Bill Chen on $HHC's value and Ackman's pending tender (podcast #135)

Bill Chen, a real estate investor, returns to the podcast to discuss HHC's value and why Bill Ackman's current tender for the company might undervalue HHC.

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Transcript begins below

Andrew Walker: All right, hello, and welcome to Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it'd mean a lot. If you could rate, review, subscribe, follow it wherever you're watching, or listening to it. With me today, I'm happy to have on, for the third time, my friend, Bill Chen. Bill is the managing partner at an institutional real estate fund. Bill, how's it going?

Bill Chen: I'm doing great. How are you, Andrew?

Andrew: I'm doing good, and we're going to see each other in person next week. So, I'm really looking forward to that, but let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. We'll probably be talking about a tender offer associated with a company here. So, everybody should just, particularly the human mind, not investing advice related to tender offers. Not investing advice. We're not financial advisors. Please, do your own work.

Second, a pitch for you, my guest. Again, this is the third time you're on the podcast, so people can go listen to the first two for the full pitch, but I consider you a good investor, and a good friend. I think people are once again going to see the degree of due diligence, and work you do on the names. We were just going through all the properties that the company owns. I was like, "Hey, have you been here?" You're like, "Yes, I'm a boots-on-the-ground investor. I've been to Hawaii, Vegas, Houston to see all these things." So you do great work on these things. I think that's going to shine through here, and I have recently learned you have absolutely impeccable taste in Chinese food. So, I can vouch for that as well.

But all that out the way, the company we're going to talk about is Howard Hughes. The ticker here is HHC. Every value investor I think, at least knows it has probably been burnt once by it, but there's a lot going on with HHC here. I think we want to talk about the value of HHC. There's a tender offer from Bill Ackman that will actually expire next Thursday or Friday. Can't remember the exact day. I know that's in play. So, I'll just turn it over to. HHC, do you want to start talking about the company? Do you want to talk about the tender? Where do you want to start?

Bill: Yeah, I'm going to, I think just say briefly what I want to touch upon is, again, I reiterate, this is not the best of advice. My purpose is to offer a framework and evidence that supports that, why not tendering your shares into this Dutch auction is a good idea. Like all we're here to do, these are my personal opinions, not investment advice, but I think I will present pretty good evidence today. Also just a framework that Dutch tender offers is in a range between 52.50 to $60. So, the stock as of right now trade at $60.46. So this is the market saying that, if they wanted to, they can just sell it to the market today at a range that is higher on the very top range of the tender offer.

So, I think that's a good framework to kind of think about. Also, I just want to reiterate, I'm a very long-term-oriented investor. On my previous podcast with Andrew with FRP and Clipper, I let the management team run the business that they want to, but in this case, I'm just a little bit critical of Ackman trying to gain de facto control of the company. My purpose today is to kind of give people a framework to think about how much is Howard Hughes worth? What's growth potential, right? What is the evidence backing up the claims that I've got a layout, right? We've actually published a public model in Excel. Anybody could go and download it. We'll provide the link [crosstalk]

Andrew: I'll put a link in the show notes for anyone. Yeah.

Bill: Awesome, and you could play around with it. You could test drive it. You could change the cap rate assumptions. You could change the percentage impairment. So, it's something that the public has access to you, and you could sensitize and test drive, and then impair our assumptions. So, that's kind of with that out of the way. I think good way to think about big picture is the current price is $60. We have put out a model, and we have a NAV of $110 per share. Now, this is including some really key assumptions like we're taking massive impairments on assets like the recently acquired Douglas Ranch. We impaired that by 50%. The Seaport, we impaired that by 40%, and we're using DCFs of 12 to 15%.

The management team has come out with discount rates that are in the high single digits. Like they guided land price appreciation that is 47%. We're using 2%, so we're really just scaling back the assumptions, and were still getting to a number that is 110 versus something that trades us $60 today. Another way, another really important aspect, which I'll get into is that, this is a buy something that's at a discount, but there's a tremendous amount of hidden growth. There's a tremendous amount of hidden growth which we'll get to a little bit later.

There is a hidden growth engine here where you could reinvest capital at 25% return. Like if that's what the company officially set today, cash-and-cash 45% we've gone back into the analysis independently verify a lot of the building level development returns, and we're seeing returns as low as, on the low end is low teens, but we've seen IRS as high as 40-50% on some of the really successful projects, right?

Andrew: Bill, if I can just jump in, and you can confirm or deny, but I think the reason that's important is a lot of value investors know stocks that the NAV is 100 and the stock trades for 50, right? The issue with a lot of these things is, it's not great businesses. There's not a lot. It's a classic, "Oh, okay, there's a bunch of cash over there, but if you get it tomorrow, awesome., you're going to make a double. If you get it in 10 years, cool, you made a double over 10 years. That's not a great IRR." I think what's important here is you're saying, "Hey, my very conservative NAV is a double from the current stock price." But what's important here, and this will come into play later, if you don't get the 120 tomorrow, that's okay because they've got all these projects that have great return possibilities associated with them. So, the NAV 5 years from now is going to be 180 instead of 120. Please, correct me if I'm wrong, but I think that's just really why that's important.

Bill: That's exactly correct, and I think that this is something that we pay a lot of attention to. On a unit level basis, we will go in and we will track, " Okay, they took a four-acre parcel, built a multifamily on it, and spent 100 million dollars - just doing a hypothetical example, right? Spend $100 on it. They built it to 8% cap rate, and the market used to be 4%, now, we're using a 5% cap rate assumption. If you build multi-family to the 8% cap rate when macro was 4%, you essentially double the value on an unlevered basis, right?

Now, if you use some construction loan, the equity, return on equity could sometimes be anywhere from 4 to 5 X depending on what that equity capitalization is, right? So, that's really unique, and the company has a 20 to 30 years of pipeline of these commercial development projects, right? That's probably what's more exciting because, Andrew, we're
all been there. We all first start out. We buy companies that have deep discounts. Their Net-nets, the Textile Mills, this is not the original Berkshire business.

This is probably one of the best real estate businesses that I've come across. So, let's kind of dig into it, let's go break down that NAV, and what I would do is I'll go with easy-to-understand to more complexity. I think that's the easier way to do it. So again, there's a public model out there, and the way we will break down the model is, there's operating assets and 4.2 billion dollars. These are stabilized assets based on Q2 annualized net operating income. A, 4.2 billion dollars, and it's a mix of office, retail and multi-family. We use a 7% cap rate for office, 6% cap rate for retail, and 5% cap rate for multifamily.

Frankly, a year ago, those multifamily will trade at 3% and a half percent cap rate, but interest rates have moved, things are different today, and I think that 5% cap rate is appropriate for multifamily because these are in their own MPC where they control all the supply. So, these supplies, some people give me push and say, "Those cap rates are too low." What's different is that they're all located within their own MPC, where they have this unique NIMBY. NIMBY for you, YIMBY for me. Howard Hughes could build anything they wanted, but no one else could really built anything. When you constrain that to a zip code, they have these really strong dynamics of where any new supply essential is going to come from Howard Hughes. They have incredible large concentration of supply in their hands.

So, that's why those 7, 6 and 5, I think are appropriate, and also keep in mind, none of these assets are older than 10 years. A lot of them were actually built within the last 5 years. So, there's an age element, there's a quality element. There's a strategic location where they have a ton of control within the MPC's. So, I call this portion the slap a cap rate, right? Take a mentalized slap a cap rate on it, and you can sensitize it. It's very easy to figure out.

