By Andy Serwer

Howard Hughes died in 1976, and yet the influence of this singular, enigmatic American icon still echoes through our economy and society. A pilot, aerospace engineer, business magnate, film producer, investor, and philanthropist who went from society darling to recluse, Hughes -- who was once the richest man in the world -- was a polymath's polymath who makes Elon Musk seem narrow, boring, and predictable.

There are no Hollywood movies about Elon yet (although one is reportedly in the works), but there are a number of Hughes films, including The Amazing Howard Hughes, where he is played by Tommy Lee Jones; Howard and Melvin, played by Jason Robards; and most notably in Martin Scorsese's The Aviator, where Leo DiCaprio does the honors, which is sort of how I picture Hughes (in the same way I picture George C. Scott as Gen. George Patton).

The threads that can be traced back to Hughes' business interests are myriad, deep, and significant, with more rabbit holes than a Kansas prairie. For business genealogists, these are the richest of veins. (Trust me, you could write a whole book about each example below.)

There's the Howard Hughes Medical Institute, one of the world's preeminent medical research foundations and one of the wealthiest, too, with over $24 billion in assets. It was originally funded by the sale of Hughes Aircraft to General Motors in 1985 -- which the auto giant ended up selling to Raytheon (which later merged with United Technologies and is now RTX), Boeing, and News Corp -- the latter of which, besides being Barron's parent, renamed part of the company DirecTV, which is now owned by AT&T.

There's oilfield services giant Baker Hughes -- the descendant of Hughes Tool, a drill bit company co-founded by Hughes' father (who patented a roller cutter bit that dramatically improved drilling) in 1908 in the Texas oil fields (and was the origin of Hughes' wealth) -- formed when it merged with Baker International in 1987.

There's the Hughes Television Network, which was big in sports, broadcasting the National Hockey League and professional bowling, and was owned variously by Madison Square Garden as well as a bygone predecessor of Verizon Communications, and was recently picked up by a communications subsidiary of Tata, one of India's largest companies.

Delta Air Lines, too, has some Hughes blood flowing through its fuel lines, as it purchased Northwest, which had purchased Republic, which bought Hughes Airwest in 1980.

Our narrative here, though, concerns yet another signature facet of Hughes' former empire -- that being his massive real estate holdings, which have traversed through their own fascinating series of head-spinning transactions and include hotels, casinos, office towers, residential communities, and even the Las Vegas Aviators Triple-A minor league baseball team (the name of course is a homage to Hughes) and 25% of Jean-Georges' 30 or so swanky restaurants.

Let's start with the endpoint here, that being a publicly traded company called Howard Hughes Holdings (market cap of some $3.8 billion) and a smaller recent spinoff, Seaport Entertainment (almost $174 million), which now happen to be owned 37.5% and 37.9%, respectively, by none other than Bill Ackman's Pershing Square hedge fund. Ackman, a social-media agitator who has been outspokenly critical of his alma mater Harvard, may be still licking his wounds over a failed attempt to take his company public earlier this year. Additionally, he may now be looking to take over the entirety of Howard Hughes Holdings, according to a recent Securities and Exchange Commission filing.

It's easy to see what Ackman likes about HHH, which specializes in premium master-planned communities such as Columbia, Md., the Woodlands near Houston, and Summerlin in Las Vegas. It also owns valuable land and properties in Hawaii. Overall, HHH has 6.9 million square feet of office buildings, 2.7 million square feet of retail space, and 35,000 acres of undeveloped land.

CEO David O'Reilly says he's particularly excited about a plan to build a movie studio with Sony in Summerlin. "Sony's agreed to film a billion dollars of content over the next 10 years there," O'Reilly says. "Which is an incredible opportunity not just for Summerlin, and not just to unlock the value of the land for Howard Hughes, but to diversify the economy of Southern Nevada."

That's in the future, though. This year O'Reilly says the company is on track to generate $751 million in cash flow, which after $240 million in interest and overhead, leaves $510 million in free cash flow.

"Roughly a third of the value of the company comes from current earnings. The rest is all future development," says Alex Goldfarb, a Piper Sandler analyst, suggesting this is more of an asset story and less about here-and-now cash flow. It's also a bit complex. "This is not just collecting the rents," he says. "This is advanced trigonometry. There's a lot of rolling up your sleeves and getting dirty to understand the company. That's what really impresses people when they dig in, but it's also what puts people off."

