Value Investors Tribe

Analysis Date: March, 2024

For the analysis of any business, we use the framework described by Warren Buffett in 2007 letter to shareholders. Warren Buffett looks for four parameters particularly: a) Understandable business economics b) Long-term growth prospects c) Able and trustworthy management d) A sensible price tag.

These parameters for Howard Hughes Holdings (referred as Howard Hughes now on) are discussed in detail below. In the last analysis of Costco, we did business valuation based on the discounted cash flow analysis and in this article we will explore new method of valuation.

Business Economics and its Moat

Howard Hughes Holdings is in the business of real estate/land development working primarily to develop Master Planned Communities. It is present in the lucrative demographics (low tax brackets, high median income, growing jobs etc.) and develops high-end real estate including commercial rentals, apartment rentals as well as houses. Moat of the business is its presence in diverse fast-growing, wealthy neighborhoods around the country. They own the land, develops properties such that supply and demand is both controlled by them. Moving to a better location with better amenities will always be a top priority of the young employees across the country. The human nature to optimize the housing needs and get the best will always make the Howard Hughes’ properties as best places to live.

Additionally, these lucrative high earning individuals create demand for office spaces. When the offices build their campuses (as they historically have), this helps in reducing commute time to work by encouraging offices near the homes, controlling zoning and providing unique experience will make their locations attractive. Why can’t someone else replicate it? Well they can, however Howard Hughes has ample land holdings, good track record of development and strong management to maintain financial discipline. Additionally, the locations they own can’t be replicated or replaced giving them great competitive advantage.

Growth Prospects

Real estate by the nature of it is a cyclical business. The sales have more than doubled in last 10 years, operating income is growing and overall growth metrics show positive direction. The company has about 13 times more land to develop than it has historically developed since inception. The capex is high however the debt financing is not outrageous. The company funds about 80% of the capex with debt and the rest with the equity. This is conservative leverage given how the debt is due; 50% of the debt is due after 2028. This gives them enough headroom to pay interest expenses and carry out maintenance of existing properties. New properties are developed with debt but they generate cash to pay out interest expenses and the cycle continues.

Management Trustworthiness

Management has been candid with the shareholders however no mistakes are openly admitted to in the earnings call. The capital allocation seems rational and the management has adapted as the market conditions especially interest rates have changed. The current CEO (David O’Reily) has been with the company for long time and has educational as well as professional background in Civil Engineering. Board is strong, led by Bill Ackman and the annual reports, presentation and other materials are well documented so as to make it easy to understand the business.

Valuation

Currently the business is trading at a negative PE. The current market cap of $3.8 billion is way below the replacement cost of existing assets. The company owns 100 million sq ft. of vertical land, assuming conservative rate of $100/sq ft. leads to total land value of $10 billion. On top of that are the condos and other cash generating properties.

Applying a proper margin of safety and conservative estimates; roughly the company is probably worth $9-$10 billion. At present there are 50,256,371 shares outstanding which implies the intrinsic business value of the company is around $179 to $200. This implies that the company is trading at significant discount to its current price. Additionally, the company did some share repurchase from December 01, 2023 to December 31, 2023 at an average price of $85.55 indicating that the current trading price is most likely below the intrinsic value of the business.

It is critical to note that there is no literature source which claims this valuation method to be accurate however given the nature of business and necessary capital structure, I believe this valuation method paints better picture compared to discounted cash flow analysis.

Disclaimer: This fundamental analysis of Howard Hughes is primarily for educational purposes so as to help value investors learn core concepts. This is not a buy or sell recommendation of any form whatsoever. Reader discretion is advised.