Andrew: Let me just ask you real quick on this because it's a weird one, where I don't disagree like the office buildings that they have at a 7% cap rate. I don't disagree with that number, right? That's 1.6 of the 4.2 billion dollars in your model, but the pushback I had when I was looking at it is like, "Yeah, I don't disagree, but if I looked at publicly traded office buildings, and not just SLG and Varnado, which are almost exclusively New York, but I mean people who are across the country, BXP is one. There's a few others. I can't really find one that trades on the public markets that's going for under a 10% cap rate, or I guess it's over, right? Ten percent is the minimum. Most of them are kind of in the 11 to 13% range. So, I get this weird mix where I'm like, "Okay, I don't disagree with Bill, but at the same time, both on an opportunity cost basis end where the market trading, and look, these guys, it's not just these guys, SLG has been saying for a year, "Hey, are the stock market values is at 9% cap rate, and we're selling New York office buildings all the time at a 4% cap rate. That doesn't make any sense, but I guess my pushover just be, okay, I can just go buy BXP for an 11% cap rate, why not do that? Does that make sense?

Bill: No, I think that's a great example, a great push back, and my response to that would be, all these other companies that you've mentioned, do not have this ecosystem control, right? So, that's important. The second part is that, in any kind of ZIP code, right? Any kind of community, any kind of town, there's a proper mix of office retail and multi-family, right? None of these other companies that you mentioned could just say, "Oh, office is over supply." Like we have this commercial acre. You know what? We could just build multifamily in retail and healthcare, right?

So, you could change; it's adaptive. You could change the mix, and what happens when you build more multifamily in that area, is that, now you have more residents that creates demand for the office. This is what's really unique about their communities is that there is still a great amount of Brazil land and great amount of commercial land where they could shift that mix. They could build the supply in response to where the demand is. Over time that mix shifts from that office over towards multifamily and retail and also, they started doing Health Care as well, right? So, I think that's a very unique distinction.

Now, if you're Vornado, and you are SL Green, you are a certain percentage in a 300 billion square foot New York City, and you have no option to shift that mix over to multifamily. You're confined to the growth rate of Manhattan, right? Which is like, that's kind of confined, as opposed to like in their MPC's, what's very different is that, what you got to keep in mind is that most of their MPC's in Summerland and in Bridgeland, you literally adding 2,000 residents a year within a half-mile to a mile radius area. You have this huge increase in population.

So, I think that's what makes it a little bit unique. Also, I kind of have a personal opinion that the public office reads are probably on their value. So, I think this is me, kind of saying that, the cap rates for some of these high-quality SL Green and Vornado is probably not correct. If you look at the private transaction, that's not what they are. But what's unique here is that, they can really scale back. Like when they do build an office, it's often built to suit with a 10-15 year lease on it.

Andrew: Sorry. I was agreeing with you, and I was also looking at the models. Now, the only other thing I would say is you said at the end, SLG and Varnado they're multiple, and I think this would apply to all the office buildings, a lot of the public real estate is not correct, and it's tough because, again, I do not disagree. I know a friend who - I don't know, if you know Park Hotel, she's done a lot on that. That's been off from Hilton, and if you did what Bill does and you go to each of the individual hotels that Park did like the boots on the ground, and you look, you'll be like, "Oh, there's absolutely no way precedent comps. There's absolutely no way Park's price is right, but it becomes one of those like, "Oh, unless you're ever going to realize the value for it, it's always going to trade underneath it."

So, it's this weird like, "When does the catalyst come? Then it's like, "Hey, if everything else is trading at a discount to Park, and you see something else treating a discount like the opportunity cost versus investing all these. It's just a little weird chicken or the egg dynamic. Did you want to say anything else on the stabilized operating assets, or should we move to a different [crosstalk]

Bill: No. I don't think there's really anything. I mean, I think, and again, like there's a model that's available. Like, if you want to shift that to 8 or 9% percent cap rate for the office, like it brings on the NAV, but I don't think it breaks the thesis.

Andrew: That's what I was doing as you were speaking. I was looking at the model, and if I change the cap rate on just office from 7 to 10, which I don't think anybody thinks like good stabilized office hours of pretty good metros are going for 10. Yeah, it takes 500 million off the value, but it doesn't break. It certainly doesn't break the thesis. [crosstalk]

Bill: Yeah, exactly, it doesn't break the thesis. Yeah.

Andrew: Cool. Okay. So, that's the operating assets which I'm with you. Those are the easiest, right? Like they're already producing cash flow. There is a little bit more for them to stabilize to get to, but these are good buildings. They're producing cash flow. It's generally, you take out the calculator, you say, "Here's the cash flow, you divide by a number to get the...", and that's it. So, what do you want to talk about next?

Bill: Well, I think the next category is the unstabilizing of the construction. It's 650 million dollars of value there. What that category is, is just a question of assets where it's a mix of all different product types. We just use one time book value to 1.3. So, if you think about their development, again, going back to that 25% cash-to-cash return that the CFO just set on the earnings call today, right? Like, as they take that
asset through construction, and get it built, and get it. You know, 40-50% leased, that value should be higher than the capital that they put into the project less the debt, right? Because they have a historical track record of creating value there. So, I think that the 1.3 times book value is only for the multifamily, and then everything else is like 1 to 1.1. So, people could also mess around with that number, if you want to adjust it all the way down to one. It doesn't break the model.

Andrew: That's 600 million of value, which 600 million is a lot of money, but when your models pushing out 12 billion, and you're saying, "Hey, we're basically valuing 600 million of at cost-ish like, it doesn't break, even if these guys wasted a bunch of money on these projects, here created by 20%, it doesn't really move the model here.

Bill: Yeah.

Andrew: Okay. So, we've gone through the stabilized operating assets. We've gone through the unstabilized. I think the next one, if I'm just going down the list is, do you want to talk on seaport next?

Bill: No. Let's save Seaport. We're going to go easiest to understand, to a more complex over time, right?

Andrew: Seaport is the most controversial, but I'm with you. There are more important things to talk about. More valuable things to talk about. I guess MPC is the next, or what do you where do you want to go? [crosstalk]

Bill: We'll do Ward Village.

Andrew: Okay. Ward Village.

Bill: Because it's a lot easier. So, what Ward Village is, [crosstalk]

Andrew: Go ahead.

Bill: No, go ahead. No.

Andrew: I just say, this matter, right?

Bill: Yeah.

Andrew: These are the Hawaii's, there are the condos. One point one, one point two billion dollars of value and your thing. So, that's about 10% of the gross asset value here, and me rambling out the way. Now, I'll turn it over to you.

Bill: So, what is this? They own a 60-acre site right on the water in Honolulu in the area called Ward Village, right? So, think like tall glassy high-end waterfront towers in Honolulu, Hawaii, that they sell for $1,400 per square foot, right? Basically like MAM prices. What's really unique is that the buyers in Honolulu will put a 20% hard deposit. It means that they put that deposit down. If they walk away from it, they forfeit 20% down payment, right? These towers are presold. So, they still have the right to build, I believe, 8 or 9 towers in total, right? There are 4 out of those 8 or 9 remaining or 90% pre-sold.

