When I first got started in deep value investing I was big into the land plays. These are companies that own a ton of land. Companies with tens of thousands of acres trading meaningfully below the replacement value of that land. I loved these ideas as a beginning investor as valuation came easy. Run a simple sum-of-the-parts analysis on what the land is worth, DCF corporate costs, factor in the after-tax proceeds should they sell the land and try to buy the stock meaningfully below this implied value. My favorite thing about these land ideas was the downside protection and knowing at the end of the day I wouldn’t get my ass handed to me by Mr. Market. There is significant margin of safety in purchasing these land banks as they all trade at sizeable discounts to true value.
The great thing about companies that own a significant amount of land is once you have your original due diligence complete, the maintenance due diligence is relatively easy to keep up with. Land values typically don’t change in great frequency on a quarterly basis, or even a yearly basis. Public market valuations on the other hand, tend to change pretty rapidly. And during these dark times, they seem to change rapidly on a daily basis. I keep my models updated on a quarterly basis, so when valuations fall, I can be ready to buy.
I’ve been following one land company for years. They own tens of thousands of acres in Florida. An operating business that spits out good cash flows in up years and ok cash flows in bad years. A new CEO has cut costs, monetized unproductive land, increased the dividend and is currently evaluating the remaining portfolio to monetize higher and better use land. I’ve wanted to own the company for years. I could just never get there on a valuation standpoint. That is until this past week.
This company owns a significant amount of land right in the pathway of Hurricane Ian. The Hurricane blew right through most of the land and the stock price has cratered. Income from the core operating business will likely be depressed for the next two years as the company recovers. Operating income and EBITDA will take a hit. But on the long-term basis, investors now have an opportunity to own pristine land in Florida on the cheap that will only increase in value as time goes on. For investors focused on the long-term and margin of safety, this is a great play.
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