KEWL - Keweenaw Land Association

[samwise]

Many posters here are familiar with this name, but it seems to get mentioned in a bad way, e.g. Jan Svenda said "did not want to read the pitch for the tenth time". Well I find the name interesting, have a position and would love to find out if I'm missing something.

 

The pitch is fairly simple. There is value. I am going mostly by memory below, but I should be roughly right.

1. Value of timberland as per 2015 appraisal: $151 million, add another 13 M they bought later in 2017 using debt.

2. debt - current assets = 18 - 5 =13 million

3. so net asset value = 151 +13 -13 = 151

4. for this you pay 1.3 *74 = 96 million, so a 50% upside.

 

You could do other adjustments, the timberland is apparently under-estimated according to a more recent timber cruise, there may be a tax deduction, some land could be sold as lots at higher prices etc. Any way you choose, people have found it to be undervalued. There are 2 VIC write-ups and Geoff Gannon has done a piece. Many have prices much above my estimate above.

 

And this has been the case for 10 years, and it has been dead money. Oddball has some blogs from 2012 (?)! So whats new now? two things.

 

1. New activist in charge. A guy who is featured in "the big short", so apparently very smart, but might not know much about forests. He has a big position which can not be sold in the markets. He needs a liquidity event unless he is happy to have a timberland investment as an inflation hedge.

 

2. New lower price. the price has dropped from 110 to mid 70s. Don't know why, but maybe the older investors don't trust the new activist, and perhaps some people are disappointed they are not forming a REIT. Low liquidity and lots of sellers is a bad combination. One of the VIC authors seems to have given up too.

 

What can happen?

1. They could manage the forests better. POPE seems to produce more cash from similar # of acres. But why should a financial owner be operationally better. Maybe they hire good people, or just cut the trees down as a slow liquidation, producing cashflow.

2. They could sell the timberland at or above appraisal value. The appraisal report shows large acre sales happen regularly. The new management has already sold a few acres/easements etc. So the market, while fairly slow, does exist, unlike say buying land bank companies which can only be slowly monetized . Or like distressed firms with hard assets which may not have enough time to find the right price, like cranes (ESSX) and helicopters(PHIIK)

3. recent selling pressure could ease and we drift back up to the 10 year normal of 100. Although this might be very slow given the low turnover and depends on how many people are trying to get out now through a very narrow exit.

 

They are cashflow neutral, and the recent sales should help delever, so there isn't any hurry. The activist has owned for 10 years, so waiting 2-3 years for the right price isn't unlikely. Likely worst case is dead money. Note that timberland renews the trees grow about as much as you cut. So unlike ships which age, and mines which deplete, you are in the same position at the end of the year. timberland prices may have moved up or down, and hopefully you had some freecashflow, but even being cash neutral means you have the gain from inflation, hopefully.

 

More extreme we could see timberland prices collapse because everyone had the same idea to grow timber 30 years ago and now no one wants wood houses anymore (there are a few articles like that). In a good case you make ~50% in 1 to 3 years.

 

Any other holders or people who have looked at this?

 

[johnny]

The has is apparently been at a perpetual massive discount to NAV, and last year they couldn't find a single buyer to even beat -that- price. Why is anybody treating these appraisals as credible?

 

"In 2017 the Company engaged Stifel, Nicolaus & Company, Inc. (Stifel), a highly-qualified investment bank, to explore the possibility of a sale

 

Ultimately, the Board concluded that the proposed offers from potential buyers did not reflect the true value of the Company and would have netted to shareholders less proceeds than the lowest stock price over the last 12 months"

 

From the proxy war:

[Gregmal]

First, we've seen a ton of the land type companies come down a lot lately. In another thread pupil mentioned JOE trading at it's lowest levels in decades. From what I see out there, raw land is quite popular. Big land holding companies, right now, not so such.

 

The second thing, and most significant to KEWL IMO is the strategic review. A large piece of the mystique around companies like this, or SHLD, or TPL, or JOE, is the simplistic, but nonetheless sexy exercise of day dreaming about "all the hidden assets/OMG a gazillion acres x a bazillion dollar per acre" bull cases. If you've followed these long enough you know they rarely happen that way, but that mystique does somewhat find it's way into the share price. The second you run a credible strategic review, and find out a real number, the bubble bursts and all that mystic goes away(Where KEWL is at now). From there, the company either stays stuck in the mud, or needs to reinvent itself and find a way to get a different valuation.