So, this is not a speculative development business. This is basically a manufacturing business where the customer has given you a hard non-refundable deposit, and can't walk away from it. On the Q2 earnings call today, they just closed, I believe they just got about 200 million dollars of cash proceeds from closing out two third of the units in a tower that they just closed. So, this is a part where if you look into the supplemental, and you look at the 4 towers that are under contract, right? So, there are two of them that they're building right now, and then there are two that they haven't put a shovel in the ground, but all four of them are over 90% pre-sold, with 20% hard deposits collected from buyers.


Then there are four more remaining that they haven't pre-sold yet, right? So, this is an area where we're using an 11% discount rate to discount all the future cash flow. We're assuming a 30% profit margin, and also a tax rate, but the key to everything is that half of all the future condo sales are 90% presold with 20% hard deposits that they can't walk away from. So, there's a certain like bird in hand element in here, and I don't think people need to get into the weeds as much just understand that dynamic. Understand this is not a speculative development. This is not like you build the condo tower. Now, you got to go to market it, and then you're subject to the whims of mortgage rates and what not? I think something like, if I remember correctly, 50% of buyers are basically cash. Only 50% of buyers I see require some sort of mortgage. The buyers who buy these assets are the kind that don't need, like they're not subject to the mortgage market.

Andrew: When I was preparing for this podcast - I mean to say this earlier - but I remember every time I look at HHC, and I've looked at it a lot, I was like, "Oh, I'm just going to look at a simple operating company. It's a simple real estate company." Then I'm looking like, "Oh, three different MPC's, Hawaii condos." I think the Hawaii condos are actually, the MPC's require more assumptions, but I think the Hawaii condo business is actually a little harder to wrap your head around just because they're pre-selling and all this sort of stuff. It doesn't mesh with the way as a non-real estate person, I kind of think about real estate, or I think about a condo in New York, right? They go build it, and then a year before it's open, they're desperately trying to sell the unit's and stuff.

Bill: No. That's a good point. So, the best example is Vornado actually developed a condo tower called, I believe, 220 Park, right? Not 220. It was one of those billionaire road towers, and in 2020, people are like, "Are they actually going to close on this?" Like, these are 40, 50 million dollar condo units, right? They closed every single one of them but closed because people put like a 20 or 30% hard deposit on it 5 years ago. In 2020, they all closed. I think those towers sold out for like 2 billion dollars. If I remember correctly. So, that is the right model. This is not a judicial speculation. We're going to go build it. We're going to sweep bullets and see if we could sell it, right? There's another future company called Trinity Place Holdings, right? Which is, the old Sims building.

Andrew: I know Trinity Place Holdings.

Bill: Right. Yeah. So, that's a polar office, right? They built everything, and then they went to market, and they're having a really hard time moving the units, right? So, this is a totally different business model. This is a manufacturing business. It's almost like you're almost manufacturing widgets at this point, and people are saying, "Take my 20% deposit and we can't walk away from it."

Andrew: The 220 Park is also - I thought so, and I just looked it up. That's where Ken Griffin bought the most expensive home ever, a 238 million condo in 220, but let me ask about work. So, you're going and you're putting up the money. I mean, it's 5 or 6 years before the condo is actually going to get delivered to a giant beautiful condo in Hawaii. Who's the typical buyer for this type of condo?

Bill: So, if I remember correctly, a lot of then are actually kind of West-Coast tech executives because if you're in California and you're very wealthy. You really, could access Hawaii easier on the East Coast. There is a big Japanese buyer presence there. Then there is a, I think only 20% is actually local. So, a lot of that buyer base is not sensitive to mortgage rates.

Andrew: I thought there might be a lot of Japanese buyers. A lot of the time, share companies have a lot of business in Hawaii, and they'll say, "Look 20% plus of our customers come from Japan." That has been a disaster post COVID because obviously, COVID hits travel, but then Japan has really strict travel policies. I think that's started to come back, but have they been able to sell for the past couple of years with the COVID restrictions? It may be a little bit more [crosstalk] if they have had any trouble.

Bill: Not exactly, and that's even with a new tower. I guess a fifth tower they're taken out the market, like just the pre-selling in this quarter was 40%, right? I'm just not seeing any evidence of slow down. Like I thought earlier this year that the velocity will slowing down, and it didn't, right? It's just like if there's one thing that's consistently surprised me is the shrink of the Hawaii condo market.

Andrew: Then, I guess just to build on a sort of like a lot of the stuff that's done that's all sold, pre-sold like they'll be getting done. The future value obviously you think, again, I'm cheating off your model, 400 million of value is coming from the under construction, about 800 million coming from the future construction. The good news, there is the future construction, as you said, it's not on spec, right? If for some reason, the buyers aren't coming in or something, they can pause or they can shut this project down. You're not going to burn [crosstalk]

Bill: They don't put a shovel on the ground unless like... I think their rationale is they don't put a shovel groundless it's 80% presold. So, you get the pre-sale off to 60%, and if they can't get to 80, they won't build it.

Andrew: Then it's 30% margins, right? So, once you're at 80% pre-sold with 30% margin, you've covered your whole cost, so then you can go and sell the rest. I'd love to get one of those condoms for cheaper. Okay, cool.

Bill: Then also just to clarify, you see that 417, right? That 417 number I think, there's about 200 million dollars that's actually in the Q3 like that it's in the pocket now. [crosstalk]

Andrew: The cash is in the pocket.

Bill: This is based on Q2, right? Then out of that 783, it's really 6 towers, if I remember correctly, and there's two of it that's pre-sold. So, when you look at that 417 plus 783 in the model, the way we really think about it is that the 417 is under construction today. Out of that 783, a third of it is 90% pre-sold. So, it's not that 783 is still to be pre-sold. There's a really big chunk like there's probably more than half of the net present value, that's already pre-sold.

Andrew: Yep. Good cashing. Anything else we should be talking about with Ward?

Bill: No, man. I've been out there in person. It's a land constraint. You got the ocean on one side; you got the mountain in the back. There's like nowhere to go. It's chronically under supply. People love it. Qualitatively, just look at the presale numbers, and look at the historical margins. Also, from a risk perspective, people complain that they got too much leverage, right? They got too much leverage, but if you think about it from the perspective of just selling out the next 4 towers will probably get them about 700 to 900 million dollars of cash inflow.

Andrew: So, we've now talked about operating assets, unstabilized assets and the Ward value assets. That's, your numbers about 6 billion dollars of value. So, we've now covered basically all of the liabilities, and look, a lot of the liabilities are secured mortgages that are at the asset level. We haven't even talked about the asset that these are covering, but it's a little bit funky math, but at this point we've covered all liability value. So, now we're just kind of getting to equity value. I guess the next place to go is either other assets or the MPC's. Which one you [crosstalk]

Bill: I think other assets is actually will be easier to cover because if you look at the other assets in essence, a lot of it is cash. So, it's easy to understand, right? A lot of it is cash, and we shrink the cash. A lot of it is prepaid expenses. In this business, where there's construction, there's all these prepaid expenses, and then there's about a half a billion dollars worth of [inaudible] like what is called MODs and SINs. So, in Nevada and Texas when they built the lots for sale, when they put in the infrastructure, the government will actually reimburse them, right? So, you could think of that as half a billion dollars of immunity bond, right? Like in essence, that's what it is, right? So, that amounts to 1.9 billion dollars, and also, keep in mind, they own some cats and dog assets. Like they still have more air rights in New York City, New York seaport, right? Like a lot of people will say, "That's worth zero." They have air rights above the fashion show. Alamo in Las Vegas right on the Strip, right? Like we'll say, lot-zero. Like there's some land in Bali, we'll say lot zero. So, there's 1.9 billion dollars that's mostly prepaid expenses, cash and essentially muni bond, right?

