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Wednesday, June 12, 2024

Initial Form 10 Thoughts, Spinoff, Rights Offering


The first public draft of the Seaport Form 10-12 came out on Friday, I took a quick read of it, here are some initial thoughts that I’ll likely come back to as the spinoff approaches sometime in Q3.  Howard Hughes Holdings (HHH) is going to be spinning four main assets into the newly created Seaport Entertainment (SEG) that will focus on “intersection of entertainment and real estate”:

  1. The Seaport District in Lower Manhattan, which includes the South Street Seaport itself, some neighboring buildings and the 250 Water St development site (which HHH/SEG recently won a lawsuit that sets the stage for construction), all of which Howard Hughes has sunk over $1B into over the last decade and is still bleeding cash (-$55MM in 2023).  Thus far, the Seaport has been a disaster (HHH took a $672.5MM impairment on the Seaport last year) and waste of capital, the project was started a year or two after Super Storm Sandy destroyed much of the old structure in 2012 and was underwritten at a 4-6% return on cost.  The development had many delays and hasn’t come close to the original profitability projections a decade or so later, as a long term HHH shareholder, I blame the Seaport for much of the underperformance over the last 5-7 years (alongside the Ackman covid capital raise).  Maybe focused management can turn this around?  There are a total of 11 physical buildings at the Seaport, as a whole it is about 2/3rd’s leased at this point.
  2. 25% interest in Jean-Georges Restaurants that was acquired for $45MM (potentially an Ackman vanity investment) with the stated strategy to partner with Jean-George in the future as an anchor tenant in new developments (Jean-Georges leases the entire Tin Building in a JV with SEG for a food hall concept).  This investment reminds me of MSGE/Sphere’s investment in TAO Group where they argued TAO’s nightclub expertise could be used at the Sphere and other entertainment venues, TAO was eventually divested.  The Jean-Georges investment feels very non-core and could be sold to raise capital for their two big development projects (250 Water St and Fashion Show Air Rights).
  3. The Las Vegas Aviators (highest revenue grossing minor league team), the Oakland A’s AAA affiliate, and the corresponding newish Las Vegas Ballpark located in Howard Hughes’ Summerlin master planned community.  The A’s are moving to the Las Vegas strip (where the old Tropicana was located) in a couple years, the current plan is to keep the Aviators in Summerlin, but TBD on how that impacts attendance/revenue.  HHH did pay $16.4MM for the remaining 50% of the Aviators they didn’t own in 2017 and the ballpark cost approximately $125MM in 2019.
  4. 80% interest in the air rights above the Fashion Show Mall on the Las Vegas strip, which is located on the north end of the strip near Treasure Island and the Wynn hotels.  Howard Hughes has brought in Anton Nikodemus as the CEO of Seaport, his previous stop was as the President/COO of MGM’s City Center in Las Vegas and before that he led the development of MGM’s National Harbor and Springfield, MA casinos.  I go annually to a conference in the City Center and have visited the National Harbor property, both are impressive gaming resorts that are well run.  The Fashion Show Mall and the other 20% of the air rights are owned/operated by Brookfield Properties (which acquired General Growth Properties (GGP), the original parent of Howard Hughes).  There’s been a significant increase in supply on the north end of the Las Vegas strip in the past year with the opening of Resorts World and the Fontainebleau (both of which post-opening are relative ghost towns).  But with Nikodemus onboard, it clearly signals that they intend to redevelop the Fashion Show Mall in the medium-to-long term.

Each of these are a bit difficult to value and don’t quite fit into a typical public real estate company (although HHH/HHC will still be a bit of an odd ball public stock following the spin, it helps on the margins).  My question prior to the Form 10-12 release was how this company would be capitalized given it loses money and likely will for the near future, plus the plan is clearly to sink money into their development assets, that question was answered with disclosure that Seaport intends to conduct a $175MM rights offering with Ackman’s Pershing Square backing it up plus cash from HHC, giving SEG roughly ~$200MM in cash at closing:

Seaport Entertainment expects to conduct a $175 million Rights Offering of equity to our stockholders following the distribution. In connection with the Rights Offering, the Company is in serious discussions with Pershing Square Capital Management, L.P. (“Pershing Square”), which through investment funds advised by it is HHH’s largest shareholder, regarding a potential backstop agreement which would be entered into prior to the distribution. Pursuant to that agreement, if finalized, Pershing Square would agree to (i) exercise its pro rata subscription right with respect to the Rights Offering at a price of $100 per share of our common stock and (ii) purchase any shares not purchased upon the expiration of the Rights Offering at the Rights Offering price, up to $175 million in the aggregate. The backstop agreement could result in Pershing Square’s affiliated funds owning as much as       % of our common stock if no other stockholders participate in the Rights Offering. Any capital raised through the Rights Offering would further strengthen our balance sheet. With over $      million of liquidity, primarily consisting of (i) $23.4 million of cash contributed by HHH pursuant to the Separation Agreement, (ii) expected proceeds from the anticipated Rights Offering and (iii) amounts available under the Revolving Credit Agreement (as defined herein), we believe we will have ample capital to invest in and drive internal and external growth opportunities in the leisure, tourism, hospitality, gaming, food and beverage and live entertainment spaces.

Rights offerings can often be juicy special situations (is this a Greenblatt special, spin + rights offering?), they come around rarely, but often signal an opportunity because the company is offering all shareholders the opportunity re-up often at a discount.  

Ackman clearly wants more exposure to SEG, by backstopping the rights offering where it’ll likely not be fully subscribed, he’s increasing his exposure in more shareholder friendly way than he did with Howard Hughes during covid with a private placement that minority shareholders couldn’t participate.  His interest in Seaport Entertainment is a bit puzzling to me, Ackman tends to like higher quality companies, something SEG is not.  New York real estate plays have always been challenging to me, especially ones that rely on development, 250 Water St will take several years to build (with original cost estimates of $850MM in 2021, likely higher now) and who knows what the apartment and office leasing environment will be at that point.  Add that with the underwritten low cap rates, the margin of safety in NY development seems extra slim.  It is also worth noting that Ackman has left the board of HHH, this is after he was famously on the cover of Forbes as Baby Buffett for his role in Howard Hughes.  I’ve seen some speculation that it clears the path for Ackman to make a bid for HHH, unlikely, but who knows.

The Seaport spin is going to be a challenge to value, can’t really do a cap rate based SOTP.  HHH trades for 1.1x book value at this point (despite holding a lot of land/buildings at historical cost), HHH is the higher quality asset, guessing Seaport will trade at a discount to book.

We don’t the spin ratio yet, but at 80% of book, Seaport is roughly worth ~$6-7 per HHH share prior to the rights offering, or about 10% of the HHH market cap.  That likely means we see forced selling, could be an interesting one to keep on the watchlist.

Disclosure: I own shares of HHH (fka HHC)

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