Original review: Howard Hughes Holdings - Ackman's Berkshire?
Tag for finding my other articles on this stock: HHH
Key takeaways
Vantage, the new insurance operation, has an exceptional new management team and is going to get every dollar HHH can throw at it, despite the fact that the legacy land business is performing very strongly.
Thesis and valuation update
When the “new” HHH was announced, the idea was that excess FCF from real estate would be deployed into buying private businesses. That’s still the plan, but it is now clear that for the first few years, all the cash will go into growing Vantage, the insurance operation, not buying additional private companies.
Ackman and team are so excited about Vantage under its new leaders (David Gansberg and Marc Grandisson, both ex-Arch) that they want to accelerate monetisation in real estate to pump money into Vantage. To do this they will explore JVs and 3rd party investment capital.
Vantage is growing rapidly into a softening insurance market. This is not necessarily a terrible idea - there are still pockets of good pricing - but it represents a risk. Underwriting indicators diverged in 2q. The calendar year combined ratio, which includes changes in reserve estimates for business written in prior years and catastrophe losses, deteriorated to 102%, meaning the company lost money underwriting insurance. However the accident year CR, which only covers policies written this year and excludes catastrophe losses, improved markedly to 91%. Time will tell which of these trends is reflective of reality, but I think it would be prudent to assume that Vantage has a few bad quarters as new management strengthens reserves. This might be no bad thing.
Valuation at $64 remains appealing. My hurdle is a 15% CAGR (2x in 5 years) and I think there is a high probability HHH achieves that. If things go well it could 3x. I will publish an updated sum of the parts in the next week or so - apologies for the delay on this.
Notes
MPCs
EBT +32% on strong land sales driven by continued strong pricing and demand.
“Every acre we develop leaves fewer remaining. Every new neighborhood enhances the value of the next one.”
Vantage
Acquisition closed in 2q.
Written premiums grew 29% and earned premiums grew 22%. Potentially risky given cycle (see below).
2q combined ratio deteriorated to 101.6% from 94% a year ago. Of this, 10.2% was Iran war cat losses and adverse prior development in a discontinued line (transaction liabilities).
Accident year CR (excluding prior year developments and cat losses) was 91.4%, a 4pp improvement y/y and very strong if the reserving is accurate.
The portfolio has been quickly barbelled: what was a diverse fixed income portfolio with significant interest rate risk is now split between cash/near cash backing the insurance liabilities, and common stocks representing Vantage equity. The common stock portfolio mirrors Pershing’s investments elsewhere, with 12-15 high quality growth companies. “The public markets, particularly at this moment, it’s our view, are giving us an opportunity to buy some wonderful businesses at discounted prices.”
Operating Assets.
Same Store NOI grew 2% for the q and 6% for TTM on healthy leasing momentum.
Adjusted maintenance FCF fell slightly in 2q on investments in leasing (to drive occupancy and growth) and higher interest expenses, but is up 16% over the TTM.
Sold Creekside Park and Creekside Park The Grove for $30m net proceeds and a 30% project life IRR.
Condos.
Park Ward Village completed and generated $131m in gross profits and $227m in net proceeds.
This is exactly as planned, highlighting the low-risk nature of this business, but completions only happen every year or two so profits are lumpy.
“We contribute irreplaceable land. Buyer deposits and nonrecourse construction financing fund the majority of the development. We largely lock in our margins years before delivery. And today, we have more than $4 billion of future expected condominium revenue with roughly 78% already under contract.”
Vantage leadership transition.
David Gansberg will become CEO - until recently in line to be CEO of Arch, but didn’t get it and left.
Marc Grandisson, who favoured Gansberg for Arch, becomes Executive Chair.
This creates the “dream team”: “our most successful investments have been finding a great business and then finding the best person in the world to run that company”.
It’s especially powerful when good people used to running big operations take over a small one.
Capital allocation - continued shift in emphasis
“We need to do everything we can to… inject more and more capital into Vantage” to exploit the dream team.
“While we maintain and want to remain committed to the long-term oversight of our master planned communities, we’ve significantly expanded our toolkit for creating shareholder value. As assets mature, we’ll continually evaluate whether our shareholders are best served by continuing to own them outright or [pursuing] alternative structures…The objective isn’t monetization for its own sake, it’s disciplined capital allocation…When we believe capital can earn a higher return elsewhere, we’ll recycle it”.
Real estate will generate $2.5-3bn of FCF over the next 3-5 years before any accelerated monetisation activity. On top of this they are looking at raising ROI and freeing capital for insurance by:
selling noncore land; and
doing more JVs and/or raising pension fund capital to fund the real estate assets.
Grandisson on Vantage’s priorities
Prioritize underwriting profit over volume, with proper alignment of incentives between shareholders and management.
Conservative reserving.
Long-term data-driven perspective on loss expectancy and profit margin.
Disciplined decision-making.
Grandisson on the stages of a P&C market cycle; he thinks we are currently in stage 3, with some lines in stage 2 and some entering stage 4:
capacity withdraws, hard market starts, rates rise sharply;
rates rise more and reserves are replenished;
rates moderate or decline, but hard market profits continue to flow, allowing disciplined underwriters to grow profitably;
the industry abandons discipline and chases volume as rates fall further.
Thanks for reading - if you enjoyed reading this please like and restack, and do get in touch if you have questions.
Pete
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