Andrew: I'm glad you hit the MODs because that's the one thing I think people will be like, "Oh, what's that? It's pretty much money, good. The government basically is saying, "Hey, if you build here and you get a whole MPC, that's going to be a massive tax base. Like, we would love to supplement that to get the tax base going and get that kind of going up, which I think brings us nicely into... let's talk about the MPC's. These are the majority of the value of the company. This is what when Ackman goes and he pitches HHC at his own conference or whatever. The first thing he always says is, "Look, the way to get rich is if you have an MPC and you hold it for 50 years, and you develop it properly, you're going to get really rich." He's given to, I think it's Irvine now in California.

Bill: Irvine, yeah. Irvine company.

Andrew: This is what he loves. This is the key asset to HHC. So, I'll flip it over to you.

Bill: Sure. So, there's a residential component and there's a commercial component. I think we could use the word MPC, and sometimes you kind of get caught up in the semantics. Like MPC stands for Master-Planned Communities, right? For those people who are new to this story, let's try to explain that. What is it exactly? A good way to think about it is that, any town that you live in, let's say, there's a town that you live in, that's like 100,000 residents right? How did it start right? Like how did that town, how did that small city start eventually? At some point, it was probably all potato farms or just like a patch of dirt, right? Like literally, that's what it is, right? I think anyone, even without a real estate background, understands some basic principles about that, where if an MPC that has 10,000 residents, you're going to sell the land on a per acre basis. You're going to sell the land for a lot less than when you got 20,000 30,000 40,000 50,000, when you get to 90,000 residents, and only have land for that remaining 10,000, you're going to sell that land for really a high price, right?

On the commercial side, that's kind of the same dynamic. Like, think about every town, every city has a good downtown area, and has some sort of like Dan's commercial hub, right? You could have a few hundred acres in a central location and it's not going to be worth a lot in the beginning when you only have 5 or 10,000 residents, but as more residents move in, those parcels go up in value tremendously, right? So, that's what these two assets are, right? The MPC residential, represents the residential lot that they owned in Las Vegas, in Summerland, Las Vegas. In Bridgeland, which is outside of the Woodland. It's a little Northwest of Houston, and there's a little area called Woodland Hills, which is like further up north. They just bought a place in Arizona called Douglas Ranch, which is probably the earliest, like in the early stages. Am I missing any? Hold on. Give me a second. Let me see, residential. So, you got Bridgeland, Summerland [crosstalk]

Andrew: The remains of the Maryland assets?

Bill: What's that?

Andrew: The remains of the Maryland assets. Am I thinking [crosstalk]

Bill: No. The Maryland is purely commercial.

Andrew: Okay.

Bill: So, it's mostly Bridgeland, Summerland and Douglas Ranch. Now, me, being the boots on the ground guy. I've been out there, and I've seen all of them. All right? I've seen all these assets. The only thing I haven't seen is a new acquisition in Arizona. Now, what I've done is that, we basically said that higher interest rates, home building got a slow. We've taken the average land sale price, cut it up by 20% and taken down future land price growth to 2% from the complete guide to 47%. Companies guide it to discount rates that are 7 to 9%, and we're using 12 to 15, right? Now, I want to differentiate this from like there's no company called four-star, right? What they do is they buy raw land. They put infrastructure, and then they sell to homebuilders, right? Those are typically three-year life cycles, right?

That's not what this business is because what four-star is, they turn real patches of dirt into fenced lots for home owners builders to buy, right? But they don't invest in retail. They don't invest in offices. They don't invest in medical. They invest in any multifamily. They don't build communities. They don't do placemaking, right? Placemaking is really like, I'll give you, think about what Howard Hughes is in the business of doing. They're in the business of putting in different pieces to a town so that it makes it attractive for people to live there, right? What that does is that - and you see it in the numbers - you see year after year the residential land prices go up. Like, if you look at the history, they've been able to hit that 5 to 7%, and there are some years where you see these dramatic increases in the land price, right?

Andrew: It's exactly what you said, right? The first homes when you're selling it, there's no one around, there's no infrastructure. If people are taking a chance, they're betting, you're going on promising, "Hey, I'm going to build this infrastructure." But they're going to get a discount, but guess what? This second round of homes, they'll say, "Oh, there's 200 homes around here. There's a store. There's a grocery center." The third round of homes, "Oh, there's 1,000 stores. There's a Whole Foods. There's a movie theater." By the last round of homes is like, "Oh my God. These are the last homes in the area. It's all built up.

There's all these experientials. So, the schools are out there. We've got the best schools. Like everything's brand new." The more you do it, the more developed it gets. It reminds me of, nobody likes malls anymore, but it's a mall, right? It's a network effect. The first stores get the cheapest deal. By the last store when it's 95% leased up, everyone's to be there because that's where all the traffic is. That's where everything is.

Bill: Yeah. I mean, literally, they're building cities and cities have network effects, right?

Andrew: Yeah.

Bill: I think that this is where I think there are issues with gap accounting when it comes to real estate, right? Like when you sell these parcels and you add a nice retail, a nice retail strip mall, or a nice experiential place in a community, the gap accounting does not take into account the fact that now, your residential land has appreciated, but you see that in the land price appreciation when they sell the land, right? So, you do see that, but from a NAV perspective, the book value still stays the same, but the book value has actually gone up. Another thing is, I keep in mind, these parcels don't sell out in 3 years. There is a 30-year inventory. Another dynamic is they usually will have 10 to 15 builders in these communities. So, it's not like they're begging builders to come built; the builders are all fighting for these land parcels.

I actually had a conversation with the CEO of Green Brick Partners, which is a very custom home builder. He says, "As a builder, - he goes - Howard Hughes is the last company I want to deal with because they have all the control. Like, they make the builders compete for it. Yes, they have the best land, but that's not our business because from a builder perspective, Howard Hughes has all the control, all the power.

Andrew: Yeah. So, MPCs, I guess we mainly focus on the residential side though, I think the same dynamics apply to the commercial side. This is 4 billion dollars of value out of the gross asset value. I think you've got here about 12 billion. So, this is really the big swing here, everything matters, right? But this is the big swing. Anything else we should be talking about just on the assumptions on how people should be thinking about these MPC's?

Bill: So yeah, on the commercial side, I want to get to the commercial side, right? Because on the residential side we have a 1.6 billion dollar figure, and that's a DCF, right? To commercialize, the only side where we came out and said that the management team has guided us, I believe that 2 billion dollar number, and we're willing to stick our neck out and say, "No, no, that's worth 2.4, right?" We're 20% above of management team has set to us, and it's like, why are we willing, why are we so gung-ho in saying, that this MPC commercial portion... and the reason is because if you look at the model, what winds up happening is that, every analyst, like if you were to JP Morgan model, what they do is they say, "Oh, you historically sold land anywhere from half a million to a million dollars an acre on the commercial side, right?

Let me comp that. I'm going to apply a tax rate for it, right? I am going to do DCF on it, right? That's totally flawed, right? Totally flawed, and the reason why it's flawed is that the companies should teach we will sell these commercial lands to a fire station police department. So, they're essentially kind of given that land away, and because you need those public facilities in your community, right? Then the remaining land, what they're doing is that specially those that are closer to the town center area, they will put an office. They'll put retail. They'll put multifamily, and that's where that 25% on lever cash-on-cash come from.