[Spekulatius]

I agree with Gregmal that putting hard numbers on the asset value of these stocks seems to cause them to fall, as the irrational element of the value seems to disappear.

With a stock like KEWL, a 50% upside is not enough imo. The stock isn’t really paying you to hold it, corprete exparmse eatup the cash flow from its underlying propreties and often more. if it does get rerated in 5 years, you do Ok with the asset value increases with inflation that going to be ~60% upside in 5 years, you get a 10% return roughly, which is good. The downside risk is to hold something like this for 10 years with nothing to show for and is equally likely. The most likely scenario is that the value increases at the same rate than the underlying asset and the discount persists.

 

I own quite a few asset plays but I insist on all of them to have some cash flow. This doesn’t mean they are doing well, but at least you are getting an dividend and it means that corporate expenses are covered and there is something leftover to pay a dividend etc.

[Haasje]

I like it. I think lumber prices aren't very good which isn't helping. They've had some road problems impeding cash flow. Land prices are dependent on infrastructure and stuff. The main reason I like it a lot is that I don't see how this becomes permanently impaired.

 

There's the guy from the big short but also Paul D. Sonkin. Author of perfect pitch and portfolio manager of a couple of nano cap funds. Top of my head: Hummingbird value, Tarsier and now at Teton Advisors. Also teaches at Columbia (an investment course I think :) )

[Gregmal]

I don't disagree with the bold. The thing for me at least, is I already own a bunch of these "won't lose money" positions. The things is, eventually they need to make money. At the stage of the game KEWL is at(and same can be said for JOE and the like) the only way to make money is through aggressive share repurchases. This takes advantage of the discount arb. Then "down the line" when valuations are more favorable, you've already spring loaded your returns by wiping out large portions of the shares. Companies trading at these supposed valuations have no business paying dividends.

 

So essentially, summarizing the above, in order to make money here, you need to have stellar yet unconventional capital allocation take place to really make it worth your while. So in other words, you're making a bet on Cornwall Capital(or whoever makes the decisions).

[BG2008]

Nothing wrong with the idea. We just found stuff that are cheaper with more cashflow.  It was always hard for me to justify how little cashflow KEWL generated relative to its MC and EV.  There are stuff out there now that generates much better cashflow.

[DTEJD1997]

Hey all:

 

As a Michigan native, let me add one thing to this discussion.

 

In the late 90's & very early 2000's, the UP of Michigan was one of the most economically disadvantaged areas in the country.  Most of the jobs left DECADES ago.

 

You could buy a house in Houghton for like $30k.

 

It is a very nice area, lots of wildlife & wonderful scenery, but not much going on economically.  I don't think very much land is going to be developed...at least not at prices that bulls imagine.

[samwise]

Thanks everyone for the replies. Let me respond by theme rather than by poster.

 

1. "Your thesis is valid, but there are better values elsewhere ". Thanks and best of luck.

 

2. There is no true value here as shown by

A. "No cash flow." I agree. They need to produce the cash flow that the appraisals are based on. After all you can only capitalize NOI when it really exists. Otherwise you are selling a fixer-upper at a discount. Question remains, can it be fixed up. I'll return to this.

B. "The strategic review bids are more valid than an appraisal." True, maybe the private market has spoken. But there is Cornwall's narrative to consider as well: the bids were received and then it was discovered that there was 30% more timber. This may also be related to the point above on cash flow. It's not clear what the bid "netted" to shareholders, and what the netting was? Was it net of 20% taxes, severance etc. If they netted $80 (about the lowest in a 5 year chart before now), then the current price is below that and Cornwall should take their lumps and move on. Current buyers may still profit.

