Valuing HHC is tricky, as Ackman himself discusses in his letter. The assets will not be monetized for a while, it is uncertain how much cash will be needed, one would need to predict the trajectory of several regional property markets, discount rates, etc. I have seen some articles that use HHC's own sales data and extrapolate them to a valuation - but there is a big difference between the price obtained in piecemeal sales and the price for large blocs of undeveloped real estate. These articles have failed to bridge that gap to my satisfaction. I do remember doing a discounted cash flow analysis when HHC first started trading, and using the sales data provided in the registration documents - assuming these continued at the same price and pace - it looked like HHC was undervalued by about half (give or take a lot). But I never became all that comfortable due to the myriad assumptions that went into that analysis.
So imagine my excitement when I noticed a WSJ report on a private-market transaction that may help value HHC! Calpers sold its portfolio of 28 housing communities in development to Newland Real Estate ("Calpers Downsizes Housing Portfolio", Wed Jan 18, Money&Investing section). Ah, now we have a comparable transaction that we can apply to HHC's master-planned communities segment. The article states that the price range for the deal valued each home site at $35,000. Here's my back-of-the-envelope take:
Looking at HHC's 2011 sales, they report sales at an average of $88,000 a lot and $356,000 an acre. This means that HHC's average "home site" is about .25 acres. They report that among their master-planned communities they have 14,000 saleable acres - or 56,000 home sites. At the Calpers price/site - that gives this segment an enterprise value of $1.96b. HHC also has a bunch of operating assets. These operating assets do $53m in NOI. Slap a cap rate of 7% on it, and we have $800m in enterprise value.*
That's an implied enterprise value for the whole company of $2.8b versus $2.4b currently. About $400m of debt means that the equity market cap is currently $2b, and should be $2.4b. The stock is undervalued by $400m, or 20%. Margin of safety? I think so, and here's why:
-I am not terribly familiar with the Calpers portfolio, but I doubt it is as good as the HHC master-planned community portfolio. HHC's communities are really best of breed, and therefore the simple price/home site metric from the Calpers transaction is probably understates its value significantly.
-HHC is a grab bag of assets and I simplified greatly in the analysis. Any assets besides "saleable land" and the "operating assets" - that is, the "strategic developments" - are ignored and are pure upside to this valuation. The Ala Moana air rights? The Maui land? etc. If this segment is just worth its book value ($188m), that's another 10% of undervaluation. Many of these assets are on the books from a long time ago, and should be worth more than book value once some attention is paid to them.
To me this was an interesting exercise to see how HHC's development assets are valued compared to a private-market bulk transaction of a similar asset. It is good to see that even with what I think is a poorer asset quality, the Calpers transaction puts a value on HHC above what the market thinks. Of course this is based on only one transaction, but I think this exercise is valuable as a supplement to a DCF analysis in order to better "triangulate" a good valuation for HHC.
Thoughts?
*These numbers are actually quite close to the book value for these two segments.
**All info is from the 10Q for the period ending 9/30/2011