Being the person that I am, I've been to the Woodlands. I've been to downtown Columbia. I've been out to Summerland. I spent multiple, at least two trips and every single one of these, and I can tell you that the remaining parcel that they have, there's 200 acres in Summerland. There's 200 acres in Woodland minimum, and 96 acres in Colombia. Those are worth at least 2 million dollars each, right? So, that in itself is about a billion dollars of value, and then the remaining portion, we value those at quote, like 360 to 727, for the remaining parcels, right?

That is a key differentiator on why our model is different from everyone else's, JP Morgan, Sarasota, and I've asked the management team. I'm like, "Why don't you guys trust this?" They're like, "People don't believe us already. Like, when we came out and told them this commercial acre is so valuable. Like they won't believe." I'm like, "This is where every single year, they probably put a half a billion dollars. This is on a lever basis. They could probably put a half a billion dollars of capital into the ground, right? The lever portion will be a fraction of that. Maybe 20-30% of that, and that equity portion will earn 25% is what they've done historically.

So, this is a key driver, the growth engine, and I've looked at the IRS, I think the worst projects are low teens. We're seeing IRS as high as 40%, and this is the portion where we're kind of pounding the table and say, "Yes, you're buying something at half of NAV, but this is the part where if you have to sit there and wait, they could just keep putting. Another thing I want to mention is that I went to downtown Columbia I think 4 years ago. It hasn't hit critical mass. You're not sure if it's going to be successful. The thing is that, as you add more office, and as you add more multi-family now, it's denser. Now, your risk of it not working out has gone down dramatically, right?

My interns, and I just did analysis on 20 acres in downtown Columbia. They built two multi-family and office, a rush on ice skating rink, and they still got land left over. I think in that sense, once they develop it, each acre of land is worth somewhere like 7 or 8 million dollars. So, you take land that everyone thinks is worth a million dollars an acre, once you develop it's worth 7-8 million dollars. The rule of thumb is you probably take the end state and divide it by 3 to get to the imputed pre-development value. So, if it's worth 8 million dollars, divide it by 3, that's actually closer to 3 million dollars. We're using two, right? They have kind of 496 acres that are core and the remaining are less valuable because it is a little bit further away from the town centers. But, this is the part where they could create a total growth from.

Andrew: This is, you hold the MPC and you get rich in 40 years. So, at this point, I've been very foolish because I think anybody who looks at this sees what Ackman sees, when they look at this, right? You see the MPC, you see the value? So, I've been pretty bullish; we've been pretty bullish. We've almost covered all the values, and I do want to get to my pushbacks, but let's cover the last two pieces of values here, right? The first would be the last piece of value would be the seaport, which I think is the most controversial project. Then the second piece would be the capitalized GNA expenses. We can get there in a second, but seaport, I'll just sum it up, the seaport is downtown Manhattan.

This was their trophy property for a long time. I think it's fair to say it's been bungled, and it's the first thing that everybody talks about when they talk about seaport, when they talk about HHC, and at this point, to me, they put a billion dollars of value into it. We've already covered 12 billion dollars of value here which covers all the liabilities, the stock price, and then some, I don't think seaport matters that much at this point. I think it's going to be a lot more successful than the bears think just based on kind of expectations, but I'm rambling a little bit. I'll toss it over to you.

Bill: Yeah. So, I think a little bit of context is important, right? Like one, I think it's hard to develop in New York City. When we did the Clipper podcast, I'm like, "You want to own New York City assets because it's so darn hard, right?

Andrew: Nobody can buy [crosstalk]2

Bill: It's so darn hard to develop here, right? Also, I think some context is important because everyone's like, "These guys are idiots. The management teams are idiots. Look at the Albatross, that is the seaport, right? I think some context is important because if you follow what's happened to retail rent in New York City, New York City, high street retail, all the major quarters like Time Square, Howard Square, SoHo, so the retail rent across-the-board New York City is down 40% since 2016. It wasn't that long ago before that, and I would actually say, the management team, and those are like, "Oh, let's throw COVID in here as well, right?" They were like gaining traction, and then COVID happened and the movie theater went out of business, right? This is meant to be a restaurant entertainment experiential place, right?

Andrew: So, for 2 years they lost everything.

Bill: They lost everything, and they have to basically redevelop, re-tenant the space, right? Like, "Let's put some history, let's put some context. It's like, are there factors that were out of their control? Was it in their control that retail rent will go down 40-50% in New York City, right? That's just what happened to retail New York City, right? Is it in their control that COVID happened? No.

Andrew: Is it in their control that New York City lost international tourists for 2 years at this point? No.

Bill: Yeah. Now, what was in their control was that, the previous management team, there was one concept in there it's called [F] I think was too high end for the area, right? Because I think he had a vision that was a little bit out touch with the neighborhood, right? That was in their control, and that is a fault of theirs, right? Now, also, there are some office spaces there, as we know, offices are tough in New York city, right? So, it's like why is the seaport important? People absolutely hate it. They have zero expectations.

I actually am there all the time. I spent way too much money there. I take my kids there. We love it. Why is it important? I think it's important because if it works, if the seaport worked, that's a half a billion dollar figure because I kid you not, that could swing to almost a billion dollars of value. It's like, how do you get there? So, in New York City, you have all these places like Rockefeller Center, Times Square., and seaport could kind of emerge as one of those areas where like those are trophy assets where if you were to sell that, there's probably some family who will want to own the seaport with the Rockefeller Center, right? So, I think that's what's important.

Another thing to consider is that the seaport literally gets sponsors that pay them seven figures sponsor fees, right? There's Heineken, I think pays them a million dollars just in sponsors, right? It's like, no cost. It's basically all force [inaudible] which makes you think, if the seaport was such a horrible place, why are sponsors paying Howard Hughes seven figures just to put their name on it?

Andrew: I told you my buddy proposed the other day, and I was looking at the pictures, I was like, "What do you propose?" He said, "Oh," he proposed that seaport. I like it [inaudible] or something because it's a beautiful spot, right? Like, I do think a lot of investors when they look at HHC and they've been burnt, and they thought seaport was going to be worth 2 billion dollars 4 years ago, they look at it and they think it's this huge sink of money. Yes, it's probably not worth the billion dollars they spent on it, but that doesn't change that it's a really good asset. They're still developing it, and they're still upside to that.

Anyway, hey, Bill, we have covered all the assets here, right? That's 12 and a half billion dollars value. There's 6 billion dollars of liabilities. Cool, that's book value, nobody's going to debate that. You capitalize the GNA at 8% to get another billion dollars loss of GNA. Take all that out, and again, the model will be in the show links. People can go look at the model, if they want. That can get you to 5 and a half billion of value. That's over $100 per share, and price versus the current stock price at 60.

Bill: Over 110th.

Andrew: I said over 100, it's the same. So, I think we've done a nice job covering all of the different pieces of HHC's value. I want to do the push back and then maybe we can wrap around to Ackman then. Look, I think the first push back, and we started to address it earlier, but the first push back is like the NAV work. You can go look at the company's history of investor days. They're always pointing to a NAV that's 100-150, and the stock price is 50 or the stock price is 100, and they point to NAV, at 150. I think the first piece of pushback a lot of people would give is, "Hey, this is similar to what I said with the tower reads earlier." Okay, cool. The theoretical value is there, but this is just never going to close. It just kind of sucks as a public market stock.

