Numantia Patrimonio Global

The Howard Hughes Corporation has signifi cant short-term exposure to the crisis. In particular, the decline in oil prices will negatively impact Houston, the location of the Woodlands and Bridgelands, two of HHC’s master-planned communities. HHC’s Summerlin master plan community will also be aff ected by the virus’ impact on the casino and conference business in Las Vegas. The company’s other assets will also be impacted to varying degrees. In order to mitigate these risks, on Friday, March 27th, HHC completed a $600 million equity off ering, the fi rst such equity off ering of any company since the crisis
began. 
HHC was able to complete the off ering as a result of a $500 million investment from Pershing Square ($432 million from PSH) and $100 million from other long-term oriented shareholders.
The independent directors of HHC made a decision to raise capital to ensure the company would maintain a fortress balance sheet, now with more than $1 billion of cash, in light of the potential short- to intermediate-term impact of the crisis on the company’s business. We believe that HHC will continue to create substantial long-term value for its shareholders, and that its portfolio of small cities with large population infl ows will remain highly desirable places to live and work. We therefore viewed the opportunity to increase our investment to approximately 30% of the company to be highly attractive at the current share price.10 While there is more short-term risk to HHC’s business, we believe that this risk is more than compensated for by the opportunity to invest capital at the current valuation.

Update – JDP has owned XPO for nearly 3 years. During the market crash of December 2018, we tripled-down at just over $50 per share or approximately 7.7x 2020 free cash flow. XPO then bought back a third of stock for an incredible price. The leveraged buyback was a bossmove from CEO and controlling shareholder Brad Jacobs.

XPO is a top 10 global logistics provider that acts as an outsourced supply chain manager for large companies. XPO is not in the parcel delivery business (UPS, FedEx, DHL, Amazon). XPO’s global scale and fully integrated suite of owned logistical assets means the company can offer best-in-class service and efficiency for its customers that they could not achieve inhouse.
The company also has a strong technology culture and is obsessed with maintaining its market lead though tech spend and innovation. XPO is far from an old-economy business and has spent more on tech bets around efficiency and cost savings than any other public logistics company we have seen.
Strategic Alternatives announcement – January 15, 2020
In January XPO announced that it is exploring the sale of all the company’s subsidiaries except its crown-jewel LTL business (less than truckload). Brad Jacobs discussed his rationale for the move on the 4Q 2019 earnings call saying that he believes the stock will always trade for a discount to its breakup value.
Valuations of lower-quality logistics companies sell for 40% - 50% higher than XPO on a multiple of EBITDA basis.
We were disappointed in the announcement to sell most of the company in order to close the current valuation discount versus playing the long game that we signed up for.
As a result, we sold 2/3 of our XPO position for $95 per share until we have a clearer view of what a “new XPO” would look like after one or more subsidiaries are sold, if at all.
Despite macroeconomics fears, we like XPO and think the stock price massively undervalues both its private market value and long-term earning power.
Here are a few selected points from XPO’s January 2020 investor presentation (paraphrased by JDP) that highlight some of the reasons we still like the company:
• XPO has leading positions in the fastest growing areas of transportation and logistics.
More than 60% of revenue comes from sectors that are growing at 2 to 4 times GDP
• XPO’s combination of scale, density, expertise and technology is critically important in ecommerce and omnichannel supply chains globally
• XPO has less than 2% share of the total addressable market opportunity (complements opportunities for further consolidation)
• XPO’s business model is optimized for free cash flow generation in all parts of the cycle: about 70% of revenue is asset-light and 77% of the cost-basis is variable.
• XPO serves customers in different verticals with diverse economic cycles. The vast majority of revenue is generated under long-term contracts (cash flow generation is more resilient in a downturn than it might seem).
• Maintenance capex is low, XPO can flex capex up or down and turn working capital into a source of cash in an economic downturn.
• LTL profit is expected to grow by $700 million to $1 billion by 2022