market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Mick McGuire of Marcato Capital Management.  His talk was entitled 'Perspectives on Book Value.'

McGuire was named a rising star in 2012 by Institutional Investor and he was previously an analyst at Bill Ackman's Pershing Square before launching his own fund and now manages around $750 million.

He sees a theme of companies owning significant assets which exceed the carrying value on the balance sheet. "Land,"  especially very old land.  Accounting rules, under GAAP, record land at cost, and it is valued at the lower of cost or fair value. It is only adjusted to mark it down, if value drops.  So it is almost never marked up on balance sheets.  So businesses with old holdings have land worth a lot more than they carry them for.

Here are his pitches that are all real-estate themed to some degree:


3 Ideas With Hidden Value

Alexander & Baldwin (ALEX):  One of Hawaii's oldest companies.  Owns commercial real estate in HI and CA.  $30/share, Market Cap $1.3B, EV $1.5B.  Revenue isn't the way to value it. Owns 7.9M sq ft of commercial real estate, and a pipeline of resorts/residential, 75,000 acres of land on Maui and Kauai.  Shows total assets of $1.43 on balance sheet, but only $832M in real estate value.

How to value their properties: Look at comps, or rental cash flow, commercial real estate worth about $442M.  mainland, similarly, get about $500M. So about $900M for real estate, about $22/share, but reduce for corp expense, so net $13.50/share, about 50% of current market value.

Active development projects are in Wailea, Kauai, still owns 100 acres in Wailea, worth about $1M/acre.  Kahului property, and highrise in Honolulu.  Total worth about $294M.   1000 acre master planned community on Kauai, up to 1500 units, selling for $1-4M each.  So JV interests another $400M,  means total, $30.00 of value, same as the share price.

You get the land "free."  What is it worth? They have 20% of Maui, and 15% of Kauai. It's mostly ag land, selling for $27k/acre. They have leased out some of the land, imply value of around $7k/acre. Will take many years to monetize the land, they use 100 years. Low value: $13.72/share to as high as $17.32 per share. Company strategy is to farm the land, waiting for  Total valuation: $43.70 to $47.30, up from $30.00 stock price today.

Q&A:  how about their corporate expenses?  They don't have a good handle on where it should be relative to where it is. "it's not an agenda item with me."  He says they've provided a lot of information to investors. 


Gencorp (GY):  Missile and rocket supply maker. $600M market cap. 11.5% FCF yield to the equity. Non core real estate holdings: carries it at $64.4M.   They said they are the largest shareholder.

Q&A:  What is the catalyst?  Says new CEO, attacked cost structure and capital structure complexity.  One questioner said they had about $300M in environmental claims.


Brookfield Residential Properties (BRP):Trading at $14.39, like ALEX, its value depends on how fast they monetize their land holdings.  62% of their balance sheet is raw land.  Yet they are considered a homebuilder.

"Positive carry call option on inevitable US housing recovery." Concerns about Toronto and Vancouver, which are priced at 6.5x and 8.9x median HH income, like the US was before the collapse.

When they value all the assets, they get approximately $2.2B of TBV, 58% increase in value, or stock move of around $44-55 per share, around 3x current share price!  No analysts covering the stock.

Q&A: Catalyst?  Analyst coverage would help.


Embedded below is McGuire's slideshow presentation from the Value Investing Congress:




Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.