Howard Hughes (HHC) Has Fallen 52% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Rhizome Partners top stock picks. Rhizome Partners, an investment management firm, is bullish on Howard Hughes Corp (NYSE:HHC) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Howard Hughes Corp (NYSE:HHC) stock. Howard Hughes Corp (NYSE:HHC) is a real estate company.

In September 2019, Rhizome Partners had released its Q2 2019 investor letter. Howard Hughes Corp (NYSE:HHC) stock has posted a return of -52.0% in the trailing one year period, underperforming the S&P 500 Index which returned 13.1% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Howard Hughes Corp (NYSE:HHC) stock has fallen by 52.4%.

In Q2 2019 investor letter, Rhizome Partners said the fund posted a return of 2.0% in the second quarter of 2019, underperforming the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Rhizome Partners about Howard Hughes Corp (NYSE:HHC) stock in the Q2 2019 investor letter.

“Howard Hughes Corporation, Previously Known As Long Term RE Compounder (“LTREC”) – Howard Hughes Corporation is a C‐Corp real estate holding company that owns master planned communities in two income tax friendly states. They also own some trophy assets in certain land‐constrained cities. Please see Q4 2017 for our original thesis.

Q2 2019 Updates – We met with the management team at the NAREIT conference in New York City in early June. We were more convinced that this is one of the most competent and shareholder friendly management teams we have invested with. During our long conversations on two separate days, we also learned how the return on cash equity is much higher than our previous analysis. This justifies why HHC did not buy back shares and instead elect to invest in development projects as it 1) generates over 100% return on cash equity and 2) the developments convert many hard‐to‐value land holdings into easy‐to‐value income buildings. This is important to gaining market recognition for the undervaluation of the entire enterprise.

Shares in Howard Hughes Corporation started selling off following news of a debt refinance of the South Street Seaport in the amount of $250 million with a LIBOR plus 4.1% interest rate. In the past couple years, I have personally spent many sessions at the seaport attending various events and followed the developments closely. The market viewed the financing amount as being too little and the interest rate being too high. We believe the amount and rate actually makes sense from a lender perspective as the Seaport current NOI is neutral or slightly negative as it continues to ramp up its restaurant operations and office leasing. However, we had a strong view that the Seaport will be a trophy asset that could command 3‐4% cap rates if sold when it reaches stabilization as it offers a truly unique view of the Brooklyn Bridge, East River, and a refreshing summer breeze that cannot be found anywhere else in Manhattan. When stabilized, the Seaport will likely be mentioned in the same breath as Fifth Ave, Rockfeller Center, and Times Square. I have purposefully invited our interns, analysts, and friends of Millennial ages to tour the site with me. Upon arrival, they would immediately share photos on their Instagram or Snapchat accounts. Without fail, their friends will respond within five minutes with comments such as, “this is a really cool place, where is it?” I believe this behavior pattern succinctly captures the long‐term demographic value of this asset. We were able to take the contrarian view on the Seaport and HHC as a whole because we have put boots on the ground and have had in depth conversations with the management team. Lastly, we should mention that it is a good strategy to own investments that are professionally shunned by other portfolio managers yet which they will gladly buy for their personal accounts. It implies that there are superficial or institutional reasons why an investment is cheap rather than fundamental ones.

Howard Hughes Corporation has now morphed from a long‐term buy and hold investment for Rhizome Partners to an event‐driven situation. By reading commentaries on investment forums, it is clear that market participants do not fully understand the fundamental value of Howard Hughes Corporation. We love operating in an environment where we have significant analytical and research advantages over other market participants. There will likely be additional opportunities to trim or add to our position at opportune times as the saga unfolds. In event‐driven situations, the party with the sharper pencil can often generate outsized returns. Despite being a small fund, we are tracked by larger market participants since we take concentrated positions in real estate companies. We consider our research and analysis to be proprietary. Thus, we have no desire to level the playing field and allow others to free‐ride off our intellectual property. Our strategy going forward is to talk generally about Howard Hughes Corporation in our investor letters. Instead, we will share our research and analysis to a handpicked list of recipients consisting of our existing partners and individuals who have had active dialogues with Rhizome. For readers who would like to learn more about our analysis of Howard Hughes Corporation, we will consider adding you to this distribution list after a “get to know each other” conversation.

There will be a very interesting ACT II to this saga that is yet to be played out. We believe that shareholders will either receive proceeds that are worth much more than the current trading price of $130 per share or the company could potentially sell off certain non‐core assets and use the proceeds to speed up developments and/or buyback shares. Stay tuned for updates.”

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Last month, we published an article revealing Rhizome Partners bullish investment thesis on Howard Hughes Corp (NYSE:HHC) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on Howard Hughes Corp (NYSE:HHC).

In Q2 2020, the number of bullish hedge fund positions on Howard Hughes Corp (NYSE:HHC) stock increased by about 17% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with HHC’s growth potential. Our calculations showed that Howard Hughes Corp (NYSE:HHC) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.