Bill: Yeah. Let me push back on that, right? It wasn't that long ago where if we were going to do the NAV, the NAV would have been, like using the same model, right, just by changing the cap rate like 3% and a half for multifamily, which literally like what they were transacting at, right? Like even lower than 6% for retail, right? So, there is a big component of that being, and also like the purpose of me putting paying like a 110 number to it, is also like, "Hey," like I, decisively wanted people to just say, "Hey, I think most people could have set this NAV without a ton of pushback like, what do I personally think? I personally think the NAV is higher than this, right? I personally think the NAV is higher than this, but like I think I want to talk [crosstalk]

Andrew: I think we've talked about some of the areas where you were probably pretty conservative on the NAV in there too, right?

Bill: Yeah. So, I think that's important, right? So, you have this big interest rate move, and you have to incorporate that. So, the NAV came down because of the interest rate move, right? Then there's a certain element of like - so, I was having this debate with someone who's really intelligent. I think that the NAV that was put out there years ago was too bullish, right? The NAV today is to conservative, right? The question is like, did they create more value than this time? I think the best way to determine that will be, just look at the NOI. Look at the NOI, put a cap rate on it, and take away some of the debts that's associated with it. It would be very clear to people that they create a tremendous amount of value.

Andrew: So, that's actually in transition into the next point of this because I think the other thing that a lot of investors, including me, would say when they look at this thing, "Okay, I don't doubt the value is there. A lot of people at this point just maybe management can ask you, maybe they can't, but I think a lot of people are very skeptical on the kind of capital allocation and the value ever agreeing to shareholders. I mean this in two ways. There's this seaport issue which we've talked about a billion dollars into. Maybe it's worth 500 million, maybe it's worth a billion. But most people think they've probably lost money on that, and some of that is outside of their control, but then there's things like at the height of the pandemic, right?

End of March 2020, they go out and they need capital, right? How do they raise capital? They do 100 million dollar stock issuance to the public and 500 million dollars to Bill Ackman at $50 per share, which I think is important in context of the tender. But a lot of people think, "Oh, 500 million to Bill, 100 million to the public." A lot of people think they're giving him a sweetheart deal doing that, right? Then there's right now. I re-read their investor, they're getting ready for this podcast and they are gung-ho on their NAV, and attacking the NAV just now, right? They say, "Hey, our NAV is way above the current share price.

At the end of 2021, we do a 250 million dollar repurchase in 90 days we buy back 250 million dollars at $100 per share, and guess what? We're going to keep doing that to [inaudible]. Q2, they buy back 2.2 million dollars of stock for, at $89 per share. Q3, they buy back basically no stock, and the stock is under $70 per share. Then right now, the stock is $60 per share, and they're not buying back anything because they're waiting on Ackman's tender to go through, right?

So, a lot of people just look at the capital allocation, the deals with Ackman, and they just say, "This isn't a business that's going to get run for HHC minority shareholders. They're going to bungle it through bad investments. They're not going to buy back shares at the right time or they're going to let Ackman capture all the value." So, I threw a lot out there, but I do think that these people who follow this. I think that's the real concern here.

Bill: Yeah. So, let me separate some of these issues. So, the capital rates within COVID, right? I think you have to take a context in terms of who's the executive in place today versus who was it? So, what was going on at the time was that Ackman pushed out the previous CEO, right? Then they had an interim CEO in place, and ironically, again, boots on the ground, I was in the Woodland's, when they were doing the Woodland's deal, the Woodland towers deal. So, they did that deal, which we kind of got into this. Actually, our strategic value to do that deal was actually on a stand law financial basis actually makes a ton of sense, but they did deal, and then COVID happened, right? So, that was done when the interim CEO, and they promptly let him go, right?

Andrew: Can I just pause you?

Bill: Yeah.

Andrew: What Bill is referring to, tell me if I'm wrong, the Woodland's deal is Occidental who at the time people forget oil was not 100 then?

Bill: Yeah.

Andrew: Occidental was a force seller. They were
over leverage. They have a big headquarters right in the Howard Hughes areas. At the end of 2019, Howard Hughes struck a 565 million dollar deal to buy this, and COVID happened 6 weeks later. But I don't think anyone would sit like, "This is a distressed seller. It's a strategic deal as you said, nobody's going to knock that deal until COVID comes maybe. So, I get you, but just to give that background, so people will know what we're talking about.

Bill: Yeah, and I think it's important and, again, it's like, are they come in location in like with their state of value of, we control supply, right? Like the Occidental deal was going to be 11% of all the class A. It's actually frankly, probably the best building in the Woodlands. So, if someone else would have come in and took over 11% supply in the market, now that someone else becomes a competitor. I think this is very unappreciated by the market, right? They got basically 8% cap rate and Occi had a 13-year-
lease with them. So, in that sense, and also, that's why this is done at a much lower interest rate environment, right?

Andrew: Occi's investment grade, right? At 13, buying 8%, 13-year cap rate investment grade.

Bill: I think people forget that. Like, they don't see the strategic value. Don't see the pure financial math behind it. They were able to get like that, but what went wrong was that the interim CEO went out and you got a breach for financing for it. They got caught with their pants down then that time period, right? So, they were forced to do the equity rates, right? Like, if you ask me, yeah, I absolutely hated that equity deal. I hated that equity deal because one, I think they got themselves put in that situation, right? Two, they probably didn't need to raise 600 million. They think like 2-300 million because they still have a decent amount of cash balance. Now, it's a little bit Monday morning quarterbacking, like who knew COVID would have turned out, right?

Andrew: That's the one, I do think it's weird that they gave 80% plus the deal to Ackman, when Ackman's got this massive COVID windfall from port study very smartly bought. But that's the one, I hit them for the least, because at the end of March 2020 as you're saying, it's really easy to look back in hindsight and say, "Hey, they could have just wrote it out. They could have recovered." But people forget. We're probably living in the best scenario for that, but we didn't know, like you don't know when people are going to be able to rent.

Bill: Literally like days without revenue was like, a thing that people talk about, right? People forget that Gavin Baker. Like what was not in your bingo card? What was not in your bingo card stress testing company was days without revenue.

Andrew: Yeah, exactly. Like restaurant companies, nobody thought these things were good for shutting down. It's like, "Hey, nobody can go to McDonald's." It's like, "A McDonald's, you can't go to McDonald's today?" The operating lease becomes all...yeah, it just absolutely hurts. So, that's the one I hate them for the least, but I do think like last year [crosstalk]

Bill: So, on the buy back, right? Now, my NAV model, I have 110 numbers, but I still think it's higher, right? So, when you think about it, when I measure a company's share buyback, I don't look at the share price, and then say, "Oh, you bought at this, now, the stocks down here." I look at it, what is your NAV? By the way, they bought back at sort of 100, but on a blend of basis, I think the cost is 90, right? The stock is at 60, again, your Monday morning back it, but like, I tend to look at the world from the perspective of, okay, if your NAV was 150, which I agree with them, and they have, like if you read the JP Morgan notes, management team have privately, each told people that they were worth as much as 170. Again, people won't believe it, right? So from a decision-making perspective, if you really think your stock is worth 150,and as high as 170, and you go out and you do a massive capital, no share buyback at 90, that makes all the sense in the world, right?

