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.