Saturday, January 08, 2005

Real Estate part 2
The Pink Sheets:
Searching For Value In No-Man’s Land
JG Boswell Company (Ticker:BWEL)

Ever considered buying real estate exposure on the pink sheets? Me either. I never really considered buying anything on the pink sheets. That’s as “over the counter” as over the counter gets. A virtual dumping ground for has-been companies, right? Not necessarily. My second investment in the wonderful world of publicly traded real estate was in a tiny pink sheet company that I’d never heard of (this will be a recurring theme as we explore my real estate adventures), JG Boswell Co (Ticker: BWEL). Boswell, headquartered in Pasadena, CA, is primarily a cotton grower, with other agricultural operations, but we’ll get into that later.

I found out about this company at the New Orleans Investment Conference , in November, 2002. I was attending the conference as a presenter, representing the personal finance magazine I wrote and edited for at the time. (I f you have never attended this annual conference, I highly recommend it.) I attended several of the breakout sessions at the conference, and one of the best was given by Rick Rule, of Global Resource Investments.

Rule’s presentation highlighted several, unheard of, pink sheet companies, sitting on undervalued assets. These companies had few shareholders, traded very infrequently, and all traded at high ($300 and above) stock prices. One of Rule’s points was that you can find tremendous value in essentially semi-private pink sheet companies. You just have to do a lot of digging, because most are not required file financial statements with the SEC (having so few shareholders), so information is hard to find. Furthermore, trading is extremely infrequent.

Among the companies Rule discussed: Crowley Maritime (CWLM, last traded at $1160), a marine transportation company (they do file with the SEC), Laaco Ltd, (LAACZ, $534.25) owner of the Los Angeles Athletic Club, California Yacht club, self storage facilities and other real estate, Farmer’s Merchant Bank of Long Beach CA (FMBL, $5600) a commercial bank, and, of course Boswell (BWEL, $600).

I was intrigued most by the JG Boswell story. Here was a semi-private company, sitting on thousands of acres of California land, some of which had water sitting under it. Ah, land and water. It does not get any better than that.

JG Boswell was interesting, but I started my research efforts with one hand tied behind my back. There simply was little information available. What little I could find was numerous mentions in newspapers. Then I stumbled upon Standard Investment Chartered Inc., a small investment house that specializes in these situations: semi-private, but asset rich pink sheet companies. There were several research reports on the site; the one for Boswell was a few years old, but with that, and a more recent update, I had at least something to add to Rick Rule’s analysis.

What I found was a profitable, albeit mysterious little company. The company founder JG Boswell, being somewhat of a legend. (In fact, there is now a biography available about him: The King of California: J. G. Boswell and the Making of a Secret American Empire by Mark Arax, Rick Wartzman, you can find it on Amazon.) In any event, based on the mosaic of information I was able to generate, I purchased a handful of shares in early 2003. The stock was trading at $300 per share at the time, and based on the extremely low trading volume (71 shares per day in 2004, for example), I was lucky to get my hands on any.

A few months later, I tried to buy more, placing a limit order, but there were no sellers. In a situation like this you never want to place a market order because you are liable to get hammered on price. The stock traded sideways for many months, and I collected the nice 3 plus percent dividend.

The stock started to move in February 2004, when the company initiated a tender offer to purchase up to 150,000 shares at $325 per share. I was initially tempted by the offer, afterall, I had held the shares a year, and the price had barely moved. I was getting impatient, as a beginner in the world of thinly traded pink sheet companies.

The tender offer documentation and financial statements I received in the mail changed my mind. This was my first look at somewhat recent financial statements, and the numbers I saw were impressive.

For instance, in 2003, the company had net revenue of $395 million, and net income of $35 million, or $36.11 per diluted share. Based on the tender offer price, that was a P/E of just 9, and a very healthy net profit margin of 8.9 percent. Book Value per share was $343.83 based on stockholders equity of $321 million, and 933,855 shares outstanding. That translated to a price to book ratio of .94. I know, book values can be misleading, based on the quality (or lack thereof) of the underlying assets. But that’s where it got better.

Total land holdings for the company were approximately 172,000 acres, 142,000 in California, and 30,000 in Australia. Current use of the land along with acreage figures, was as follows:

Use Acres
Pima Cotton 79856
Tomatoes 17938
Alfalfa 20109
Wheat 12101
Garbanzo Beans 3397
Other Crops 3703
Fallow 5000
Eastlake real estate ?
Cotton 30000
Office park 52

(As for water, company documents mentioned a supply of groundwater under owned land, used to water the crops. But there were no specifics about the supply.)

As I mentioned in my last piece, one metric I like to calculate for companies with land holdings is Enterprise Value Per Acre. In Boswell’s case, Enterprise value at the time was calculated as follows: (in millions)

Market Cap $303.5
Total Debt $170.8
Min Int. .6

EV: $472.3 million
Acres: 172 thousand

EV/Acre: $2745.9

The above figures were as of the tender offer. It is difficult to calculate the current EV per acre, because much of the data is not available. However, based on the doubling of share price, a perceived reduction in shares because of the tender offer and assuming levels of debt and cash are similar:

Current EV/Acre: Estimate: $4000-5000

Boswell is a nice story. Good, profitable operating business perhaps undervalued land, and a growing dividend ($3.25 per share quarterly, up from $3 last year and $2.75 the year before). The stock most recently traded at $600 per share. The downside to a story like this is the lack of information. The company is not required to file with the SEC, so even for shareholders, financial statements are scarce. The only ones I’ve seen since becoming a shareholder were those pertaining to the tender offer. Still, I’ve doubled my money, and will continue to hang on to these shares. It’s all about the land for me….

No comments: