Bill Chen on HHC's value and Ackman's pending tender

Episode Summary

Executive Summary: The episode argues that Howard Hughes (HHC) remains materially undervalued despite Bill Ackman’s Dutch tender offer. Bill Chen and Andrew Walker walk through HHC’s asset base—stabilized operating properties, Hawaii condos, master-planned communities, Seaport, and other assets—contending a conservative sum-of-the-parts model supports roughly $110/share versus a ~$60 stock price. They also debate capital allocation, control risks, and Ackman’s possible strategic motives.

Main Topics: Sum-of-the-parts valuation of Howard Hughes (Priority: 5/5): The discussion builds a conservative NAV-style model for HHC, arguing the company is worth roughly $110/share even after haircuts to cap rates, land values, and development assumptions. Stabilized operating assets (Priority: 5/5): HHC’s office, retail, and multifamily portfolio is valued using cap rates on annualized NOI. The speakers argue the assets are high quality and located in controlled MPC environments. Howard Hughes development pipeline and hidden growth (Priority: 5/5): The episode emphasizes that HHC is not just a static asset play; it can reinvest capital at attractive returns through development, which could drive NAV higher over time. Ward Village / Hawaii condo business (Priority: 5/5): The Hawaii condo platform is framed as a low-risk, pre-sold development business with hard deposits and strong buyer demand, providing near-term cash flow and future value. Master-planned communities (MPCs) as the core asset (Priority: 5/5): The MPC residential and commercial land bank is presented as HHC’s strategic moat: decades of land inventory, control over supply, and long-term value creation through placemaking. Seaport controversy and optionality (Priority: 4/5): Seaport is acknowledged as the most contentious asset, but the speakers argue the market is overly pessimistic and may be underappreciating its sponsor income and long-term trophy-asset value. Capital allocation and Ackman’s tender offer (Priority: 5/5): A major theme is whether HHC’s capital allocation has helped minority shareholders, and whether Ackman’s move to increase ownership is both an undervaluation play and a structural maneuver related to Pershing Square.

Key Arguments: HHC’s current stock price (~$60) appears well below a conservative intrinsic value estimate of about $110/share, even after significant haircuts to asset values and assumptions. The company’s assets should not be valued as a static NAV because HHC can reinvest capital into developments that historically earn high unlevered and equity returns, creating hidden growth. The stabilized portfolio is being valued with cautious cap rates, yet still supports significant value; lowering assumptions further does not break the thesis. Ward Village is not speculative condo development: units are heavily pre-sold with hard deposits, making future cash flows more certain than typical real estate projects. MPCs are HHC’s moat because they control supply, can shift land use mix over time, and benefit from long-term population growth and placemaking. Seaport has been a disappointment, but the market may be over-penalizing it; the asset still has sponsorship value, traffic, and trophy-property optionality. Concerns about capital allocation are real, especially around prior equity raises and uneven buybacks, but the tender is viewed as a separate valuation decision from management quality. Ackman’s increased ownership could reflect both a belief in undervaluation and a possible strategic path involving Pershing Square’s structure and potential future transactions. The company’s debt profile is viewed as manageable, with fixed-rate maturities providing runway while operating income and land sales continue to grow. Near-term cash inflows from condo closings and asset stabilization could improve flexibility and potentially support share repurchases or other capital uses.

Data Points: Dutch tender offer range: $52.50 to $60 per share - Ackman’s tender offer discussed at the start of the episode. Current stock price: ~$60 per share - Used as the reference point for the valuation debate and tender decision. Model-derived value: ~$110 per share - Bill Chen’s conservative public model estimate for HHC intrinsic value. Operating assets value: $4.2 billion - Stabilized assets valued using cap rates on Q2 annualized NOI. Office cap rate assumption: 7% - Used in the stabilized operating asset valuation. Retail cap rate assumption: 6% - Used in the stabilized operating asset valuation. Multifamily cap rate assumption: 5% - Used in the stabilized operating asset valuation. Unstabilized / under-construction value: $650 million - Value assigned to mixed development assets, using roughly 1.0x–1.3x book. Ward Village value: $1.1 billion to $1.2 billion - Hawaii condo development platform valuation within the SOTP. Other assets value: $1.9 billion - Mostly cash, restricted cash, prepaid items, MUDs/SIDs, and smaller assets. MPC residential value: $1.6 billion - Residential land bank value in the model. MPC commercial value: $2.4 billion - Bill Chen’s estimate, above management’s roughly $2.0 billion figure. Seaport value: ~$0.5 billion to $2.0 billion upside range implied - Chen suggests the market may be overly pessimistic; the conversation references a substantial upside if Seaport performs better. G&A capitalized value impact: ~$1 billion added value / equivalent adjustment - Capitalizing G&A and related adjustments in the valuation framework. Total gross asset value: ~$12.5 billion - Approximate total asset value before liabilities. Liabilities: ~$6 billion - Referenced as being broadly covered by asset value before equity value calculation. Net equity value: ~$5.5 billion - Implied equity value after liabilities and G&A adjustments. Hawaii condo hard deposit: 20% - Buyers put down non-refundable deposits on pre-sold units. Ward Village pre-sales: 4 of 8 or 9 remaining towers are over 90% pre-sold - Used to argue the development is low-risk and largely de-risked. Ward Village profit margin assumption: 30% - Used in discounting future condo cash flows. Ward Village discount rate: 11% - Used for future condo cash flows in the model. Near-term condo cash inflow: ~$200 million - Cash proceeds from a recent tower closing mentioned during the discussion. Additional near-term cash inflow: ~$30 million by year-end - Expected from Hawaii condo closings between the episode date and year-end. MPC residential land inventory: ~30 years - Described as long-duration inventory in the land bank. Commercial acres in core MPCs: 200 acres in Summerlin, 200 acres in Woodlands, 96 acres in Columbia - Examples used to argue the remaining commercial land is highly valuable. Pacing of builder competition: 10 to 15 builders - Number of builders typically competing in the communities. Debt maturity window: 2018 to 2031 - General unsecured debt maturity schedule referenced as fixed-rate runway. Unsecured debt amount: ~$2 billion - General unsecured debt referenced as expiring over the maturity window. Ownership before tender: 27% - Ackman/Pershing Square’s existing ownership stake in HHC. Target ownership after tender: ~40% - Tender is meant to increase Ackman’s ownership to or above this level. Tender price context: $50/share during COVID - Referenced as Ackman’s prior distress-era purchase price. Hawaii condo buyer mix: ~50% cash buyers - Used to argue demand is less sensitive to mortgage rates. Q3 land sale outcome: Year-over-year land sale higher - Used as evidence of continued land demand despite a weak homebuilding environment.

Pivotal Quotes: "the Dutch tender offer is in a range between $52.50 to $60. So, the stock as of right now trades at $60 a border" — Bill Chen: He frames the tender as not obviously attractive versus simply selling in the market. "we have an average of $110 per share" — Bill Chen: Core valuation claim supporting the argument against tendering. "this is not a speculative development business. This is basically a manufacturing business where the customer has given you a hard, you know, a hard non-refundable deposit" — Bill Chen: Explains why Ward Village is viewed as lower-risk and more predictable than typical condo projects.

Implications: Listeners are urged to view HHC as a complex, long-duration asset compounder rather than a simple NAV discount play. The tender may understate upside if the conservative model is right, but execution, capital allocation, and Ackman’s control remain key risks.