Maui Land & Pineapple (“MLP” or the “Company”) owns over 23,000 acres of land on the island of Maui in the state of Hawaii. The Company’s land holdings include 21,000 acres in West Maui in and around the Kapalua Resort with the remaining 2,000 acres of land in Upcountry Maui. The Company is planning the development of two urban locations and also operates a land leasing business, a utility business, and a resort management business. Maui Land & Pineapple began operations in 1903 and by 1933 had accumulated most of the Company’s current land holdings. The Company later became known nationwide for growing a hybrid variety of pineapple known as Maui Gold. The Company was also actively involved in property development, having helped develop the Kapalua Resort through the construction of multiple golf courses, luxury condominiums, and a Ritz Carlton hotel. The Company’s prior successes came to an end with the Great Recession, as Maui Land & Pineapple borrowed heavily to finance resort expansions that were no longer in demand after credit markets ceased up and real estate prices declined. The Company subsequently focused on shoring up the balance sheet and improving operations by monetizing non-core assets and exiting the money-losing pineapple business.
The Kapalua Resort is a luxury resort featuring two world-class golf courses, white sand beaches, two marine sanctuaries, a Ritz Carlton Hotel, and other award-winning accommodations. The Company’s land holdings include 900 fully entitled urban acres, 10,800 agricultural zoned acreage, and 9,000 conservation/watershed acreage. The developmental acreage includes 46 acres located within the Kapalua Central Resort and 800 acres of mauka (mountain side) land surrounding the resort area. These land holdings are irreplaceable assets that few other locations on the planet can match. Maui Land and Pineapple also owns 2,000 acres in Upcountry Maui where it is planning a 300-acre development called Hali’imaile Town.
In addition to the Company’s land assets, Maui Land & Pineapple also operates a land leasing business, a utilities business, and a Resort Amenities business. The land leasing segment leases 265,000 square feet of commercial, industrial, and agricultural property primarily within the Kapalua Resort. Key properties include the Honolua Shop and Merriman’s Restaurant, which borders the Pacific Ocean. The land leasing segment generated $5.5 million in revenue and $2.7 million in EBITDA in 2015. The Company’s utility segment provides water and wastewater services to the Kapalua Resort. The Company outsources the management of these operations which generated revenue of $3.3 million and EBITDA of $800,000 in 2015. The Resort Amenities segment manages the Kapalua Club, a private club in Kapalua. The segment generated $1.4 million in revenue and $150,000 in EBITDA in 2015. These segments should continue to provide the Company with over $3.5 million in EBITDA annually, easily covering the Company’s cash operating expenses and interest payments.
Following the financial crisis, the Company had an overleveraged balance sheet and a significant pension liability. Maui Land & Pineapple undertook a series of asset sales to repair the balance sheet and put the Company in a flexible position where it could again begin developing its pristine land holdings. In September 2010, Maui Land & Pineapple sold the Company’s two Kapalua golf courses for nearly $75 million. In October 2014, the Company disposed of 244 acres of land at Lipoa point for $19.8 million in proceeds, which were used to reduce a large portion of the Company’s pension obligation. In 2015, the Company sold the Kapalua Golf Academy for $12 million and recently sold 300 acres of land entitled for working-class housing for $15 million. Proceeds from the two recent asset sales were utilized to further pay down debt. The results of the Company’s deleveraging strategy are impressive. The Company’s debt balance has been reduced from nearly $95 million in 2009 to $26 million today and the Company’s pension obligation has declined from $44 million to $10 million. In addition, Maui Land & Pineapple has several parcels of land that are currently being marketed for sale with potential proceeds earmarked for further debt reduction. Finally, the question could be asked that with several large developments planned, could Maui Land & Pineapple revert to its prior ways and again lever up the balance sheet in order to fund project development. Our conversations with management indicate that this is not the case. Management recognizes the progress that has been made and has no desire to repeat prior mishaps caused by excessive leverage. Maui Land & Pineapple will likely look to partners to reduce the Company’s cash commitments for new developments and has stressed than any debt utilized in development projects will be non-recourse in nature.
When evaluating any potential investment, Gate City Capital Management considers the price we would pay for the entire company. Maui Land & Pineapple currently has a market capitalization of $126 million and an enterprise value of $151 million. This enterprise value ascribes a value to the Company’s land of $6,600/acre; a deep value price for Hawaiian property where land with an ocean view sells for over $500,000/acre and even agricultural land typically fetches more than $25,000/acre. We have valued the Company’s land holdings at over $325 million and the entire Company (after deducting ongoing expenses and potential capital gains taxes) at nearly $260 million. After subtracting the Company’s $26 million in debt results in a market capitalization of over $230 million and a share price of $12.30/share, representing over 90% upside from the current share price. Finally, while we generally prefer companies with low price/book ratios, we note that most of the Company’s land is on the books at prices from the early 1900’s.
[us_separator] The above post has been excerpted from a recent letter of Gate City Capital Management.
Performance for the period from September 2011 through August 2014 has undergone an Examination by Spicer Jeffries LLP. Performance for the period from September 2014 through December 2015 has undergone an Audit by Spicer Jeffries LLP. Performance for 2016 is unaudited. The performance results presented above reflect the reinvestment of interest, dividends and capital gains. The Fund did not charge any fees prior to September 2014. The results shown prior to September 2014 do not reflect the deduction of costs, including management fees, that would have been payable to manage the portfolio and that would have reduced the portfolio’s returns. Actual performance results will be reduced by fees including, but not limited to, investment management fees and other costs such as custodial, reporting, evaluation and advisory services. The net compounded impact of the deduction of such fees over time will be affected by the amount of the fees, the time period and investment performance. Specific calculations of net of fees performance can be provided upon request.