Why Did Bill Ackman Buy Howard Hughes Stock?

Bill Ackman, the billionaire founder of Pershing Square Capital Management, L.P. bought a significant number of shares in real-estate development firm Howard Hughes Holdings Inc. (NYSE:HHH) last year.

The company hasn’t been profitable in the past twelve months and trades at a high EBIT multiple. Plus it operates with a significant burden so what precisely jumped out at him about this once high-flying stock that compelled his investment team to splash out on the stock? 

How Much of Howard Hughes Does Ackman Own?

Similar to Warren Buffett, Ackman has a history of searching out companies with straightforward businesses that might not be trading quite near their intrinsic values. Where the two differ is that Ackman tends to take a more operational approach by actively turning a company around whereas Buffett is much more passive in his investing methods.

That might explain why Ackman is acquiring shares of a company in the real estate sector at a time when the consensus among many is that high interest rates will stifle demand in the sector. 

Pershing Square believes that the company is currently in the early stages of unlocking its value-creation opportunity. Ackman and co bought a additional 3 million shares of Howard Hughes last year In the hopes that Howard Hughes would become increasingly free cash flow generative.

This considerable investment took Pershing Square’s stake in Howard Hughes to 38%. Aligning with Ackman’s investment style, Pershing considers the purchase price that averages at $72 per share to be a “deep discount” to its intrinsic value.

Stepping Down as Howard Hughes Board Chairman

Ackman has also served as Howard Hughes’ chairman of the board since the company’s founding in 2010 as a spinoff from General Growth Properties.

This month, it was reported that he will step down from his post and be succeeded by long-term board member Scot Sellers.

However, Ackman reiterated that this move did not change the relationship that the company had with Pershing Square, which is expected to remain a major shareholder in the company. All the signs point to Pershing remaining bullish on Howard Hughes’ future success.

Is Howard Hughes In Good Financial Shape?

Pershing Square saw reasons to be excited about Howard Hughes’ financials, not least its FY 2023 Master Planned Communities segment’s earnings before taxes that were reported at $341.4 million, up 20.6% compared to the prior year.

Meanwhile, new home sales which are a prime indicator of future land sales are up by 45%. Homebuilders are seeing heightened demand, driven by a supply shortage of vacant homes in MPCs.

However, we do see some other signs, particularly concerning the company’s top- and bottom-line performance over the past few years.

Between 2020 and 2021, annual revenues grew by 104.1% year-over-year to $1.43 billion. However, the top line only grew only by 12.6% to reach $1.61 billion in FY2022. Then in 2023 the rising tide turned around as revenue declined by 36.3% from the year prior to stand at $1.02 billion.

As revenues fell backwards, so too did profitability suffer. In 2020, the net loss attributable to common stockholders stood at $26.1 million and increased to $56.1 million in 2021. By 2022, it had increased considerably to $184.53 million while in 2023, it fell to a net loss of $551.77 million in 2023.

Seaport Spinoff

Howard Hughes is set to execute a spinoff of its Seaport division into a publicly listed company by the end of this year.

This new company, Seaport Entertainment, will be a corporate umbrella for entertainment-related assets in New York and Las Vegas. Last year, Anton Nikodemus was appointed as this division’s CEO.

Howard Hughes is redefining itself as a pure-play real estate company focusing more on its MPC segment. Pershing Square appears to be backing the move because of the heightened focus on this segment and the potential for value creation.

As of 2023, this segment comprised 36% of Howard Hughes’ revenue, and only the rental segment topped it in revenue weighting.

Why Did Bill Ackman Buy Howard Hughes Stock?

Bill Ackman bought Howard Hughes stock in expectation that value will be created when it spins off Seaport and sales go up this fiscal year.

Analysts do see upside for sales this year though that may be driven by capital that is stemming from the debt-laden balance sheet.

Weighing up the pluses and minuses, the revenues are around $1 billion but profitability is elusive and sits negative to the tune of almost half a billion. 

Fair value for the stock is $88.25 per share according to the four analysts who cover the stock. One point to highlight is that the shareholder yield is -17% so the upside is laden with a fair share of risk.

So, Should You Invest in Howard Hughes Now?

While Ackman sees considerable long-term value in Howard Hughes, investors who invested in the stock five years ago are sitting on 45.6% share price declines.

Over the past year, the stock performance has not been favorable either with declines of 21.3% already evident. For context, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained 22.1% over the same period.

HHH’s price is sitting at a premium compared to its trailing-12-month rental revenue, a little bit of a stretch compared to its industry peers, however it is trading marginally higher than its 52-week low of $59.15 per share.

While one Wall Street analyst rating sees 49.8% upside in the stock, the proof will be in the pudding. Certainly, Ackman’s faith in the stock’s prospects is encouraging but investors may want to sit on the sidelines before rushing in and joining Bill and his team. At the very least, it may be worth hanging tight until the company reports first-quarter earnings next month.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.