Ackman’s Pershing Square Loads Up On Howard Hughes Following Tender Offer

Summary

• The investment was boosted by 11.46%.
• The firm issued a tender offer in October for the real estate company’s stock.

Billionaire investor Bill Ackman (Trades, Portfolio) disclosed last week he boosted Pershing Square Capital Management’s stake in The Howard Hughes Corp. (HHC, Financial) by 11.46% following the close of its previously announced cash tender offer in November.

The guru’s New York-based hedge fund is known for taking large positions in a handful of underperforming companies and pushing for change in order to unlock value for shareholders. While he has found success in recent years with Chipotle Mexican GrillCMG
Inc. (CMG, Financial) and StarbucksSBUX
Corp. (SBUX, Financial), one of Ackman’s most well-known activist targets, which did not end well for him, was Valeant Pharmaceuticals. He also pursued an unsuccessful short of Herbalife Nutrition Ltd. (HLF, Financial), which he bowed out of in 2018.

Howard Hughes investment and tender offer

According to Real-Time Picks, a Premium GuruFocus feature based on 13D, 13G and Form 4 filings, Ackman invested in 1.56 million shares of Howard Hughes on Nov. 29, impacting the equity portfolio by 1.37%. The stock traded for an average price of $70 per share on the day of the transaction.

On Nov. 11, Pershing Square announced it increased the price range of its cash tender offer to purchase up to 6.34 million shares of Howard Hughes. The offer, ranging from a low of $61 per share to a high of $70, was the firm’s best and final offer. At the time of the announcement, the high end of the range represented a 28% premium to the stock’s closing price on Oct. 13, which was the day before the initial offer was made.

The firm noted the exact price would be determined through a modified Dutch auction. In a separate announcement on Nov. 30, Pershing said the final price that was agreed upon was $70 per share.

The guru now holds 15.18 million shares of The Woodlands, Texas-based real estate company, which currently account for 13.31% of the equity portfolio. GuruFocus estimates Ackman has lost 12.61% on the investment since establishing it in the fourth quarter of 2010.

In his semiannual 2022 letter, which was published in August, Ackman said Howard Hughes has made “significant progress in simplifying its business and has a substantial runway for long-term value creation.”

Further, he wrote the company’s balance sheet is insulated from the impact of rising interest rates and is “well positioned for the current inflationary environment.”

Valuation

A major real estate development and management company, Howard Hughes has a $3.64 billion market cap; its shares were trading around $72.98 on Tuesday with a price-earnings ratio of 15.40, a price-book ratio of 1.04 and a price-sales ratio of 1.92.

Based on historical ratios, past financial performance and analysts’ future earnings projections, the GF Value LineVALU
indicates the stock, while undervalued, is a possible value trap currently. As such, potential investors should do thorough research before making a decision.

Further, the GF Score of 75 out of 100 indicates the company is likely to have average performance going forward. While it received high ratings for GF Value and momentum, its profitability, growth and financial strength ranks were more moderate.

Earnings update

Howard Hughes reported its third-quarter financial results on Nov. 2.

For the three months ended Sept. 30, the company posted net income of $108.1 million, or earnings of $2.19 per share, which improved from the prior-year quarter. Revenue of $640 million also grew substantially from a year ago.

It closed the quarter with $354.60 million in cash and $4.6 billion in total debt.

In a statement, CEO David O’Reilly noted the quarterly results “reflected solid financial performance despite significant macroeconomic uncertainty.”

“While our segments were not immune to the market headwinds, our acclaimed portfolio of mixed-use assets performed well, generating increased MPC EBT, robust condo sales, and strong NOI in our world-class multi-family and office portfolios,” he said.

Financial strength and profitability

GuruFocus rated Howard Hughes’ financial strength 4 out of 10. As a result of the company issuing new long-term debt over the past several years, the company has poor interest coverage. The low Altman Z-Score of 0.9 warns the company could be at risk of bankruptcy if it does not improve its liquidity. The weighted average cost of capital also eclipses the return on invested capital, meaning the real estate company is struggling to create value as it grows.

The company’s profitability fared a bit better with a 6 out of 10 rating, driven by a strong operating margin and returns on equity, assets and capital that outperform over half of its competitors. Howard Hughes also has a moderate Piotroski F-Score of 4 out of 9, meaning conditions are typical of a stable company. Despite recording a decline in revenue per share and operating income losses, it also has a predictability rank of one out of five stars. GuruFocus found companies with this rank return an average of 1.1% annually over a 10-year period.

Guru shareholders

Of the gurus invested in Howard Hughes, Ackman by far has the largest stake with 30.42% of its outstanding shares. Baillie Gifford (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Murray Stahl (Trades, Portfolio), Donald Smith & Co., Ken Heebner (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Keeley-Teton Advisors, LLC (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies also have positions in the stock.

Portfolio composition and performance

The majority of Ackman’s $7.88 billion equity portfolio, which 13F filings show was composed of six stocks as of the third quarter, is invested in the consumer cyclical sector. The industrials and real estate spaces have much smaller representations.

The guru’s other holdings as of Sept. 30 were Lowe’s Companies Inc. (LOW, Financial), Chipotle, Restaurant Brands International Inc. (QSR, Financial), Hilton Worldwide Holdings Inc. (HLT, Financial) and Canadian Pacific Railway Ltd. (CP, Financial).

In its monthly report for November, Pershing Square recorded a net performance of 8.2% for the month and a year-to-date net performance of -4.8%.

Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.