Maui Land and Pineapple, a case of cheap assets depending on where you sit in the capital structure.

Whether or not a company is cheap can change depending on where an investor sits in the capital structure.  A company with enviable assets out of reach to investors is just a dream, not a great investment.

Maui Land and Pineapple (MLP.NYSE) is the type of company investors dream of owning.  Imagine being able to say you own a bit of land in Hawaii in the form of a nature preserve, resort, utilities and commercial real estate.  That's what Maui Land and Pineapple investors can claim.  The company owns 23,000 acres of land on Maui, a magnificent island paradise sitting in the middle of the Pacific.  The company also owns and operates the Kapalua Resort, and manages a private nature preserve.

The company specializes in property management, and real estate sales.  They are focused on selling real estate parcels at the resort, not hotel rooms for weekend vacationers.  Beyond their resort real estate the company owns and operates two public water utilities.  They also own and lease commercial property to businesses on the island.  The company has their fingers in everything related to real estate, sales, leasing, development, preservation, agriculture, and extraction.

A familiar theme in the investing community is "undervalued real estate."  The theme is often that the market doesn't appreciate the true value of a company's real estate.  Sometimes this is because the real estate is held on the books at historical cost and no one noticed.  But more often it's because the real estate is being utilized by the company in a sub-optimal manner and investors don't have faith it's true value will be realized.

Maui Land and Pineapple fits both descriptions.  The majority of their 23,000 acres are held on their balance sheet at historical cost.  The stated value for their 23,000 acres is $5.15m, or approximately $221 per acre.  This is because the majority of the company's land was purchased between 1911 and 1932 and held at those values.  The value for investors is if management is willing to sell off their excess holdings.

Selling real estate is the modus operandi of Maui Land and Pineapple.  The majority of the company's revenue is due to their real estate sales.  From parcels as small as an acre to larger tracts the company is continually selling it's holdings.

In the trailing nine months the company generated $20m in revenue, $12m from outright land sales, $4m from leasing activity, $2.4m from their utilities, and $1.1m from resort amenity sales.  They have a market cap of $94m and are selling for slightly more than 10x trailing nine months net income.

The company's book value is negative due to an accumulated deficit, but is likely grossly understated.  I haven't done a deep dive into the value of the land (you'll see why below), but a recent sale took place at $480k per acre.  If one were to estimate the land was worth 1/3rd of that price, and that only 12,000 acres were salable the company should be worth $1.9b, yes, billion with a "b".

There are good assets, good recent earnings, so what's the issue?  This should be a screaming buy.  A company that is selling for hundreds of book value if they sold off half their land.

The problem is that the storyline might be true, but it is unlikely that equity investors will be the ones recovering the value.

The nature of real estate is that if it isn't levered it's very hard to make a return, or at least that's what real estate management companies tend to believe.  Secondly it's hard to extract the value from real estate without selling it.  One route to extract value is to borrow against real estate holdings and finance whatever ventures one believes are more worthwhile.  And finance they have, Maui Land and Pineapple is no stranger to the world of debt.  They have $40m of revolving debt that is due this year including a $25m loan to Wells Fargo, a $14m AgCredit loan and $400k headed to First Hawaiian Bank.

Unlike equity investors lenders don't get to share in the upside when they make a loan to a company, they are primarily concerned with receiving their money back.  There is no doubt that Wells Fargo, AgCredit and First Hawaiian Bank made prudent loans to Maui Land and Pineapple, even if the company ends up on shaky footing.  Those three lenders have liens against all of the company's assets, the utilities, the land, the resort, and the commercial space.  If Maui Land and Pineapple were to declare bankruptcy the lenders would be the new owners of valuable real estate among other things.

It's uncertain as to how the company will pay their $40m in debt coming due this year.  In their most recent filing the company states that "Absent the sale of some of its real estate holdings or refinancing, the Company does not expect to be able to repay the outstanding balance of the revolving line of credit on the maturity date."  The company will either need to refinance their loans or sell a considerable amount of real estate, or do both to meet their debt maturity this year.

At the Microcap Conference in Philadelphia in November Chris DeMuth spoke about looking for investments with constrained counter parties.  When a counter party is constrained they're often forced into making uneconomic decisions.  A savvy investor can take advantage of a situation like that and purchase assets or earnings at considerable discounts.  The issue with an investment in Maui Land and Pineapple is an equity investor is buying into a company that is a constrained counter party.  The clock is ticking for the company to either refinance their debt or be forced into real estate sales by the summer.

On the surface Maui Land and Pineapple appears like it could be an attractive investment with valuable land and cheap earnings.  But a deeper dive reveals a company that is a constrained counter party.  The real investment opportunity is for anyone looking to buy Hawaiian real estate on Maui at attractive prices, or anyone in the position to make a secured loan to the company in the next few months.

9 comments:

  1. Nate, absent refinancing many companies would go bankrupt. If the value is there a bankruptcy with liquidation could be best for shareholders.

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    1. Correct, many companies face refinancing risk. But most companies don't stack all of their debt to mature at the same time. Maui Land and Pineapple has set themselves up for a situation where the banks have the most leverage. They can either demand higher rates or force the company into selling land. The majority of the company's revenue is from land sales, they don't have much else.

