Unlocking Undervalued Real Estate

By Travis Johnson, Stock Gumshoe, October 1, 2012

Just had an interesting presentation from Mick McGuire of Marcato Capital Management, he called out three different companies who have good operating businesses but also understated values that are hidden by their balance sheets … in this case because they are carrying real estate at purchase prices.

The three are Alexander and Baldwin (ALEX), Gencorp (GY) and Brookfield Properties (BRP).

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ALEX has been a value investing favorite for a decade or more because of that undervalued property, so this is something that every ALEX investor probably already knows — they used to also be even more confusing because they owned a shipping line, back when I owned these shares probably 8-10 years ago, and they’ve jettisoned that and become a bit more advanced in their real estate management (the shipping division was Matson, it was spun off a few months ago).

Only have time for the shorthand here now, but basically he says that their massive land bank on Kuai that they carry at their 19th century cost basis should add about $14-17 more to their per-share price — if you ignore that land and just count their current commercial properties, their development projects and their joint ventures, the stock is worth almost exactly what it’s trading for today, about thirty bucks a share. The land also generates enough income, through agriculture, that they get to benefit from it even as they wait for it to become more valuable through very gradual development and inflation. A fine argument, but not new for many of you, probably — I think ALEX is a pretty safe bet but the catalysts are likely to move very slowly on that real estate and I haven’t looked at the big spinoff details enough to be comfortable with this one, my knowledge of ALEX is quite old.

GenCorp (GY) is another one that has been muttered about in value circles for a while — I have some speculative call options on this one (I don’t usually write about my options trades unless they come up as conflicts or are otherwise likely to be interesting — they’re often foolish bets on my part to manage my inner gambler on low-conviction ideas, using small options trades to avoid making more dangerous foolish bets with larger sums), and the big argument there is that it’s a good business, which will become ...

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