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3 developing real estate plays
The quiet assets behind GenCorp, St. Joe and Intrawest could eventually make their stocks roar upward as the companies unload valuable land.
By Michael Brush
Real estate has shot up so much in the past few years that cautious investors are wary of putting money in the sector now for fear of buying the top. But there's still a clever way to capitalize on the real estate boom without taking too much risk.
Here's the trick: Find companies with a lot of real estate on their books at rock-bottom prices because they bought it long ago. As these companies sell or develop that land and realize its value, shareholders should see big payoffs.
Three good examples, according to Pirate Capital, a Norwalk, Conn.-based hedge fund that takes a value approach to investing, are GenCorp (GY, news, msgs), The St. Joe Co. (JOE, news, msgs) and Intrawest (IDR, news, msgs). The shares of all three could double or triple in the coming years as these companies sell or develop their land. Here's a closer look.
Cheap land, suburban sprawl
A military contractor, GenCorp has tested rocket fuel on a once-remote tract of land near Sacramento, Calif. since the Cold War.
GenCorp purchased the land from a mining company in 1953. But over the past five decades, Sacramento's suburban sprawl has reached GenCorp's borders, driving up the potential value of its land.
What'll it be worth if it ever goes on the block? And how much of that is already priced in to GenCorp's stock? These are tricky questions. For help, I turned to David Lorber at Pirate Capital, which has a position in GenCorp.
Let's start with what we know. GenCorp has broken out a 5,800-acre chunk of the land for sale or development. The company is getting the environmental and zoning approvals needed before construction can start, a process called entitlement. GenCorp estimates three separate pieces of this land will be entitled in 2006, 2007 and 2008.
Now, let's take a look at where this may lead. Based on sales of similar land nearby and an estimated appreciation of 6.7% a year (the annual appreciation in the area since 1977), Lorber estimates GenCorp's land will fetch about $300,000 per acre by 2008, assuming it gets entitled. That works out to $1.94 billion for the 5,800 acres, or $31 per share, in 2008.
What about the rest of the company? By 2008, GenCorp's rocket-fuel division should be worth $11 per share. A chemical division GenCorp hopes to sell soon should bring $1.80 per share. Adjust for estimated cash and debt levels in 2008, and you have a stock that should sell for at least $40 in 2008. That would be a 120% gain over recent levels of $18.
Going it alone?
GenCorp would profit even more if it develops the land, but it's not clear it'll take that path. For the moment, all we know is that GenCorp is planning to get the 5,800 acres entitled, which makes the land more attractive to developers.
GenCorp says only 1,800 additional acres may hit the market. Using Lorber's assumptions, that would add another $10 per share, making GenCorp a $50 stock at some point after 2008.
Is GenCorp's land safe? Years of rocket-fuel testing have left perchlorate, a potential health hazard, on parts of it. But this may not be a problem. The company only used about 4% of its 21-square-mile piece of land for testing. The perchlorate also has drifted down 300 feet below the surface. Yes, it has polluted aquifers, but clean drinking water for the area will be available from other sources.
Besides, GenCorp has drilled several wells into the aquifers, and it's using the wells to pump the water out and clean it. The Environmental Protection Agency has yet to set standards for acceptable perchlorate levels in water. But a recent National Academy of Sciences study suggests the cutoff for acceptable levels may be well above standards used by GenCorp in cleaning the groundwater.
In the sunshine state
Originally a timber company created by part of the Dupont family, St. Joe is the largest private landowner in Florida. It has about 820,000 acres, or about 2% of the state, mostly in the Florida panhandle.
But here's the catch. Most of the land was bought for well under $10 an acre before World War II. So as St. Joe continues to pare the remnants of its timber business and focus on real estate development, it has one key edge. Its primary input, land, has a cost basis of virtually nothing.
"We start out with an enormous advantage over everyone else," says Peter Rummell, the company's chairman and chief executive. "Think of us as a manufacturer, and our raw material is free."
Figuring out how much profit that land might eventually generate as the land is developed and sold is a lot more complicated than it is with GenCorp. There's simply a lot more land. And St. Joe also has a bigger variety of projects on the horizon, including resort and retirement homes, single-family homes, beachfront properties, golf courses, marinas and commercial and industrial projects.
But here's one simple way to boil it all down. St. Joe has a market capitalization of $5 billion. Divide that by the 820,000 acres, and you see that the market puts a value of about $6,000 per acre on St. Joe's land, says Stephanie Tran, another analyst at Pirate Capital, which has a position in St. Joe. In contrast, land near St. Joe's turf goes for anywhere from $30,000 per acre for use as industrial parks to $600,000 per acre or more for premium lots.
The next great place
The bottom line: St. Joe will get much more than $6,000 per acre on average. Tran thinks much of St. Joe's land will easily fetch more than $100,000 an acre after it's entitled.
A lot hinges on whether St. Joe succeeds in making northwest Florida the "next great place" to live and vacation, as it likes to say. There are some signs the company is well on the way. For instance, the new Panama City airport, to be completed by 2009, could help draw more companies to the area.
In addition, a savvy national real estate developer has taken an interest in St. Joe's turf. Simon Property Group (SPG, news, msgs), one of the country's largest mall and shopping center developers, recently bought 93 acres from St. Joe for $286,000 apiece, with options on 125 more acres. Simon Property should be able to draw high-profile stores and businesses to the area. Analysts also think the waves of retired baby boomers looking to move south may put down roots in the panhandle.
What does all this mean for St. Joe's stock? Based in part on the huge gap between the $6,000 per acre value the market puts on St. Joe land and the $100,000 per acre much of the land could eventually fetch, Pirate Capital's Tran believes to stock could go for $150 a share in four or five years.
On the slopes
A Canadian company that builds upscale ski and beach resorts, Intrawest isn't like GenCorp and St. Joe as a real estate play. It doesn't have thousands of acres of cheap land on the books from age-old purchases. Most of it was bought in the 1990s. So it has appreciated some, but not as much as the land at GenCorp and St. Joe.
But Intrawest looks like a decent land play nevertheless, believes Tran, whose firm holds shares in the company. The reason: The market seems to be missing the potential value of the resorts Intrawest plans to build or expand in North America and Europe.
Popular Intrawest resorts like Whistler Blackcomb in Vancouver and Mammoth in central California have a certain cachet that attracts vacationers, partly because these ski villages are laid out with the feel of cozy European towns. They're also in prime locations. Whistler Blackcomb, for example, will host part of the 2010 Olympic Winter Games. It hosted the 2005 Snowboard World Championship in January.
But while sports fans and vacationers appreciate Intrawest resorts, investors may be missing the potential value of 19,000 condos, townhouses and single-family lots queued up for development over the 15 years. The land behind those 19,000 condos is on the books at $395 million, or $20,800 per unit on average. But if you throw in the typical markup on the land and the profits from sales commissions and ongoing management fees after the units are sold, that land will really be worth six times as much, estimates Tran.
What's more, Intrawest is taking steps to move debt and semi-developed properties off its balance sheet and into partnerships in which Intrawest has an interest. With these burdens reduced, Intrawest will start to trade more like a normal vacation-resort management company, which have richer valuations. All told, says Pirate Capital's Tran, Intrawest could trade north of $50 over the next five years, from around $19.50 now.
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