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  2. "The company will either need to refinance their loans or sell a considerable amount of real estate..."

    Even at $100k / acre, they would have to sell "only" 400 acres to cover $40M, or just under 2% of their holdings. While time may not be a luxury, it seems like they could split up that sale a bit as well to get a better price ($100k / acre on Maui is a song).

    The real risk here seems to be that the management sucks at their jobs (picking profitable ventures) and will repeat this cycle, slowly bleeding off valuable assets without the shareholders having anything to show for it.

    "Is this company a constrained counter party in any way?" is definitely going on my investment checklist.

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    1. I agree, considering the facts prudent management would dump 2% of their holdings, retire the debt and operate debt free. The leasing business seems to provide enough cash flow to cover expenses.

      The problem is they want to be a public company and show public company earnings. To do that they either need leasing scale (potentially not possible) or they need to continually hive off some of their land.

      The land is valuable, but as you say management has squandered an incredible asset.

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    2. An update is probably required to this. The 63% owner is Stephen Case, former AOL exec. This is starting to look like a rich person's playground that is coincidentally traded. No wonder they don't care about shareholder returns, too worried about making sure they have enough golf courses.

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  3. Nate, I think you may be missing a few key elements of the story here. In terms of the debt maturities there are a few other options outside of bankruptcy protection or distressed real estate sales.
    1. Refinance / push out maturities: They have done this in the past (May 2014) and you allude to this in the post. Agree if they go this route they may get squeezed for higher interest rates but the incremental $1-2m should have a minor impact in the scheme of things. However, the environment for high yield has gotten significantly worse so perhaps they are unable to refi this time.
    2. Rights offering: Steve Case (63% equity owner) will not let the banks steal the assets for $40m. Absent a refinancing, I believe the company will do a rights offering. They have done these in the past to restructure the balance sheet (yes, they came out of the 08-09 recession in very bad shape and have been restructuring ever since). I believe the most recent rights offering was in July 2010.

    I think the biggest risk is that Steve Case tries to seize value for himself at the expense of minority shareholders. He could do this through a loan or an equity offering to refi the debt but it seems unlikely given the reputational headwinds he would face and more importantly, his history of acting in the best interest of all MLP shareholders. Since he took control of the company in 2010 he has made significant progress on behalf of shareholders. He (and the management team he hired) have acted methodically trying to be as efficient with capital as possible. In fact, this prudence may turn out to have been a mistake since the environment in Maui recovered with such vigor that an unconstrained balance sheet would have allowed them to develop for this cycle. In any event, here are a few asset sales Case has overseen:
    1. Sold 244 acres at Lipoa Point to the State of Hawaii for $19.8m. This land had zero development rights and would have taken decades to receive those entitlements. Instead they negotiated with the State who wanted to own this land for preservation purposes. Seems to have been brilliant negotiating by using the proceeds to fully fund the unfunded pension obligation. The State gets to claim a win by preserving the land and helping retirees and MLP monetizes an asset for a very full price.
    2. Sold a 25 acre golf academy for $12m to TY Management (Tadashi Yanai of Fast Retailing – one of wealthiest people in Japan). Again, a very full price for a property with zero development rights and the sale took place just a few months ago. TY Management owns the Kapalua Golf course and it appears they wanted to use the academy as temporary tee boxes as they renovated some of the course. Seems to be a great deal for MLP as they monetized an asset with no development rights for a price that implies full development rights.

    In both instances it appears MLP was taking advantage of constrained counter parties, not the other way around. Obviously that can change at any time.

    Full disclosure: I own MLP and am therefore very biased

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  4. Steve is right. If Steve Case wanted to steal the company, he would have done so by now. I would also add, I actually think his involvement makes this stock much more attractive than a lot of other land companies, where management can drag things out and keep reinvesting proceeds from real estate sales into new deals regardless of attractiveness to extend their employment. Most such companies trade a discount to their asset value for this reason. Arguably should not be the case here.

    Management here actually seems quite sensible and smart, but Steve Case having control gives some additional assurance that the company is truly aligned with shareholders.

    I would also note that Steve Case is from Hawaii. He was born and grew up in Honolulu and went to the private Punahou School (where Pierre Omidyar and President Obama went) and has donated to a lot of local causes (including $10mm to Punahou for a middle school named after his parents). That may provide some additional comfort in his stewardship of the company, and I think it probably helps the company manage the local politics involved in land development.

    The land within the Kapalua Resort area (800-900 acres) is already fully entitled with specific development plans. Existing single-family homes on quarter acre lots within Kapalua are selling for $2.5-3mm each. Getting land entitled in Hawaii is notoriously difficult (the film The Descendants shows the local politics involved), which also helps keep supply limited.

    Full disclosure: I also own MLP and may be biased.

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  5. Nate, the below link outlines my thesis for MLP if you're interested:
    https://medium.com/@svafier/maui-land-pineapple-588572aff407#.uf6gr6ndf

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  6. This is all very insightful, have there been any recent updates to this?

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