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Evan Vanderveer
Evan Vanderveer

Value in Land

September 20, 2007 | About:
“Price is what you pay, and value is what you get,” according to Warren Buffett, yet investors sometimes forget that this lesson can apply to other assets besides equities. Most recently, they appear to have forgotten the value in land.

Though not always perfectly clear, an arbitrage opportunity exists when a public company owns a great deal of land. Equity investors are used to having a constantly flowing ticker telling them how much a specific stock is worth. When two markets come in contact, equities and real estate, a gap often appears between the value of the land and the price of the company.

To compound this spread even more, accounting rules have given value hunters a generous gift. With companies recording their land at historical cost without adjustment, a great deal of research must be done in order to discover the true value of the asset. Even better, many investors value the land at historical cost without taking into account any appreciation whatsoever.

In today’s market, there are a variety of different real estate asset- backed securities. Public real estate investment trusts are down approximately 15% year to date. I will review only a few different cases here, though many exist, and a large portion is likely undervalued.

Consolidated-Tomoka Land Corp. (CTO) is an old timber company based in Daytona Beach Florida. The company owns 11,250 acres of land just to the west of Daytona Beach carried on the balance sheet at just a few million dollars.

The average selling price of an acre of the company’s land over the past few years has been about $38,000. Similar recent land sales in the same area support the valuation. Using “back of the envelope accounting” we arrive at a value of $427,500,500. The current market cap is $371,820,000. Additionally, the company has purchased 25 premium quality retail properties in the past eight years, many of them occupied by tenants such as CVS. The properties cost the company $110 million dollars.

Combined, we arrive at a value of $537 million dollars, an approximately 44% discount. Not included in the valuation are the over 200,000 acres of surface rights all over Florida and the company’s golf course operations. I should also note the land valuation is conservative and is virtually certain to grow in the future due to geographic placement. Daytona beach is the only moderately priced, undeveloped region on Florida’s east coast.

Like many companies recently, the stock has come down because of its connection with the housing market, yet this drop does not always accurately reflect a drop in the value of the land itself. The truth is however that the company has stated publicly that the land is almost entirely slated for commercial development, which is doing quite well in the Daytona Beach area.

A second case is Supertel Hospitality (SPPR), a real estate investment trust, based near the oracle in Norfolk, Nebraska. The company owns 93 limited service hotels with over 7,245 rooms. The majority of the company’s hotels operate under brand names such as Super 8 and are scattered throughout the country.

Using a 5.1% appreciation rate, assumed by the author of a report on Valueinvestorsclub.com and fully supported by OFHEO data, the book value of the properties is now $205 million. The current market cap is $155 million. If we add $54 million of accumulated depreciation, a total that likely distorts the true underlying worth, we arrive at a value of about $260 million or a 68% discount.

The dividend is currently 6.5% with increases in the last seven quarters. The motel business has historically been a successful high cash flow business and this selection appears to be significantly undervalued.

A special case is National Fuel Gas (NFG). The century old utility company is based in NY and PA and owns 770,000 acres of land sitting on top of Devonian Shale. Until recently, the land was truly worthless because the gas could not be recovered due to the dense formation of the shale. The drilling technology now allows for a decent portion of the gas to be captured.

Both analysts and the company’s balance sheet value this land at virtually nothing. But that is about to change. In a recent Morgan Stanley report on the comparable Devonian Shale of another company, the land was valued at $5,500 per acre. Using the Morgan Stanley valuation, we get an additional $49 per share, or more than 100% upside.

The remaining business segments are fairly simple and are valued widely at about $40 per share. As more wells are opened and more gas is extracted, the value of this land will become quickly apparent to the market.

Of increasing interest lately is the value of land underneath brand name retailers. Long’s Drug Stores is another idea recently posted on VIC. The thesis is yet again that the price of the company largely understates the value of the underlying real estate.

What makes the drug store chain especially attractive from a real estate point of view is the high concentration of California locations. Retail land in California has become especially valuable in the last few years and the prime positions would be attractive to any retailer.

The author compares the land to a recently completed comparable buyout of a similar drug store chain. The value is pegged at $1 billion or 50% additional value above the current $2 billion market cap.

Not to be ignored are the mega retailers. Activist investors have targeted companies such as Target and Sears with their sights possibly aimed at real estate. Both have significant amounts of land under their stores which may mean that the companies themselves are undervalued in comparison to the true value of their assets.

Though these companies are not gushing cash, they are full of cheap land. The market appears to ignore this fact because of the negative housing sentiment. Investments like these may be great ways to buy into real estate with having to worry about who is going to mow the lawn.

Please note the author has positions in CTO, SPPR. And NFG. This is not a solicitation to buy or sell stocks.

About the author:

Evan Vanderveer
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.7/5 (19 votes)


Tkervin - 10 years ago    Report SPAM
My one quibble w/CTO is this.......their return on assets and equity is not very good.....and that is w/the land valued at cost. Value the land at market and their results are much worse. The value of their land holdings most likely will be unlocked slowly over time. It's just not very liquid. It could be argued that this stock has already had its run.
Harison - 10 years ago    Report SPAM
Great article.
Buffetteer17 premium member - 10 years ago
A little dirt never hurts.
Port45 - 10 years ago    Report SPAM
Low ROE because Land is bloating the balance sheet until it produces commercial real estate NOI. Rest assured the moat is intact from the qualitative fact of how much of Daytona CTO actuall owns.
Zippbrain - 10 years ago    Report SPAM
In your valuation for sppr you forgot to subtract the 200 million in debt from your value.....

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