Andrew: I'm 100% with you. I'm not trying to quarterback you on the stock price. What I'm trying to quarterback them on is, you bought it 90, when you thought your shares were worth 170. Now, your shares are at 60, so they're even cheaper. Yeah, your values probably come down because of interest rates, but they're not buying.

Bill: Okay. So, on the 60, I mean, if you just spend a half a billion dollars, right now with the condo towers that are closing, let's see if they keep our Mac shares.

Andrew: They didn't in Q3 though.

Bill: What's that?

Andrew: They didn't [crosstalk]

Bill: No, they did buy back some, but there's a cadence to their cash flow, right? So, the way that you think about this business is that, this isn't some like, there's some lumpiness to their cash flow, right? So, they have this Hawaii kind of tower that they just closed, right? They'll probably get about, I think 250 million dollars of cash that comes in. Let's see what they do with that. I think that's a little bit too early to say, to see.

Andrew: I hear you. It's just in the cues they give they give some interesting disclosure because they give post Q buy back numbers. So, you can actually see like in the Q2 cue, they say, "Hey, we bought back another 370,000 shares in July." Then in the Q3 cue, they say, "We bought back shares, 370,000 in Q3." So, you know they didn't buy a single share in August and September, and I don't know, I just look at them and say, [crosstalk]

Bill: But Andrew, again, it goes to, where does the cash to buy back shares?

Andrew: I know, but you go from 2.2 million shares in Q2 when the stock is 90 to basically 0 in Q3, and then your largest shareholder who you've done a sweetheart deal with, announces a tender in October. Like it just looks bad to me, and I just looked at this, I'm like, "Hey why aren't buying back like averaging it out over the entire year, instead of blowing their whole load in Q2?"

Bill: Because their cash flow isn't this nice [crosstalk]

Andrew: But instead of doing it 2.2 in Q2, and I get like, they probably thought that it was a great deal in Q2. They can do a million in Q2, a million and Q3, and kind of dollar cost averaging over the whole year instead of just going all at once.

Bill: I agree. Right? I agree. They probably could have like, measure that out, right? I don't know, maybe if the stock price actually was 150, will we be having the same conversation today? Do you get what I'm saying?

Andrew: Let me switch from the buy back because you've listened to this podcast. You've been on this podcast, you know, I love buybacks, but let me ask about some other investments, right? Like one thing I did hear from [crosstalk]

Bill: I mean I kind of want to just put it out there. Like, I think the stop price reflects the fact that a lot of these points that you bring up [crosstalk]

Andrew: Oh, there is absolutely no doubt about that, right?

Bill: I think as a reference, Ackman's COVID distressed price was a $50 deal, right? The stock is at 60. Ackman's doing a Dutch tender offer between 52.50 to 60, right? I think the price tells you a lot about what kind of discount is being baked into.

Andrew: I think that's why you're ringing the bell here, right? You're saying like, "Look, I can buy a lot at 15 [crosstalk] You tried to buy a lot of 60s. Before your tender shares, think about this. There is a lot of value here. You're just trying to lay out, "Hey, here's where all the value is."

Bill: Yeah, and one thing that I've learned is that sometimes these transactions you're like, I effing hate them. I'm grossed out by it, but the right thing to do is to put your emotions aside, and buy because I did buy more at 50, when Ackman bought on COVID, right? I was disgusted by it. I hated it, and okay, yeah. I don't like Ackman at this point, right? Like, I held my nose, and I bought a 50 during COVID because I knew that took away the liquidity issues, and it took away that extreme left held risk.

Andrew: If you think capital allocation, I want to talk a little more about capital allocation, but if you think capital allocation has been a problem, and Bill is on the board here, and owns 27%. He's the control shareholder here. But guess what? After he does the tender, he's going to own 40%. He's basically, he has majority control at that point. Like, the capital allocation problems are going to go away real fast at that point. Let me just ask you two more small questions on capital allocation.

One thing I've heard from a lot of shareholders is, last year the company's out here saying, the NAV just really going to focus on checking the NAV case discount. Then the next thing they do, is they go and they buy the Arizona MPC. I think we like MPC's, but I do think people said, "Hey, you're trading the big NAV, discount, you've got decades worth of inventory to go attack at Woodlands and stuff at Summerland, and why are you going and getting another MPC here?"

Bill: Yeah, I mean, in a perfect world, I would love for these guys to do just put capital, put shovels in the ground in their existing MPC, sell the land and just use it like TPL all the way to multi [inaudible] right?

Andrew: Yep.

Bill: Because that it is so funny because putting shovel in the ground doesn't require a lot of capital, right? The Douglas Ranch, I'll be honest with you, I don't like that deal. It is their core competence. Like building MPC's is their core competence. I don't like it like a lot of other people, but it's a story. It is what it is. I don't have a lot of good answers to defend it. They did say that they're expecting to sell 1,000 lots right out of the gate. I think that there's a perception that they need to put a lot of dollars into the infrastructure, and what the company is basically saying is that, they actually don't, right? So, it's yet to be seen like does it muddy up the narrative? Yes. Do I have strong opinions on it one way or another? Like not at this point.

Andrew: Yeah, and look, it's 600 million, so again, it's not the huge needle mover, but if you're out there saying, "Hey, we're trading at 2/3 of NAV," and then you go do this big acquisition that's going to take years. Like maybe it pays off, but it's just the capital allocation. All right, last one in capital allocation then I do want to talk a little bit about Ackman. Then I hate talking to you guys. Really, we talked for a long time. Just they did an investment into the Jean-Georges Restaurant. They announced it at the investor day. It's small, right? It was 55 million in total.

Bill: No, no, Jean-Georges has a lot of strategic value, actually.

Andrew: I know it was strategic, but I just felt like the history of real estate people investing into restaurant businesses is not great. It's just weird that Jean Georges is doing the team building.

Bill: So, I'll push back on that, and we don't have the time to go really into it, but the Jean-Georges investment, what's unique about it is that, because I've been there, right? They've actually replaced the hospitality management off like Malibu farms, and I think they have a chain restaurants to be operated under Jean-Georges, right? Because this is a very tough environment for restaurant operators for hospitality operated, and I've eaten at these restaurants before Jean-Georges took over, and after Jean-Georges took over. Jean-Georges Hospitality Group is absolutely phenomenal in terms of providing you the service and the quality of the food, right?

I think that, a longer conversation is that, it used to be the ratio between an office tower and ground level retail. The ground level retail is worth way more the office tower above it, right? For the same square footage. That's changed, right? Now, there's a dynamic worldwide there are restaurants, there are office tower owners all over the world who's asking Jean-Georges to say, "Hey, can you come and open up one of your restaurants?" All right?

Andrew: Yeah.

Bill: So, they claim that it's NASA like, but I think that investment in Jean-Georges has a lot of strategic value because Jean-Georges is very important to the success of the seaport.

Andrew: I hear you. It's just, as soon as I saw a real estate company investing in restaurants, I'm like, "Oh no."

Bill: Obviously, it looks bad. I get it. It's true like, what good strategic decision has been conforming? Let's think about that. At the end of the day, if you have to make good strategic decisions, you're probably doing something that like runs against the grain a little bit.

