Ira Sohn 2017: Howard Hughes Corporation

Summary

At the 2017 Ira Sohn conference, Bill Ackman devotes his slot not to a new activist target but to a single existing holding: Howard Hughes Corporation. The speech is structured as an argument by analogy. He begins with Donald Bren and the Irvine Ranch — the longest-running proof that land development, conventionally viewed as a risky, cyclical, capital-intensive business, can become a compounding machine when it is run with a multi-decade horizon, conservative financing, supply discipline, and a single-owner mind-set. From that case study he pivots to Howard Hughes, Pershing Square's real estate spin-off from GGP, and shows how the same structural ingredients are present in its five master-planned communities and strategic redevelopment districts. The presentation is unusually patient by Ackman's standards: no proxy fight, no broken company to fix, no near-term catalyst beyond the gradual recognition of intrinsic value. It is a public case for holding a wide-gap asset through long-duration development.

Ackman is candid about the source of the opportunity. The market prices Howard Hughes on the volatility of quarterly land sales, which makes the stock look like a cyclical developer; he argues the right unit of analysis is the net asset value of the land bank, which compounds as infrastructure, zoning, and population growth convert raw acreage into entitled, saleable lots. The company controls supply, owns irreplaceable assets in supply-constrained markets, and is run by a CEO whose compensation is tied to long-dated warrants. The speech also carries a post-Valeant emotional register: measured, data-driven, and deliberately unconfrontational. Even the Persian Square Foundation opening — an update on $400 million in philanthropic grants — signals that this is not the same presenter who once used Sohn to call a company a pyramid scheme.

Full Text

Machine-generated transcript (ASR); minor transcription errors may exist. Speaker turns and paragraphing restored editorially — words unchanged.

Bill Ackman:

Just a quick uh little um update on the Persian Square Foundation. We're now up to about 400 million in grants uh since that last fact. So we're something we take quite seriously.

Bill Ackman:

So I want to talk about a business that people think about as a pretty risky business. Uh the land development business. Why is it risky? Well, it's enormously capital intensive. You need to make it a very large upfront investment. You can only get recourse leverage. Uh it takes time to get zoning. You get approvals. You're all ready to go. The market changes. they have to go forward anyway and your profits are in the last few lots that you sell. So this is a very high-risisk business.

Bill Ackman:

What's interesting is the 27th wealthiest man in America and by the way I think Forb's numbers wrong. He's in here for $15.2 billion. This is Donald Bren. A lot of people have never heard of Donald Bren. He's a land developer. He basically did one deal or one very very large deal. He built a master plan community. He took over a master plan community called the Irvine Ranch. That's been his life for the last 40 years. My guess is his net worth is closer to 30 or more than $30 billion. And one way to find a great business is to look in the Forbes 400 and see where people made their money. And what's interesting here uh is he did this. This wasn't he got the cycle right. He's been doing it for 40 years. That tells you he's been through uh the best and the worst uh in real estate. That picture on the left is the Irvine Ranch uh master plan community which he purchased in 1976. Uh 40 odd years later, it's one of the best places to live in the country and he's done a remarkable job. Now, one of the keys to investing in master plan communities and land development is you don't want to be the first guy. He stepped in more than a decade after the planning uh took place. You want to be the second owner or perhaps the third owner.

Bill Ackman:

We want to get in after a large upfront investment has been made, the community is established. So, what is a master plan community? It's typically what we describe it as a more than 10,000 acre uh property. It's a piece of raw land that has been designed almost like building a city with a lot of forethought, but instead of a traditional government, you've got one owner. And if you have an owner with a long-term approach, a lot of very long-term value uh can be created. And the key is making sure you have the right assets in the right places. You start out bu put putting in infrastructure, then you start selling some lots, then you start building all the amenities necessary to make an attractive place to live, and eventually you have a fairly remarkable uh business. So, the Irvine Ranch is 93,000 acres. It's about a fifth of Orange County. And he bought it with a group of investors, about $337 million. You know, good chunk of that money was borrowed. Uh over time, he bought out all his partners.

