and other mall developments in locales such as Charlotte, Houston and Virginia. The turnaround of these sites will be tied to the overall recovery of the real estate sector so investors will definitely require some patience and the stomach for some serious speculative activity.
The Brookfield/Fairholme/Pershing group has pledged $250 million to Howard Hughes Corp and at least in the beginning, Brookfield will be responsible for management of the properties. Also raising eyebrows was the announcement that Mr. Ackman was named chairman of the spinoff – clearly he (and his hedge funds) will be invested in its performance. I expect piggybacking investors to follow him (and Fairholme) along for the ride. The CEO position is expected to be filled after the company is spun off, although it is currently occupied by David Arthur, Brookfield’s managing partner of North American real estate investments.
The plan to emerge from bankruptcy was approved today by US bankruptcy judge Allan Gropper. The company restructured close to $15 billion in debt and secured $6.8 billion in capital from sources such as Brookfield, Pershing, Fairholme, Blackstone and the Teacher Retirement System of Texas. As a result, all creditors are expected to be repaid in full and even existing shareholders have benefited from the recovery.
Due to the bankruptcy and involvement of several high profile names, this spinoff is attracting a lot of attention. Perhaps it deserves it though and the situation smacks of some of the examples brought down by Joel Greenblatt in his book on the subject. With some hard work spent digging through the legal documents one might find attractive investments in both the parent (much stronger balance sheet) and in the assets they dump into the spinoff (probably more longer term investments). Today’s WSJ seems to think so and suggests that at current prices, one would be acquiring the assets of Howard Hughes for next to nothing (they used cap rate valuation method based on several estimates).
As is often the case with spinoffs, there is still time to conduct due diligence and we will keep you updated on the matter.
Disclaimer: Author currently holds no position in any stock mentioned
Some people seem to think HHC will see selling pressure post-spin as it is very difficult to value w/out steady CF’s and a relatively weak real estate market. I am thinking that all the media coverage may deter some from dumping shares. What impact do you think the media will have on HHC shares in the short term?
Investment is a game of probabilities. Waiting until its obvious to everyone that there’s value in a business/security is waiting too long. I think this will be a good investment (both the spinoff and ggp itself). If investors dump shares I’ll be the contrarian here and stick with Mr. Ackman and Berkowitz. Their track record speaks volumes and I think this will be at the bottom of what can be expected. Unless the economy gets much worse, which I doubt, then the these properties will be valuable, especially given the fact that Bernanke is making it his duty to increase inflation. Disclosure: long ggp.
@Value Stocks – that is an interesting question. Unlike most spinoffs, the parent, GGP, is coming out of bankruptcy which makes it unlikely that many mutual funds, ETFs and other ‘mandated investors’ will be owners and thus forced sellers. As a result, the driving force will be an ‘investment decision’ which is always hard to predict how people view the stock (for example you mention reading about selling pressure while the WSJ implied a buy).
Looking at the ownership data on Yahoo Finance (not the best resource – should be better info once Q3 13F filings become available in November), it appears that many owners >1% are hedge funds. With Mr. Ackman as Chairman, we know Pershing Square (largest shareholder) will be in Howard Hughes for the long run.
Other owners include Och Ziff and some large event driven funds like Paulson & Co (John Paulson) and Suttonbrook. I imagine they will be sitting on some huge gains in GGP and might use the bankruptcy exit as their exit event. Perhaps many individual investors will as well (or have already). HHC might be too long term investment for a hedge fund or it could be a perfect ‘catalyst driven’ investment. Many might view it as a ‘lottery ticket’ type investment that they are picking up on the cheap and can just sit on. Obviously, investors such as Berto (comment above) will not be selling.
So…this isn’t your typical spinoff. However, I do think the well advertised presence of big-name investors will cause people to take a chance on the name and hang on as opposed to outright selling (see Berto above). It surely can’t hurt. What will the pros do with their shares though? Only they know…