 

3. "The value will not be realized.SHLD, JOE, TPL". I guess you are saying it takes too long to sell the land. I agree that they can't sell plots of land to home builders at a sufficient pace. But that's the business JOE is in, not KEWL. KEWL sells either timber or timberlands. The few possible lots to build houses are a minor part of value. Unlike SHLD, KEWL is not burning the forest down to feed some ongoing business disaster. Unlike TPL, I expect the royalties to be a minor part of the story which is not in management's control. So the real question is: can KEWL sell enough timber or timberlands to realize value either as cash flow or capital gains? Since the timberland valuation depends on the NOI *cap rate, these questions are related through the NOI. Cap rates are also a risk in a rising rate environment, but note that these assets get priced at real rates, so inflation based rate rises should not matter much.

 

So in my view the biggest questions are

1. Are timberlands sold in really big blocks unlike homesites? Yes , the appraisal shows blocks bigger than KEWL being sold infrequently after the crises, and very frequently before the crisis (see page 15, table 2.1). KEWL had bids, and 110 investor groups were contacted (2017 annual report). Timberland is an institutional asset class, while land banks are not. They are classed along with property as real assets, which produce inflation adjusted income. So yes, timberlands are sold in institutional scale. Unlike JOE, you don't need to sell out acre by acre.

2. What NOI can the property produce? This is the big unknown. The appraisal makes some assumptions based on commonly expected tree growth rates, harvests and costs. It says the property is not special, has access roads etc, so there is no reason to adjustable variables up or down. If it's "not special " , it should produce the normal income, and be sold at a normal cap rate. Why doesn't it produce that income? Either the property is damaged goods, or it's under managed. I lean towards the under management given the family ownership, lack of a proper timber inventory and comparables. Besides the appraisal there are listed stocks like POPE, which produces $20 million EBITDA from 120k acres, while KEWL does $2 million from 180k acres. They are not the best comparable (different state), but they do show that timberlands can have real earnings. I assume the appraisal used closer, but private, comparables for their DCF.

 

Other things to worry about:

Supply and demand. This is a commodity. Timber is heavy and markets are local. The 2017 annual claimed that mills were over supplied. Hard to increase harvests if there are no mills to process, and if all other commodity producers have the same thought.

Cap rates may rise. The appraisal mentions 20% loss during the crises.

Motivation of new management. And their honesty. So far so good. They seem reasonable in interviews. I assume they don't want to keep it in the family and earn a salary.

 

Ultimately I own it on the same three points I had before. There is (probably) value, management incentives have changed for the better, price has also become better (perhaps for uneconomic reasons, if former family is selling).

[Foreign Tuffett]

Is anyone still following this? At first glance it look like Mai is moving things in the right direction (repurchasing shares at relatively low prices, doing some interesting deals, etc).

[ACooke]

Is anyone still following this? At first glance it look like Mai is moving things in the right direction (repurchasing shares at relatively low prices, doing some interesting deals, etc).

 

Not closely although i do hold a position and continue to believe it's trading at a material discount to the value of it's timberland.

I think it provides a reasonable inflation hedge but outside of that, don't see much in the way of a re-rating catalyst.

If shares are continually bought in at a material 'discount'/book, I'm happy sitting tight for the time being.

 

Have you got any further thoughts? Particularly on how the VULC liquidation may guide for a fair value of KEWL's assets?

[samwise]

Yes, right direction, easement sales to generate cash, increased harvesting. But no sale of large amounts of timberlands yet. I expect it to be a boring investment (watching trees grow), until he extracts value or doesn’t.

[Foreign Tuffett]

Is anyone still following this? At first glance it look like Mai is moving things in the right direction (repurchasing shares at relatively low prices, doing some interesting deals, etc).

 

Not closely although i do hold a position and continue to believe it's trading at a material discount to the value of it's timberland.

I think it provides a reasonable inflation hedge but outside of that, don't see much in the way of a re-rating catalyst.

If shares are continually bought in at a material 'discount'/book, I'm happy sitting tight for the time being.

 

Have you got any further thoughts? Particularly on how the VULC liquidation may guide for a fair value of KEWL's assets?

 

I was actually looking at this as a decent comp.

 

https://www.lymetimber.com/2019/09/16/affiliates-of-the-lyme-timber-company-lp-to-acquire-555000-acres-of-timberland-in-michigan/

 

My understanding is that VULC was able to get a premium for its timberland due to it being under-harvested (for lack of a better term), so I'm not sure that's a great comp