Bill Ackman:

He owns 100% personally. and he was pressured over many years to sell pieces of the ranch and he refused. He retained all of it or effectively all of it. It's now got a population of a quarter million people. It's considered the safest big city to live in America and it's been a remarkable investment. I I don't I couldn't figure out what his actual original capital investment here is, but he turned a relatively small amount of money as a minority investor in this deal. I think it was less than 30% into at least a $15 billion fortune. So, what did he do? Well, first he started off with very good real estate. Location, location, location certainly applies. He bought into an existing master plan community where a big investment had already been made. He used the increasing value of the land to minimize the equity required so he could avoid having outside partners. In fact, he was able to buy out his partners over time. He used uh debt, a modest appropriate amount of leverage. Municipal financing. These are basically tax increment uh bonds where you build infrastructure and you uh issue municipal bonds to pay for it. And he kept his balance sheet conservatively financed. He controlled the supply of land. So he never dumped land on the market. He would only make sure that home builders bought enough but not too much. And he was careful about not overbuilding. And again, he controlled the zoning. He can control the timing, the release of land. And he was the developer.

Bill Ackman:

And he took a very long-term view. This was going to be his legacy. And his guiding principles were number one maintain the land owner a single owner because only one person could have this kind of a vision wouldn't have to argue about what to do think very long term the master plan constantly update the planning continue to reinvest in the land be careful you know land stewardship long-term view make every city in the Irvine ranch an important and happy place to live and just make sound decisions these are basically their principles Um so actually go back one more slide. Okay, next. Here we go. Um so he says the problem is he says developing this property is the best possible way is the most important thing in my life. I expect to be working well into my 90s and he's approaching his 90s. He's not for sale. And so the here I am in a conference talking about public investments and you can invest. So the question is how can you invest along with or at least in the style of Don Brent? And the answer is a public company called the Howard Hughes Corporation. This is a public company that we formed about six years ago.

Bill Ackman:

And what's interesting about it is it's got five master plant communities around the country with very similar uh qualities to uh the Irvine Ranch. The Seapport District, and it's a district, it's the only privately owned district in Manhattan, and we're going to talk about that. Downtown Columbia we won't talk about, but it's actually the fourth, it's ranked fourth in the country in terms of places to live. Uh, in Houston we own the Woodlands and Bridgeland. I'm chairman of the board of the Howard Hughes Company. In Summerland, we have the most valuable real estate, a 24,000 acre master plan community. And in Hawaii, we have an urban master plan community. We own 60 acres on the beach with 9 million square feet of approvals. And like uh the Irvine Ranch, we're coming in not as the first owner, but in many cases the third owner or later. Our oldest master plan community is in Colombia. We've got over 5 million square ft of vertical development to do there. All the lots have been sold.

Bill Ackman:

That's a 50 odd year old project. The Woodlands, we still got lots to sell. It's 30,000 acres. It's twice the size of Manhattan. Howard Hughes controls the zoning. It's I call this Sim City, but for real. Uh Summerland, 22,000 acres of which we own the remaining 4,000 undeveloped acres. Bridgeland, a lot more to go because it's a younger community. the South Street Seapport which is 400,000 ft of street retail in New York, a 65,000 foot rooftop and Ward Village in Hawaii which is 9 million square feet of development. So just in terms of history, uh Howard Hughes, you think of him as an aviator, but he actually apparently made most of his money in real estate. Well, he's inherited a lot, but then he invested in real estate. Uh he he acquired Summerland and then Rouse bought Summerland, then General Growth bought Rouse.

