Nitin Sacheti, portfolio manager of Papyrus Capital (now part of ARS Investment Partners) for Hedge Fund Alpha in September 2018 explained his investment thesis for Maui Land & Pineapple (MLP) company.
Sacheti started off by pointing out that he was never a fan of investing in land banks. He witnessed the moving of St. Joe between Einhorn and Berkowitz back and forward without any true value monetization.
However, he changed his opinion in the case of MLP based on several important decision-making facts:
- Incredible location of land in Kapalua.
- Plans for the development, sale, and monetization.
- Quality of management, and insider ownership.
- At the time of the thesis, the stock was sold at a massive discount with a 250% upside potential.
The potential of the company is based on the ownership of 200 acres of land in Kapalua The land has two very high barriers for development in Hawaii including water and being fully entitled. The company has a smaller cap of only $200 million and no net debt combined with a slight cash flow coming from operations.
Besides this chunk of land, MLP owns 10,800 acres of agriculturally zoned land and 9,000 acres of conservation land in West Maui. On top of that their ownership reach goes to 2,100 acres of lower-quality agricultural land in Upcountry Maui. Papyrus sees the 250% upside potential on NPV values on future developments and multiples on the core of the business.
Today, we are diving into his thesis, and how it played after a six-year time frame.
Company History
MLP has a history dating back to over a century. The focus of operations was on the pineapple and sugarcane production. The fields were fitted with the irrigation system which is crucial for the later acquisition of development permits.
The team that was leading the company in the past leveraged the company with the continuation of pineapple operations that were generating losses. Some of the losses were offset by selling golf courses owned by the company before the recession.
After the property prices fell, the company decided to sell all non-core assets including the Kapalua golf courses. They spent the next eight years deleveraging the company, managing to reduce net debt to zero by 2017.
When the company finished the deleverage process it entered the next stage of selling the highly valuable land bank. Weinberg Trust in 1999 owned the majority of the company, when in 2008 Steve Case bought their stake after which he joined the board.
MLP Operations
Complex MLP operations are divided into three segments: leasing, utilities, and resort amenities.
Leasing
The most important element of their business is the leasing of commercial property that the company owns. Properties are located in Upcountry Maui, Other West Maui, and Kapalua Resort.
The company discloses square footage and occupancy levels by location which allowed the fund to assess an average price per square foot. Other West Maui locations are focused on commercial space, Upcountry Maui on industrial and farming activities, while Kapalua includes a resort and accompanying facilities.
The plans of the company at the writing of this report were to convert some of the farmland in Upcountry to a commercial space, which would raise its value per square foot. The Resort is being upgraded with new amenities including a zipline, also with a goal of raising the value of rent.
The fund estimated that after the property renovation, there will be 250 thousand leasable square feet. An average lease price per square foot is an estimated $36, and if the occupancy levels are at 95% which is almost guaranteed, leasing revenue will grow by 2019 to $8.5 million.
Utilities
The Utilities sector of the company consists of two maintenance companies - Water Company, and Waste Treatment. These operations have predictable costs that can only vary depending on the amount of rainfall occurring during the season. These assets provide significant flexibility over the development of new properties.
Resort Amenities
Kapalua Club with a wide array of amenities including pools, spa, and beach club is partially owned by MLP. Membership was in decline at the time of the interview, however the new Kapalua Mahana Development should drive it upward. The fund assessed that the costs and revenue of these operations would be flat.
Earnings Potential
Three operations groups combined can generate about $12.8 million and $4.3 million in free cash flow. Translated into shares, that equals $0.23 per share, and after applying 14x multiply based on the very stable and predictable nature of the business combined with pricing power in leasing, that results in $3.21 per share.
The Land Bank - What Makes The Investment Interesting
The whole project can be divided into five segments that are in different stages of development and planning.
Kapalua Central Resort
This project is the first that MLP is planning to undertake and it should spread out across 46 acres with 61,000 square feet in commercial gross leasable area. Central Resort will in its full capacity have 188 condo units in Kapalua.
This location is top of the line and in this segment of the market, lots are sold at $2 million and homes up to $10 million. With the project being “shovel ready” it is estimated that it will be completed within three years.
The way the project will go will most likely include selling the land leaving it to the developer to create a plan. Another way is a joint venture with a developer and in that case, MLP will receive half of the net operating income.
Land Adjacent To Ritz Kapalua
MLP also has in its portfolio 50 acres of land adjacent to Ritz Kapalua, a $ 1,500-a-night expensive resort. It is expected that MLP will quickly act and start a project for this highly valuable piece of land.
It is important to note that commercial properties that are half in size in that zone have been sold for multiples of MLP’s entire market cap.
Kapalua Mauka
This is a long-term MLP project that is also shovel-ready. The period for its realization is somewhere between 2025 and 2035. It includes 800 fully zoned acres in Kapalua, which is impossible to get anywhere in the market. A plan includes a golf course and 639 residences including homes and condos.
Hali’imaile Town
MLP also has plans to develop a small town with a premise of a holistic traditional community focused on agriculture and sustainable living. From the looks of the plans, it seems like a development idea created for wealthier locals entwined with trendy but affordable living and amenities.
The original project includes 100 homes with 500 thousand square feet of gross leasable area. Due to the lower prices, the fund estimates the development at 15% of $500 thousand per home and $30 per square foot in gross leasable area.
Other Owned Land
Besides these higher-priced pieces of land, MLP owns 10,800 acres of agricultural land and 9,000 acres of conservation land. At the time of the interview, several conservation projects had been realized, and a large-scale lobby against other conservation projects was formed. Thus, from the fund they do not expect those 9,000 acres to be properly utilized.
The fund assessed the agricultural land to $20 thousand per acre. However, they believe that over time the value of the land will grow and that lucrative projects will be developed.
How The Investment Played Out
From a six-year perspective, the investors in MLP could be happy with their choice. The stock price was at $11.84 at the time of the thesis, while today it reached $22.67 which is an increase of +70%.
In the 2023 annual report, the executives did mention new projects to be started in the future but did not provide additional info about them. What they did mention is that the projects are aimed at providing new household capacities, together with new amenities which will increase the value for the shareholders.
Papyrus made a bold bet that over time the stock value will rise for 250% reaching $41, and that is still a viable possibility. When we take into account data from March, they showed a stock gain of 118% in the last 52 weeks.
The Maui fires in 2023 did slow down the company and its projects. However, when comparing the first quarter of 2024 and 2023 it is clearly seen an increase in leasing, pointing to a recovery from the impact of the natural disaster. There is a reported increase in occupancy in the already operating projects of Kapalua Village and Hali’imaile Town Center. They pushed an increase of 8% in the YoY revenue of the company.
The operating revenue according to the newest report raised 7.5% due to a rise of 24% in commercial real estate occupancy during 2024. Increases in revenue are also reported from resort amenities and other leasing revenues.