Goldfarb figures the company is worth $95 a share, which is a good bit more than its current price of $75 -- and way down from its peak of $152.45 a decade ago. Why did the stock swoon?

For one thing, investors weren't happy with the company's asset mix, which was disparate and/or not of the highest quality. Over the past decade, the company has sold off the likes of 110 North Wacker, a skyscraper in Chicago, and the Outlet Collection at Riverwalk in New Orleans, in addition to the Seaport Entertainment spinoff, which includes New York City's South Street Seaport property plus additional venues and restaurants, as well as the Jean-Georges stake and the Las Vegas baseball team.

But HHH was also buffeted by Covid -- particularly its Seaport businesses -- and rising interest rates. Plus, the company really is a category of one. "I t's neither fish nor fowl," says Goldfarb. "It's not a REIT, it's not a home builder. It doesn't have a natural, dedicated investor base." And then there's Bill Ackman and his intentions. He had been chairman of the company but stepped down this past April, and is now signaling he may buy the whole enchilada. (Ackman declined to comment for this article.) So just what is he up to?

To get a clue, it helps to again dial up the Howard Hughes wayback machine to delve into HHH's lineage.

In 1972, Hughes, suffering from a variety of maladies including severely debilitating obsessive-compulsive disorder (manifested in part by acute mysophobia), sold off Hughes Tool in an IPO. The businesses he retained -- aircraft, real estate, media, and casinos -- he organized into a holding company named Summa (Latin for "highest"). When Hughes died four years later, he had neither children nor a will, which resulted in 20 years of litigation by some 350 claimants. During those two decades the company sold and unwound business after business, to focus on real estate primarily, renaming itself the Howard Hughes Corporation in 1994.

Two years later Hughes was bought by mall developer Rouse Co. for $520 million plus a share of future profits. Rouse famously helped revitalize urban areas by building landmark projects such as the South Street Seaport, Faneuil Hall in Boston, and Harborplace in Baltimore. It also built the aforementioned planned community Columbia, Md., designed to be a model for racial and socioeconomic integration.

In 2004 Rouse was bought for $7.2 billion by General Growth Properties, or GGP, a giant real estate developer and shopping mall operator founded by the Bucksbaum brothers of Cedar Rapids, Iowa. But GGP had leveraged up, and when the financial crisis hit in 2008, the company cratered and its stock fell 98%. This attracted the attention of Ackman, who amassed a 25% stake in the company by December of that year. The following April the company filed for bankruptcy, receiving some financing from Ackman, who proceeded to shepherd the company through Chapter 11.

In 2010, GGP landed a multibillion-dollar investment from giant Canadian investment firm Brookfield and emerged from bankruptcy. At the same time, GGP spun off Howard Hughes Corp. Ackman got a 9.46% stake in the company and became chairman. (The company reorganized and swapped "corporation" for "holdings" last year.)

A few points to note here regarding Ackman. First, the GGP episode was a huge moneymaker for Ackman. ("We turned $60 million into $1.6 billion," he told Bloomberg.) This is not the case, though, with HHH, where, according to FactSet, his average purchase price is $81.83 -- $5 or so underwater. "Ackman knows the company cold, and he only has to buy around 60% at this point," says Goldfarb, who noted that to take the company private, Ackman would have to pay a price where shareholders don't feel "short-shrifted." What price is that? "Something over $100," Goldfarb thinks.

O'Reilly makes the case for owning the stock on its own merits. "We're not the right stock if you're looking for a short-term catalyst," he says. "We're a stock you want to own and hold because we're going to create value for generations. We're going to increase the asset value of this company at a double-digit rate without ever having to raise capital to dilute our equity owners," he says, pointing to its free cash flow.

"Bill's rationale for wanting to own 38% of Howard Hughes, or even more based on his filing, is because he believes, like I believe, that there is an incredible long-term ability to create shareholder value," says O'Reilly.

Still, Ackman's next move will figure large. I keep imagining him sitting across the negotiating table from Howard Hughes. I'd put my money on Hughes. But the Aviator has left the building a long time ago...or has he?

Write to Andy Serwer at andy.serwer@barrons.com

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September 19, 2024 12:20 ET (16:20 GMT)

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