Bill Ackman:

Uh they bought Rouse for the shopping centers. Didn't take much interest in these master plan communities. Um, we got involved when GGP filed for bankruptcy and that's when we bought out the 50% interest in Summerland was held by the heirs of Howard Hughes and then Howard Hughes began its existence uh when we formed the company and spun it out of general growth. Just a little bit of history on the company. Uh we bought 25% of GDP in 2008 for $60 million. It filed for bankruptcy in 200 April 2009. I talked about it at this conference uh in May of 2009. I think the stock at the time was around a dollar. We bought out the Hughes heirs. Uh the company emerged from Chapter 11. Investors made a 100fold return versus the November 2008 price. All the bond holders got their money back.

Bill Ackman:

We formed at Howard Hughes. We spun it off to shareholders and we got backing from Blackstone, Brookfield, Fairome, and us. In 2011, we bought the 47 half% of the Woodlands that was held by the Morgan Stanley Real Estate Fund again to consolidate ownership. In 2012, we bought out Brookfield Fairome and Blackstone. We then exited GGP and we retained our stake in Howard Hughes and we've never sold a share. We never talked publicly about the company. So the question is why are we talking about it now? The answer is I think this is one of the most attractive times in the history of the company to invest. The stock trades at one of the widest uh discrepancies between the underlying net asset value and we have a much better understanding of the business and the business has had a huge head start over the last six years. So if you look at the urbine ranch principles, we've adopted them. Soul owner in Howard Hughes, thoughtful master plan, continual reinvestment of land, minimizing third party equity, in fact buying out our partners, long-term approach, judiciously selling land but not dumping land on the market, and being an appropriate long-term steward. We've got a conservative balance sheet.

Bill Ackman:

Uh we stopped selling commercial land. when this was when owned by others DGP they would sell off land basically to pay debt service we stopped land sales in fact we started buying out parts of the MPCs we didn't control because we understood that once you get to a certain tipping point uh the commercial development opportunity becomes large once you get beyond a certain population you can start building uh vertically and we control effectively all of the commercial and residential vacant land and we control the zoning and when you own these assets in the later stages of a master plan community you can build enormous value and it's a business with a virtuous cycle. So you start by selling lots of home builders that brings in a population that creates demand for shopping centers, office buildings. You build the buildings, they generate cash flows and so on and so forth that makes it a more appealing place to live. You can sell residential lots at a higher price and the cycle continues. Let me give you a few examples of the NBC's that are owned by Howard Hughes. The Woodlands, for anyone who's been to Texas, it's one of the most considered the most desirable place to live in Houston. It's a city, as I mentioned, twice the size of Manhattan. We own the vacant land. Uh we control the zoning. We control the timing of of supply. 115,000 residents, ranked as the best place to live in Texas, the sixth best place to live in the country.

Bill Ackman:

Uh Exxon Mobile just moved their corporate campus very close to the Woodlands, a 5 million square foot campus. And in fact, we we did a build a suit for Exxon in the property. Perfect example, we saw this nice piece of vacant land. We said, "What should we do there?" We came up with an idea. Uh fast forward in two and a half years we built a million and a half square feet of space, leased it up and are generating, you know, ultimately $50 million of net operating income from this property. Unlike a REIT that has to buy land or buy buildings, we have an enormous amount of internal development opportunities. There's more than 50 million square feet of unbuilt vertical opportunity inside this company. This is Summerland. You get a sense of the scale of this community. Again, about one and a half times the size of Manhattan. This is Las Vegas.

Bill Ackman:

Uh it's 9 milesi from the strip. It's 25 years old. The most attractive place to live in Las Vegas is an irreplaceable asset you could not create today. Uh we did a deal with Discovery. People know Discovery Land. We're selling land in the desert. 77 lots for $250 million. You can do the math. You know, $4 million lots uh in the desert. Gives you an idea of how valuable a master plan community is and the remaining land uh in that community. Um we kept the commercial land. So we didn't sell it to others.

