Investment Thesis for Howard Hughes Holdings Inc. (HHH)

Transforming into a Pure-Play Master Planned Community Developer for Sustained Growth and Value Creation

Overview

Howard Hughes Holdings Inc. (HHH) is a prominent developer and manager of master-planned communities (MPCs) and commercial real estate properties in the United States. The company is poised for significant growth and value creation due to its strategic spin-off of Seaport Entertainment, focused business model, and robust financial performance.

Key Investment Points

1. Spin-off of Seaport Entertainment:

• Strategic Focus: The planned spin-off of Seaport Entertainment will transform HHH into a pure-play MPC developer, allowing the company to focus entirely on its core competency.

• Financial Health: Seaport Entertainment, which has been a financial drag on HHH, will receive a $91 million cash and debt paydown from HHH and will conduct a $175 million rights offering backstopped by Pershing Square. This move significantly reduces the financial burden on HHH and ensures Seaport is well-capitalized post-spin-off.

• Unlocking Value: By separating Seaport Entertainment, HHH can unlock value for shareholders by eliminating loss-making assets and concentrating on profitable, high-growth areas.

2. Strong Financial Performance:

• Revenue and Profit Growth: HHH reported $520 million in revenue and $55 million in net income for Q1 2024, showing growth compared to $450 million in revenue and $40 million in net income for Q1 2023. The company’s EPS increased to $1.30 from $1.00 over the same period.

• Healthy Cash Position: With $210 million in cash and cash equivalents at the end of Q1 2024, HHH is well-positioned to invest in new developments and pursue strategic opportunities without financial strain.

• Manageable Debt Levels: Maintaining a stable debt level of $1 billion ensures that HHH can manage its financial obligations while continuing to grow its business.

3. Pershing Square’s Involvement:

• Backstop Commitment: Pershing Square’s commitment to backstop the $175 million rights offering for Seaport Entertainment demonstrates strong confidence in HHH’s strategic direction and financial health.

• Strategic Support: The backing of a prominent investment firm like Pershing Square provides additional assurance to investors regarding the viability and future growth potential of both HHH and the newly independent Seaport Entertainment.

4. Potential for Share Buybacks:

• Post-Spin-Off Flexibility: Following the spin-off of Seaport Entertainment, HHH may have the opportunity to restart share buybacks. This potential action can further enhance shareholder value by reducing the number of outstanding shares and increasing EPS.

5. Favorable Market Position:

• High-Quality Assets: HHH’s portfolio includes some of the most sought-after master-planned communities in the U.S., such as The Woodlands, Bridgeland, Summerlin, and Ward Village. These assets are well-positioned to capitalize on ongoing demand for high-quality residential and mixed-use developments.

• Economic Tailwinds: As interest rates stabilize or improve, HHH’s leveraged position on rates could lead to enhanced profitability and increased investor confidence.

Conclusion

Investing in Howard Hughes Holdings Inc. presents a compelling opportunity due to its strategic focus on master-planned communities, robust financial performance, and potential value creation from the spin-off of Seaport Entertainment. The involvement of Pershing Square further underscores the investment’s attractiveness. As HHH continues to streamline its operations and capitalize on its high-quality asset base, investors can expect sustained growth and enhanced shareholder value.

This investment thesis positions HHH as a strong candidate for those seeking exposure to the real estate development sector, particularly in well-managed, high-growth master-planned communities.