As I wrote before, I’m not entirely sold on a housing boom, what with college debt levels increasing and impoverishing what should be a new generation of homebuyers.
Masterminds of master-plans
Like its namesake, Howard Hughes Corp (NYSE:HHC) has strong Texas and Vegas ties. I’m familiar with its Woodlands, TX development and came this close to buying a house there. It’s one of the best planned communities in Texas with a first rate private school, premium shopping, etc; maybe that’s why in 2012 it was rated number 3 in sales. The company has a second development near Houston, called Bridgeland.
The real estate investment and development company also has Summerlin, a similar master-planned community in Vegas, some world-class Hawaii properties, the Columbia, Fairwood and Emerson planned communities in Maryland, and received unanimous approval from the NYC city council to develop the NYC South Street Seaport district in lower Manhattan. Construction should begin this fall and completed in 2015. This will be a big deal, as the area is already one of the most visited sites in the world, ahead of the Louvre.
Controversial activist investor Bill Ackman of Pershing Square is Chairman of the company (you can see him applauding when the company IPO’d in 2011). You know him best for his public feud with Carl Icahn on CNBC over Herbalife Ltd. (NYSE:HLF) and his losing long on J.C. Penney Company, Inc. (NYSE:JCP). Management owns 30.6% of the company.
Management presented at the JMP Securities conference on May 13 and claims the market is not fully recognizing the company’s change from an asset-valued model to a cash flow-based one, the return to a normal housing market, or the value of its developments going forward. That might be partly due to its high forward P/E of 40 and light analyst coverage of one sole analyst giving it a strong buy and a price target of $125.00 with a low target of $120.
Whitney Tilson of Kase Capital also values the name at $125, citing the same reasons the company did at their May 13 presentation. The stock closed at $101.61 on May 13 and has climbed 66% in the last year.
Schwarzman’s shopping spree
Then there’s The Blackstone Group L.P. (NYSE:BX). Blackstone’s market cap at $12.33 billion is larger than Howard Hughes Corp (NYSE:HHC)’ at $4.01 billion. The Blackstone Group L.P. (NYSE:BX) is an alternative asset manager operating in five segments: Real Estate, Credit Businesses, Hedge Fund Solutions, Private Equity, and Financial Advisory. This is the one buying foreclosed single-family homes at a reputed torrid pace of $100 million worth of houses per week for over a $3 billion investment in the last year.
The Blackstone Group L.P. (NYSE:BX) has its fingers in a great many pies, owning 70% of Pinnacle Foods, which it brought public recently. Other deals that were also closed include Motel 6, Vivint (number 2 in US home security and home automation), Capital Trust’s asset management platform, and several new funds.
The Blackstone Group L.P. (NYSE:BX)’s assets under management ballooned by almost a third to $205 billion from 2011, and analysts expect a 30% rise in EPS from $1.63 in FY 2012 to $2.13 for FY2013. Its CEO is famed investor Steven Schwarzman and he’s very active in all kinds of deals, including bidding for an Australian chicken processor, Ingham Chicken.
Investors should be aware that buying Blackstone will involve a more complicated tax return because it is a limited partnership model. But for a small K-1 inconvenience you get a yield of 5.50% and a forward P/E of 8.10. The PEG at .61 indicates it is undervalued with the industry average PEG at 1.95. Despite doubling from a low of $11.13 to a close of $22.20 on May 13, it has yet to return to its high of nearly $35.00 before the financial crisis.
Still pounding the table
Forgive me for pounding the table on Toll Brothers Inc (NYSE:TOL), but I think it is still the best homebuilder going forward. Its sales of high end condos, homes, golf courses, and country clubs won’t be affected by less affluent applicants’ credit ratings or a possibly troubled first home buyer market in the years to come.
Like the other two stocks listed, this one has management skin in the game, with the co-founding Toll Brothers Inc (NYSE:TOL) holding over 10 million shares. Although it doesn’t currently pay a dividend it’s generating enough cash per share for investors to believe that that may change one day.
This isn’t a name to wait too long to buy. The P/E has risen to 12.61 and the PEG is rising, now at 1.11. The stock is trading close to the median price target of $38.00. Its past five years’ growth rate was 45.16%, but is decelerating to 44.16% for the next five years. However, at 44% I’ll take deceleration any day of the week and twice on Sunday open houses.
Barclays must agree because it did a 180 degree turn on Toll Brothers Inc (NYSE:TOL), giving it an Underweight in February and upgrading to Overweight on April 22. The return on equity is good at 17.21% and the profit margin stands at 24.90%. One thing to be aware of is that the short interest has grown by almost 50% to 7.20% since March as the stock moves higher.
In closing
For yield the go-to name is Blackstone. It’s not just a housing play, either, but with such diverse operations requires detailed due diligence. I think Tilson and Ackman are right on the money about Howard Hughes Corp (NYSE:HHC), having seen some of the properties in person and coming away quite impressed. This one may be poised to jump once more analysts cover it. I’ve liked Toll Brothers Inc (NYSE:TOL) and would love a pullback, but it just seems that may not happen.
The article Three Housing Plays to Hold Forever originally appeared on Fool.com and is written by AnnaLisa Kraft.
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