Hughes Corp.’s ‘Plan B’ may yet end in sale
Company seeks buyer with long-term vision
When Howard Hughes Corp. announced in June that it would conduct a strategic review amid sluggish stock performance, analysts believed the company was headed for a sale. At the least, Hughes Corp. was expected to shed some of its properties or bring in fresh investment capital.
But this week’s announcement that a sale did not pan out and that the company is planning instead to slash expenses and install new leadership might just be the next best thing.
“As far as a Plan B goes, it’s very good,” Alexander Goldfarb, a managing director at investment banking firm Sandler O’Neill + Partners in New York.
Hughes Corp. earlier this week announced the results of a strategic review, saying it planned to cut costs by $50 million per year, in part by moving its Dallas headquarters to Houston, sell about $2 billion in non-core assets and promote Houstonian Paul Layne to chief executive.
The moves came after more than two dozen groups were solicited to gauge interest in acquiring the $5 billion company, which executives said would have required a buyer with significant and long-term capital.
Hughes Corp. owns, manages and develops commercial, residential and mixed-use real estate throughout the United States. Its largest properties include The Woodlands, The Woodlands Hills and Bridgeland in the greater Houston area, as well as Summerlin in Las Vegas, Ward Village in Honolulu, Columbia in Maryland and the Seaport District in New York.
Master-planned communities and major mixed-use developments take years, or even decades, to build.
“This company is incredibly valuable, but it’s valuable for someone with a lot of money and a very long time horizon,” Goldfarb said. “The challenge is coming up with the check.”
A long-term asset
The transformation, Hughes executives said, will better position the company to grow as a leaner, more focused business.
The company was created in 2010 when Chairman Bill Ackman, chief executive of New York hedge fund Pershing Square Capital Management, tapped Dallas-based real estate investor David Weinreb to take over 34 assets spun off from shopping center owner General Growth Properties. Grant Herlitz became the company’s president.
“David and Grant built a company out of a collection of what we describe as ‘orphan assets’ that didn’t generate any meaningful cash flow at the time the business was created,” Ackman said Monday afternoon on a conference call with investors to discuss the company’s future.
But the stock price in recent years has been stagnant, and over the summer the company’s board launched a strategic review and began talking to potential buyers.
Ackman said 35 investors, including real estate private equity firms, sovereign wealth funds and large family offices, were contacted to see if they would be interested in buying the business. Of those, 14 groups did “fairly deep due diligence.”
Most of the parties, though, did not have the war chest needed to finance such a deal.
“Unlike what they thought initially, (that) this was a buy, break up and sell story, they realized this was a real going concern and a multi-decade investment asset,” Ackman said. “And the answer they gave us was, ‘We don’t have the capital.’ ”
One group, however, still appears to be interested, and the parties are expected to meet in the “relatively short term,” Ackman said.
Sum of the parts
When it didn’t look like a sale was imminent, the board began to consider what the company would look like in the future.
As a dominant force in its master-planed communities, in which it retains essentially all land and development rights, the decision was made to narrow focus and dispose of Hughes’ noncore assets, those the company said generate inadequate returns and require a disproportionate amount of management attention.
In addition, the company said it would move to a decentralized regional management model.
The change will allow regional managers to take advantage of development opportunities with less bureaucracy, said Vahid Khorsand, an analyst with BWS Financial in Los Angeles, who recently visited the Summerlin community in Nevada
“In a centralized system, decisions took longer, and funding was not always available to undertake a new project,” he said in a investment report.
The corporate headquarters in Dallas had substantial overhead that duplicated regional operations, as well.
The company has not said how many employees will relocate to Houston but that the majority would be offered jobs here.
Leadership changes
The leadership shakeup put Layne at the helm, working closely with Chief Financial Officer David O’Reilly.
Layne, who had been president of the company’s central region based in The Woodlands, its largest regional office, replaced Weinreb, who also gave up his seat on the board to Layne. Herlitz,
Hughes Corp.’s president who was also up for the CEO job, will leave as well.
Layne was recruited to Hughes Corp. in 2012 and has helped lead more than $1.2 billion in development of office, retail, apartment, hotel and storage properties in The Woodlands.
He was formerly an executive vice president at Brookfield Properties Corp., overseeing a 9.7 million-square-foot portfolio in downtown Houston. Prior to that he was a vice president at Trizec Properties.
Layne said on the conference call that the company had identified development opportunities in The Woodlands that include more than 1 million square feet of office space, 500,000 square feet of retail space and 600 hotel rooms. It could also build senior housing.
The roughly 2.3 millionsquare-foot office portfolio in The Woodlands is 95 percent leased.
“We have the opportunity and are moving quickly to develop additional office assets to meet the demand for office space,” Layne said on the call. “It will even be a challenge for us to assemble the square footage we require for our own relocation for Howard Hughes.”
The Monday announcement sent the company’s shares down 23 percent in after-hours trading. It’s not unusual for a company’s share price to jump after announcing it could be sold, as short-term investors drive up the value of the stock. The opposite is true when a deal does not materialize, the analysts said.
Ackman said he will be a significant investor in the company for the foreseeable future.
Hughes shares closed up 1.85 percent Thursday to $111.12..