Aside from an overlap in a couple holdings, I find the commentary on markets and philosophy very interesting….

HT to @farnamstreet for tossing this my way

Pershing-Square 3Q 2011 Letter To Investors (click to open pdf)

What is interesting here is the length of these extensions. Nine years at a lowers rate is great. I total $GGP has taken its maturity schedule from 2.4 to 9.1 years and lowered the rate near 20%.

CHICAGO, Oct. 17, 2011 /PRNewswire/ — General Growth Properties, Inc. (NYSE: GGP) (“GGP”) today announced the refinancing of four shopping malls representing $966 million of new mortgages. These four new fixed-rate mortgages have a weighted average term of 9.1 years and a weighted average interest rate of 4.63%, as compared to the 5.66% rate on the prior maturing loans. After adjusting for GGP’s ownership interest, the Company’s pro-rata share of the new four non-recourse mortgages totals $483 million.

The four newly refinanced malls have the following terms:

• Natick Mall (Natick, MA—Boston):
• $450 million at 4.60% due 2019
• Galleria at Tyler (Riverside, CA—Los Angeles):
• $200 million at 5.05% due 2023
• First Colony Mall (Sugar Land, TX—Houston):
• $185 million at 4.50% due 2019
• Northbrook Court (Northbrook, IL—Chicago):
• $131 million at 4.25% due 2021

Year-to-date, GGP has completed nearly $3.9 billion ($3.1 billion at GGP’s pro-rata share) of new property level non-recourse financings with a weighted average term of 9.9 years and an interest rate of 5.1%. These mortgages successfully conclude GGP’s 2011 financing plan and replace $3.2 billion ($2.5 billion at GGP’s pro-rata share) that had a weighted average term of 2.4 years and an interest rate of 5.81%.

“At the start of 2011, one of GGP’s stated goals was to strengthen the Company’s balance sheet and liquidity while also reducing interest rates and extending the average debt maturity profile,” said Sandeep Mathrani, chief executive officer of General Growth Properties. “We have accomplished our 2011 goals and are now focused on 2012 financing opportunities.”

Time for Bill Ackman to channel his “inner Buffett” when it comes to Howard Hughes?

Howard Hughes Corporation ($HHC) (from the website):

We own, manage and develop commercial, residential and mixed-use real estate throughout the country. Our company is comprised of 34 assets including master planned communities, operating properties, development opportunities and other unique assets spanning 18 states from Hawaii to New York. We have approximately 200 employees, almost half of whom are dedicated to the growth and service of our master planned communities.

MASTER PLANNED COMMUNITIES

The company’s master planned community business consists of the ownership, development and sale of property at four communities with over 14,000 acres of land remaining to be sold. These include Summerlin in Las Vegas, Bridgeland and The Woodlands in Houston, and Columbia, Fairwood and Emerson in Maryland.

OPERATING PROPERTIES

The company’s eight operating properties are primarily retail and include South Street Seaport (Manhattan, NY), various properties in Columbia Town Center (Columbia, MD), Landmark Mall (Alexandria, VA), Riverwalk Marketplace (New Orleans, LA), Rio West Mall (Gallup, NM), Cottonwood Square (Holladay, UT), Park West (Peoria, AZ) and Ward Centers (Honolulu, HI). Currently, several of the operating properties present significant opportunities for redevelopment.

DEVELOPMENT OPPORTUNITIES

The company also has an exciting and diverse pipeline of strategic opportunities for near, mid and long-term development. These range from air rights and surface parking lots to aging properties poised for redevelopment.

We are going to focus on one group of assets here, Ward Center who recently got $250M from $WFC for its redevelopment

Ward Centers is comprised of approximately 60 acres of fee simple land situated along Ala Moana Beach Park. It is within one mile of Waikiki and downtown Honolulu. Ward Centers currently is a 550,000 square foot shopping district containing six specialty centers and over 135 unique shops, a variety of restaurants and an entertainment center, which includes a 16-screen movie theater.

In January 2009, the Hawaii Community Development Authority approved a 15-year master plan, which entitles a mixed-use development encompassing up to 9.3 million square feet, including up to 7.6 million square feet of residential (4,300 units), five million square feet of retail and four million square feet of office, commercial and other uses.

Here is a site map:

Great, you say but we all know RE value is “location, location, location”. Agreed so here is an aerial picture of the site:

The area in red is $HHC’s property. Anyone want to guess what 4300 luxury condo’s with that view might be worth?

If we use Zillow based on sales, we get a price per square foot for 2bdrm condos in Honolulu and Waikiki in a range of $450 to $550. We could argue that since $HHC will bu building near Waikiki Beach that the higher price should prevail but we’ll just split the difference and call it $500. We’ll also assume only 80% of the approved space is livable (excluding common areas, walls etc) and now we have ~6M sq.feet. That space, assumes it sells for an average price of $500 sqft means its gross value of $3B. If we give $HHC a 20% profit margin that means they bring in $600M. I would say $HHC’s margin would be much higher as considerable planning/permitting expenses were already realized pre-spin from $GGP. I would also argue condos with immediate access to an ocean front park on the island and with walking access to a 1st class shopping/dining area would bring premium prices but we’ll just go with “average” for purposes of discussion. This also excludes 100% of the value for the Ward Centers Shopping area and improvements in NOI/value that will comes from its upcoming facelift and the 20 acres of ranch land owned on Maui. It would be the time now to now note that $HHC’s total market cap is $1.4B

So, when I say that the Hawaii properties owned by $HHC are worth more than the entire company now, this would be the reason why.

