Ackman Makes Long Bet on Property Reversal With Howard Hughes

William Ackman of Pershing Square Capital Management LP
William "Bill" Ackman, founder and chief executive officer of Pershing Square Capital Management LP.

William Ackman is about to take a bet on two of the hardest-hit sectors of the economy: housing and commercial real estate development.

Ackman, who runs hedge fund Pershing Square Capital Management LP, is one of the lead investors in a new company that Chicago-based General Growth Properties Inc. is spinning off as part of its bankruptcy reorganization. He also will be chairman of the new firm, a money-losing collection of partially built malls and housing developments.

While the stake in the company, to be known as Howard Hughes Corp., may someday prove lucrative, it may be difficult to value the spinoff’s real estate while the property market is in a slump and the timing of a rebound unclear. The company’s net asset value “can vary considerably in the hands of different investors,” Andrew Rosivach, an analyst with Credit Suisse Group AG, wrote in a Sept. 13 report.

“There’s value there, but the likelihood of this thing trading above its net asset value is pretty close to zero,” said James S. Corl, managing director of real estate investments at New York-based private-equity firm Siguler Guff & Co., and former chief investment officer at Cohen & Steers Inc. “A group of assets does not a strategy or a franchise make.”

Ackman’s role in the spinoff comes after Pershing, Fairholme Capital Management LLC and Brookfield Asset Management Inc. teamed up to bring General Growth out of bankruptcy, defeating a takeover bid by rival mall owner Simon Property Group Inc. The investor group committed as much as $6.55 billion as part of the restructuring plan, scheduled for court approval on Oct. 21. The spinoff is planned for early November.

‘Irreplaceable Assets’

“It’s a phenomenal collection of irreplaceable assets and they have a lot of long-term value,” Ackman said in an interview. Pershing Square will have about a 24 percent stake in the spinoff when General Growth, the second-largest U.S. mall owner, exits bankruptcy.

Hughes Corp.’s assets will include Summerlin, a 22,500-acre (9,100 hectare) master-planned community in Las Vegas, the city with the highest foreclosure rate in the U.S. The development isn’t projected to sell out until 2039, according to a regulatory filing. Among other Hughes Corp. properties is South Street Seaport, a shopping center in Manhattan that General Growth tried to sell prior to the April 2009 bankruptcy.

“We acknowledge that, as a collection of assets, it will take time for people to get their arms around the value that’s in the portfolio,” Thomas Nolan, General Growth’s president and chief operating officer, said in a telephone interview. He declined to speculate on how the company’s shares may trade.

Real Estate Hurt

Both home sales and commercial real estate development have been hammered by the economic slump. New home sales in August matched July as the second-lowest in data going back to 1963, U.S. Commerce Department data on Sept. 24 showed. Sales of previously owned homes were the second-lowest in records going back a decade, the National Association of Realtors said.

Commercial real estate prices fell for a second straight month in July, sending the Moody’s/REAL Commercial Property Price Index 43 percent below its 2007 peak.

General Growth’s ties to billionaire aviator Howard Hughes, who died in 1976, stem from the company’s $11.3 billion purchase of Rouse Co. in 2004. Rouse had acquired the remaining Hughes assets, including about 22,500 acres of Nevada land, in 1996 and agreed to pay heirs and other shareholders over time. Debt from the Rouse takeover helped push General Growth into bankruptcy, the biggest in real estate history.

General Growth’s restructuring, which requires about $8.4 billion in financing, will pay creditors in full and provide a recovery to its shareholders, the company says. Each holder of a General Growth share will receive one share of new General Growth stock and 0.0983 share of Hughes Corp. common stock.

Pershing Square, Brookfield

Ackman’s Pershing Square, Brookfield and Fairholme have committed $250 million for Hughes Corp., according to court papers. Brookfield Advisors LP, an affiliate of Toronto-based Brookfield Asset Management, will provide interim management for Hughes Corp., according to a court filing.

Bruce Berkowitz, founder of Miami-based Fairholme, and David Arthur, Hughes Corp.’s interim chief executive officer and managing partner of North American real estate investments for Brookfield Asset Management, both declined to comment through their spokesmen.

General Growth said in an Oct. 8 statement that a permanent CEO would be announced after the spinoff is completed.

South Street Seaport

Nolan said there is a perception among some stockholders that the separation of the traditional mall company from Hughes Corp. is a “good bank, bad bank” plan. That isn’t the case, he said. The spinoff’s investors are interested in building up the company and developing such assets as South Street Seaport, Nolan said.

“There is no intention other than putting the best long-term value creation plan together,” he said.

Unlike General Growth, Hughes Corp. won’t be a real estate investment trust, according to a registration statement filed with the U.S. Securities and Exchange Commission. REITs are required to distribute at least 90 percent of their income to stockholders, and investors buy shares mainly for the dividends.

“Your classic REIT investor is less likely to invest in Spinco,” said Cedrik Lachance, managing director at Green Street Advisors, a research firm in Newport Beach, California. Spinco was a temporary name before the Howard Hughes Corp. moniker was chosen for the spinoff. “What you’re buying is the hope that over a long period of time a large number of developments will prove successful.”

Mall Developments

The new company will own four mall-development projects. Those include the partially built Shops at Summerlin Centre in Las Vegas and 162 acres of vacant land southeast of Charlotte, North Carolina. Among its other assets are a stake in the Woodlands, a 28,400-acre master-planned community north of Houston, and Landmark Mall in Alexandria, Virginia, where the city council has authorized as much as 5.5 million square feet of mixed-use development, according to General Growth.

Hughes Corp.’s net loss was $703.6 million in 2009 after $680.3 million of impairments, mainly in its strategic development business. It recorded a profit in two out of the last five years, according to a regulatory filing. The company had $340.5 million of debt as of June 30.

Among those that didn’t want shares in the new company were Howard Hughes’s heirs, who fought General Growth over the compensation they would receive for the Summerlin development. The mall owner agreed to pay the heirs $230 million -- $10 million in cash and the remainder in cash or new General Growth common stock -- soon after it leaves bankruptcy, the company said on Sept. 20.

‘Contrarian Investments’

The real estate owned by Hughes Corp., after suffering in the slump, will bounce back eventually, said Mark Jacobs, a bankruptcy partner at Pryor Cashman LLP in New York.

“These are classic contrarian investments,” said Jacobs, who isn’t involved in the General Growth case. “You’re buying something that has gotten what I consider to be an unjustified bad reputation for a low price, and you will ride it up.”

Pershing Square, based in New York, may hold its investment in Hughes Corp. for as long as 10 years, according to Ackman.

“We’re long-term investors,” he said.

The case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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