Bill Ackman:

Uh we built out the community around it. The best way to see that is by going to this picture. So all that surrounding property and development, those are the households and we save to the end the commercial property. You build a commercial property. Obviously once you have that kind of density becomes enormously uh valuable. It's you think about real estate typically you build a building if you do a great job you help all your neighbors around you make their properties more valuable. Here we own all the property and therefore we get the benefit uh for the company. This is what downtown Summerland looked like in 2010 and this is what it looks like uh today. It's a spectac it's made of course the Summerland a much more attractive place to live because it's got an attractive downtown that of course enables us to sell lots at higher prices that increases the density that improves the uh retail sales which means we can increase rents and it's a pretty interesting uh business. So the overall approach is continue to sell lots. We're building the population, these various communities, stabilize the existing assets. These are office buildings, retail, shopping centers, uh, you know, apartments that we've built and then build new ones.

Bill Ackman:

We've got 50 million square ft of development inside this company. Vast majority of this land is unlevered, no debt on it. 37 million are within the four walls of our master plan community. Uh, we're going to finish the South Street Seapport. I'm going to talk about that in a second. We're going to deliver uh more condo towers in Hawaii. The question is what's this business worth? So the problem here is if you were to take a look at the financial statements for the Irvine Ranch, uh you be hard to make heads or tails of it. You know, this is a development business. There's a huge amount of depreciation. There's a lot of capital going in. You know, gap accounting, uh you know, kind of is just not a good way to think about the business.

Bill Ackman:

Looking at short-term cash flows, they're incredibly volatile based on this quarter's land sales. That doesn't really tell you much. Book value is not a reflection of long-term asset value. So we think the best approach is what I would call a back of the envelope approach. Certainly one that I can do in 15 minutes in front of a group. So the easiest thing to value is we've got uh you know operating assets. These are recently constructed assets that are in various stages of lease up about $240 million of stabilized NOI. You can assign a cap rate. We believe they'll be at this level in two years. Discount back those cash flows. Now what's interesting is because these assets are largely within master plan communities and we control the supply. This is much less risky real estate.

Bill Ackman:

So the risk of someone the problem with many real estate deals is in one market you think you need one more apartment building and then you got four developers who build one more apartment building at the same time. Here we can control and prevent that problem from happening. So the cap rate that you would use to value these assets is meaningfully lower. Um if you think about the residential land a lot of people think of land development as a risky business but when you're selling the remaining lots in an established community it's a certainty that those lots will be sold. you know the macro factors will have some impact in terms of the exact timing of the sale but you know you're going to sell them and generally we've been able those assets appreciate at a rate similar to where we think you should discount those cash flows because of the high certainty so you can actually look at today's values uh to assess a value for those assets and then we have a bunch of other stuff so an asset 110 North Wacker was the old headquarters for GGP we're building a 1.35 million square foot office building we just signed a lease with Bank of America to take a half million square feet uh and it goes on and I've got accelerate because I'm running out of time. So, we think the operating assets, that's the stabilized or the approaching stabilized incomeroucing assets, the residential land, those lots that will be sold over time, any list of other assets, including 110 Northwhacker is about equal to the enterprise value of the company and the per share value of the business at $120 a share. So, what else do you get for your money? Well, you get this. This is the new South Street Seapport. If you go downtown, it actually looks like this today. It's not open yet.

Bill Ackman:

It's going to open in 2018, but this is 400,000 square feet, about 170,000 feet in the pier. The next building over is what's called the tin building, a 50,000 foot building, plus all that other land uh you know to the west is part of this asset. And this is an going to be a spectacular place to to work, to entertain, to have fun, to go to concerts. The roof deck holds 4,000 people for an outdoor concert. Um John George is opening up the equivalent of Harrod's Marketplace. uh uh in this location and uh this is one of the most valuable pieces of real estate uh I've seen in my career. It's going to open in a year. You get it for free. You also get this. This is 60 acres in Hawaii at the beach uh with an approval for over 9 million square feet of new buildings. And in fact, we've made a lot of progress. Uh we've built uh almost 1100 condominiums.