Andrew: So, I think we've covered, a lot of people had thoughts about macro and rates. Yes, rates could keep going up like, I think the cap rate you use are pretty conservative. I think you can haircut them. I don't know if you want to touch quick the macro rate., but I [crosstalk]

Bill: Sure. There's macro, the secular, and there's interest rates, right? Like nothing we can talk about all day is that like, there's a circle trend people in California and bought this, moving to Texas and Nevada, right? So, there's like a structural, I mean, this is like, everyone knows this. There's this big structural movement, big structural migration to these areas. On interest rates, I would just point out that we've looked at the maturity rate. Like there's almost two billion dollars of general unsecured rate that expires in 20.18 and 20.31. Those are fixed rate, right? So, you have a lot of runway before you like in a higher interest rate environment, you have to deal with it. You generally, should be able to increase your rent and your NOI while you have the same interest cost.

Then you have the ladder, you have probably I think 40-50 different properties that have mostly fixed rate at the property level, right? So, what the way that they have the deck capitalized, it doesn't keep me up at night even though some people have complained that it's too high. So, I think I just want to point that out. From a macro perspective, I think a lot of the one thing that is interesting is that if you look at their Q3 land sale, everyone the headline would be, "Home building is in the DOM. It's like, no one's buying homes anymore." But like their year over year land sale is actually higher than the year before. So, I was kind of very positively surprised by it. I think there's higher interest rates are definitely going to hurt, right? Higher mortgage rates at definitely going to hurt, and that's why we put down like if you have JP Morgan model, I think they have, I think JP Morgan model for residential has something like 3 billion dollars for residential land value, and we got that at 1.6. We've already cut kind of like, "The heck out of it."

Andrew: Perfect. Okay, so the last thing I want to talk about here. So, we came out of the beginning. This is the reason we're doing it, right? Ackman's 27% of this through Pershing. He's trying to get over 40% with this tender offer. I think you were just trying to lay out, "Hey, before you tender, the value here is much higher, consider this before you do." But let's talk about like, obviously, Ackman's trying to 13% more of this because he thinks there's value here. But I do think there's an interesting thought of, "Hey, what are Ackman's long-term plan for HHC?" So, I just wanted to give you so you can talk about that.

Bill: So, this is probably where I'm going to sound like the lease, you know? Like, this is not my strength. My strength is on the real estate side. I think the issue like, as I thought through it... and by the way, thank you to your podcast because James Podcast was with you, and people started people messaging me. They're like, "Hey, I think Ackman's going to buy." I'm like, "What are you talking about," right? I looked into the Investment Company Act of 1940, and it's like, "You can have 40% securities, and guess what? Like the ass heavy, right? It's like, what's a book or how you use?" Like exactly 9.5 billion dollars? I think portions like excluding cash is like 9 or 10
billions dollars, he's got to buy more. He's going to shift some of those assets over. It's almost that 60/40 mix is almost too much, too perfect of a ratio for that to be a coincidence.

Andrew: Just so everyone knows, what Bill is referring to. I did a podcast with James Olivar, I'll include it in the show notes where we talked about Pershing, and one of the things James talked about it, this is all James, not me, as what Bill's saying, Howard Hughes, Bill owns a lot. If he took control of it, this would be his way out of the 40's company act to get PSH over to US listing or something. So, yeah.

Bill: So, a lot of people are saying, "Why not just buy PSH?" So, I thought about it some more and my thought is, "Okay, and if anyone know this better than I do, please reach out, right? Please, reach out to me, I'm Bill at Rising Partners.com, please reach out. My understanding is that, there won't be a take private, right? He gains control. There won't be a
take private because he needs the Howard Hughes like vehicle to stay public. Like, if I'm wrong people, please, correct me, right? He needs how use vehicle to stay public, and then at some point, there's going to be some sort of a merge or some sort of transaction where he brings the assets from PSH, Pershing Square Holdings, which is trade on your [inaudible] right? Because I don't think he could use the currency domicile vehicle, and bring domicile into the US, right? If I'm wrong, please people, let me know. So, you kind of make an argument that he's a structural buyer here, right?

I think what I'm trying to do is raise awareness so that if it does occur, and such as Pershing Square itself trades at a 30% discount in that, right? So, you could take that, in a way, you can say, "Okay, I'll be less angry at Bill Ackman if the stock were higher in that merge cut up. I still won't prefer it because it will be like, I just want pure play exposure to this vehicle. This is what I signed up for. This is what I understand. Do I want to get more exposure to Bill Ackman's like stock-picking ability? I probably don't need that.

Andrew: Look, so I guess the way I've kind of looked at it is two birds with one stone, right? The first bird is, he clearly thinks HHC is undervalued, and this lets them deploy a lot of capital to buy HHC at rates that you know? You look, he put a lot of money into it at $50 per share during the height of COVID. Like getting a lot more money into it at $60 per share. Now, probably looks really attracted to him. So, that's the first bird, but then I do think there's like a little bit of being shot where he's saying, "Hey, at some point if I want PSH to get over into the US, and I want the 1946 Act, and all that, HHC is a perfect vehicle for that. By going from 27% ownership to 40% ownership, I'm just getting a little bit closer to that bank shot too. So, that's how I kind of look at it. But look, Bill, I think we've talked a ton about everything. I mean we're approaching into our podcast. You think we didn't hit on HHC you think we should have talked about or anything you wish we had hit a little harder?

Bill: I don't think so, man. I think we cover so much. I mean I think maybe the only thing will be just the near term cash inflow. Like, if you look at the model, there's probably going to be an inflow of 30 million dollars between now and year end just from the Hawaii condos closing, right?

Andrew: Yep.

Bill: So, I think that's at today's price, it's 10% market cap, right? That gives a cap rate like leeway to kind of like use that cash, deploy it, in some way. Another thing will be, our model is based on Q2 annualized, but a lot of Q2 annualized, some of it is still kind of recovering from COVID. Some of it, those specific assets just haven't hit like they're true stabilized, that operating income. So, there is another easy half a billion dollar potential pick up, just from the analyze hitting the guided stabilized numbers provided by management team, right? So, that's another $10 or upside, right? Another thing is just, there's constantly that bucket of 650 million dollars of unstabilized, those are all going to convert into NOI producing cash flow, producing assets. Like, there's this constant stream of assets that you've prepaid for, but hasn't generated in a cash flow. So, when you look at this, you need to be a little bit forward-looking, kind of got to skate to where the pocket is a little bit because anything that's like... because I'll give you, think about the development business. You're putting up the money. You're putting shovel ground. You're developing it, right? But the cash flow may not show up for 3-4 years.

Andrew: Perfect. We'll, Bill, this has been great. Looking forward to seeing you next week. Anybody, again, I'm going to include the link to the model in the show notes. So, anybody who wants to go, look at it, can play around with it. See, look, I actually think it's pretty conservative. This is a name that's caused a lot of heartache to a lot of investors, and I do the values there, man. Anyway, Bill, looking forward to seeing you next week. Appreciate you coming on. Looking forward to the fourth appearance at some point in the future, and we will talk to you soon.

Bill: I'm coming for Cherry Roper's Wrecker, man, at this point.

Andrew: I'll let him know. Every time somebody says that, I let him know, and he says, "Nobody's taking that con from me."

Bill: What he has now, 8?

Andrew: Seven or 8, yeah.

Bill: Seven or 8, all right, I'm not free. So, I don't know. I got a shot, all right?

Andrew: Talk to you soon, buddy.

Bill: Okay. Yeah, talk to you later.

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