It also means that when you buy shares of $HHC, you not only get an undervalued claim on the Hawaii assets but the S. Street Seaport (NYC), Las Vegas, Houston, Baltimore/Washington and the rest of the operating assets for free…..not a bad deal

It is also why it would be VERY disappointing not to see Ackman, management or the company itself not buying shares at these levels. Buffett recently said “I like buying dollar bills for less than a dollar” when talking about the recently announced Berkshire ($BRK.A) buyback. The argument could easily be made (I hope I made it above) that were $HHC to announce a buyback it would be “buying back dollars bills for less than the value of just its Hawaii assets”. In fact, I would go as far to say they would be buying them at conservatively $.20 -$.40 on the dollar for the whole co., not the $.90 Buffett decided to buy Berkshire shares back at.

It is pretty clear that management buying 7yr. warrants for shares in the company in the $50′s (cannot be hedged) that they feel the value of it is far more than that. Why else would they lockup millions of their own money for that long?

Further, despite that hatred I have for excess debt and the love of a good clean balance sheet ,one has to start to go through another process. If $HHC can buy its stock at a discount of 50%-70% from its value today, is it worth taking on some debt at LIBOR + 3% to wipe off 1/4 or more of the shares? Would the return generated for shareholders be worth it? At discounts to value this large, I am beginning to lean towards “it just might be”.

Ward Centers Fact Sheet (click to open.pdf)

This is a good deal that I would expect to see grow with deals for malls in Canada. GGP is spinning off its “B” mall portfolio and adding “A” malls at the same time. This will lead to an upwards valuation in GGP as its metrics across the board will improve.

CHICAGO and TORONTO, Sept. 21, 2011 /PRNewswire/ — General Growth Properties, Inc. (NYSE: GGP) (“GGP”) and Canada Pension Plan Investment Board (“CPPIB”) today announced a joint-venture partnership to acquire Plaza Frontenac. As part of the transaction, CPPIB also will invest in GGP’s Saint Louis Galleria. The joint venture will maintain ownership in the two high profile malls in the St. Louis metropolitan area.

Under the joint venture, GGP will own a 55% interest and CPPIB will own a 45% interest in Plaza Frontenac. CPPIB’s acquired interest in Saint Louis Galleria will be 26%.

The acquisition of Plaza Frontenac represents the addition of a strong, luxury brand asset, with 482,000 square feet of total leasable area and in-line sales of more than $500 per square foot. The mall is one of only nine malls worldwide anchored by both Saks Fifth Avenue and Neiman Marcus. After the acquisition, GGP will own and manage three of these nine properties. Saint Louis Galleria is a super-regional mall with gross leasable area of more than 1 million square feet with in-line sales of more than $585 per square foot. Saint Louis Galleria is anchored by Macy’s, Dillard’s and Nordstrom (opens September 23, 2011).

“Plaza Frontenac is certainly a retail gem in the Midwest and we couldn’t be more thrilled to add it to our portfolio. Owning both Saint Louis Galleria and Plaza Frontenac allows us to further solidify our presence in the St. Louis trade area and create retail synergies between the properties so both can flourish,” said Shobi Khan, chief operating officer of General Growth Properties, Inc. “As much as we are excited with the Frontenac acquisition, we’re equally thrilled to form a prosperous, long-term relationship with CPPIB. CPPIB has a proven track record as a strong investment partner and sophisticated commercial real estate investor.”

“This joint venture expands the geographic diversity of CPPIB’s U.S. real estate portfolio with the addition of two premier malls,” said Peter Ballon, VP and Head of Americas, Real Estate Investments, CPPIB. “We look forward to partnering alongside GGP whose experienced management team and proven track record are well-aligned with our strategy to acquire and hold high quality assets over the long term.”

PLAZA FRONTENAC

Plaza Frontenac is a 482,000 square foot high-end luxury center in St. Louis, MO, with sales per square foot of more than $500. It’s one of nine malls worldwide anchored by both a Saks and Neiman Marcus; together with Fashion Show (Las Vegas) and Tysons Galleria (McLean, VA—DC), the addition of Plaza Frontenac will give GGP ownership of three of the nine. Plaza Frontenac makes its home in the heart of St. Louis’ most affluent demographic area. Plaza Frontenac’s roster of fine dining restaurants includes Brio Tuscan Grille and Fleming’s Steakhouse. Inside, shoppers discover St. Louis’ most fashionable retailers, with more than 65% of them exclusive to Plaza Frontenac, including Tiffany & Co., Louis Vuitton, Cole Haan, Sur La Table, BCBG Max Azria, Juicy Couture, Kate Spade, and L’Occitane.

SAINT LOUIS GALLERIA

Saint Louis Galleria is one of St. Louis’ top tourist destinations, boasting more than 165 specialty stores—more than 25 of which are exclusive within the St. Louis area, including Anthropologie, The Art of Shaving, The Bose Store, Janie and Jack, Lacoste, Love Culture, LUSH, Marmi, Restoration Hardware, True Religion, Urban Outfitters and Vera Bradley. Nordstrom is scheduled to open September 23. Outstanding culinary choices include The Cheesecake Factory, California Pizza Kitchen, Saint Louis Bread Co., and soon-to-open Black Finn American Grille and Vida Mexican Cantina & Kitchen.