Mick McGuire, is the founder of Marcato Capital Management. Marcato Capital Management is a value oriented fund, which investors across sectors. Mick McGuire was formerly an analyst at Bill Ackman’s Perhsing Square Capital. Mick McGuire is currently giving his presentation on hidden assets in book value at the Value Investing Congress in New York.
Below are highlights from Mick’s presentation:
Marcato is now 2 years old, and currently manages $750mm out of San Francisco. Their approach is to look at companies with $1B – $5B market caps that are poorly managed. Marcato targets these companies and seeks to work with management and the board to make positive changes.
Today Mick is focusing on land, which due to accounting rules is rarely ever marked up, but is often carried well below fair value. Today his three ideas that relate to this theme are:
Alexander and Baldwin (ALEX)
Brookfield Residential Properties (BRP)
Mick is starting off discussing ALEX, an idea he and mentor Bill Ackman have already done very well on. Focusing on the commercial real estate, he thinks the total NAV is just over $900mm compared to book value of roughly $800mm. After corporate overhead, he thinks this portfolio overall is worth about $15, or roughly 50% of the company’s current value.
Marcato completed a DCF on each development property, and believes in aggregate the conservative value of all development properties is ~$300mm. Conducting a further DCF of JV assets, Marcato gets a total NAV calculation of ~$30 per share. This means that shareholders today are getting ALEX’s land stakes essentially for free.
In Marcato’s analysis of the land, they looked at DCF’s with sometimes 100 year time horizons. But ALEX’s current strategy is to farm the land for sugar cane as a holding strategy. Looking at the cash flows from this land farming business, Marcato adds ~$17 a share of value resulting in a total target price of $47 or a 50%+ upside from the current price.
GenCorp is Mick’s second idea. He believes it has hidden non-core real estate holdings held in one line item on its balance sheet. This land was acquired in the 1950’s, mostly used as a buffer between missile test cites and residential areas. What was once remote mining acreage is now surronded by Sacremento’s nicer neighborhoods. GlenCorp has receieved certain permits to develop this 6,000 acre tract. The most recent comp indicates the land is worth $50k – $60k per acre. Additionally the excess office space that GlenCorp owns has an NOI of $5mm+ and leads to a valuation of $66mm.
In addition to the hidden real estate value, Mick believes the core business is very strong and earnings are understated due to non-cash accounting treatments. He believes the company trades at an 8x P/E of true economic earnings.
Mick’s final idea is Brookfield Residential Properties: BRP
Like ALEX, Mick focuses on NAV and book value when analyzing the value of the business. The large majority of the company’s assets are pure land assets. Over 62% of balance sheet assets are raw land. Marcato prefers this position because they have a general thesis that housing starts will recover and home builders will now focus solely on building houses instead of land developments.
Recent U.S. home start statistics are improving, but remain well below historical levels. U.S. home prices are at cyclical lows while Canadian home price trends are virtually opposite. The Canadian side of the business is currently generating 97% of the gross profit of the company. Marcato views the U.S. home business as a positive call option on a U.S. housing recovery. The U.S. back log and orders are bouncing back, and management guidance supports healthy growth in revenue and gross profit.
Mick believes BRP can pay a one time or recurring dividends without compromising core operations. Because most of the portfolio is land, BRP does not have the same impairment problems that other home builders experienced. Canada is over 50% of their asset base, and Mick believes carrying value is well understated for BRP. He thinks its important for investors to closely examine true book value when looking at the current multiples.
Recently BRP improved disclosure which helps in determining an accurate valuation. If carried at current market value Mick believes BRP’s true value is ~50% above the state value. If BRP traded at the same book values of industry peers, Marcato believes an implied share price of $44 – $55 is reasonable. Compared to the current price of ~$15 this provides a 3x+ upside
3:28pm EST: Q&A
Mick received a question on GlenCorp about the environmental liabilities. He explains that back in the 50’s, 60’s, and 70’s they were complying with the then current evnironmental regulations, but by the 80’s these practices were no longer in compliance. There is a liability on the balance sheet which projects the expected environmental liability. However GlenCorp also has environmental assets in connection with Northrup Grumman on the balance sheet which he thinks more than offsets the liability. Overall he thinks the net is an environmental positive on the balance sheet for GY. Also the land that they are proposing to develop was never used for testing and has all the necessary entitlements.
3:33pm EST: Closing Remarks
Mick likes to look for businesses that have hidden real estate assets, but are fundamentally not real estate businesses. GlenCorp is a perfect example of that, with a solid underlying operating business. He thinks all real estate is local, and part of the research is doing on the ground research in the key markets. They don’t take an overall view on the real estate cycle, but instead focus on specific situations where real estate may not be valued fully.