Bill Ackman:

Actually, we've sold 1100. We're about 86% sold. And we're building a new development uh again only as needed. There's no pressure. U but we we only build until we see the demand. This is what it looks like uh last year. Here's one of the completed uh buildings. And it goes on next. Uh that's that's what it looks like fully built out. And again, once you build a whole bunch of high-rise condominiums, of course, it makes the retail the street retail more valuable. Uh the most valuable or one of the most valuable shopping centers in the country is located less than a half a mile from the project. It's called the Alam Moana shopping center.

Bill Ackman:

It's worth recently was sold a half an interest was sold for a couple billion dollars and we own a similarlysized retail opportunity in this uh location. What else do you get for your money? You get 37 million square ft of development in the MPCs that has yet to be built and these are projects on which we expect to earn a high return. How can you get a sense of that? We've built almost four million square feet over the last six years. NOI of about 144 million about a 9% return on cost. These assets we think are you know five six% type assets you know and you know the opportunity going forward is about 10x that you get that for free. Then you say what about taxes? What's interesting is this is a very taxefficient uh business for the most part. Uh you know depreciation interest expense we've had the benefit of significant NOLs. We have some high basis assets. Uh the nature of land development allows you to defer taxation.

Bill Ackman:

Uh and uh we're of course a beneficiary of a reduction in tax rates. Our balance sheet is almost entirely non-reourse. We limit the amount of recourse debt uh that we have. We're about twothirds non-reourse.

Bill Ackman:

And we got a great management team. Uh and the C and the CEO is compensated in a bit of an unusual way. When we spun the company to shareholders, he invested $15 million in six-year warrants he couldn't sell until the fifth year. He still owns them. They expire in November. Obviously, his incentive is to see a higher share price, but he's going to reinvest $50 million in new warrants when he sells uh the old warrants and retain 50 million of common stock from the exercise of those warrants. So, our CEO certainly believes, as do other members of the management team.

Bill Ackman:

And with that, uh I'm going to tell you how you can learn more. Uh we've kept the company kind of as a secret. Uh we have very little in the way of analyst coverage. We had our first earnings call in the first quarter. We're going to have our first investor day. And if you want to come uh it's uh very soon. So thank you very much. [Applause]

Key Themes

• Wide Gap Between Price and Intrinsic Value — the stock is priced off volatile quarterly land sales while the underlying land bank compounds over decades
• Simple, Predictable, Free Cash Flow — once entitled, master-planned communities generate saleable lots with pricing power from supply control
• Capital Allocation Discipline — conservative financing, non-recourse debt, and CEO warrants tied to long-term share-price performance
• The Right CEO — the CEO's reinvestment of warrant proceeds and six-year lock-up align his horizon with the asset's duration
• Avoiding Extrinsic Risks — diversification across five markets and supply-constrained locations limits single-market cyclicality
• Concentration as Risk Mitigation — a long-duration, misunderstood asset held with conviction rather than traded around cycles

Context & Significance

This speech sits in Act III, the valley, but its mindset is already renaissance. In May 2017 Ackman is barely a year removed from the Valeant exit, still managing a portfolio under redemption pressure and a public reputation for combat. Choosing to spend a scarce Sohn slot on a slow-developing real estate asset — and framing it through a forty-year case study rather than a fight — is itself a statement. The combative forensic short seller of 2007 and the brawler of 2013 are not visible here; the speaker is an owner trying to teach the audience how to look at a balance sheet that the market misreads because its value arrives in chunks over decades.

The honest retrospective is that the thesis required more time and more capital markets cooperation than any single conference speech could guarantee. Master-planned communities are genuinely long-duration assets, and the gap between intrinsic value and market price can persist for years if development schedules slip or real estate cycles turn. Ackman does not pretend otherwise; he explicitly warns that short-term cash flows are volatile and that the company has kept itself "kind of as a secret." What the speech documents is not a flawless pitch but a deliberate change in posture: from trying to force a catalyst to underwriting an asset and waiting for the world to catch up. Read alongside the 2007 MBIA presentation, it marks the distance between the golden-era Ackman who inverted other people's balance sheets and the post-valley Ackman who is content to let his own holdings compound in public view.