I recently came across a post at Journal of Value about Griffin Land & Nurseries, Inc (GRIF) that alleged GRIF's real estate had more value than GRIF's enterprise value. This is quite a claim considering the company carries its real estate at $116.3 million and has an EV of $186 million, so I thought I would look into it further.
First, what does GRIF do? It has two lines of business: a real estate division which owns and operates commercial and industrial properties as well as develops residential subdivisions in Connecticut and Massachusetts, and a landscape nursery business that supplies independent garden centers and wholesalers. Interestingly, the company also owns a 4% interest in a magazine publisher in the UK.
The company has only a passing relationship with profitability and its free cash flow is weak. Furthermore, the company trades at a premium to book value and appears to utilize a fairly high level of debt for its performance (D/E of 0.6). I find none of this attractive, and would normally not spend a lot of time looking into this company. But then I came across the Journal of Value article, which showed the following data, taken from the company's recent 10-K. First, the raw land holdings, which is land to be developed for residential use:
Griffin Land & Nurseries - Land Holdings, Source: 10-K
Second, we have land used for the nursery operations:
Griffin Land & Nurseries - Nursery Real Estate, Source: 10-K
Finally, we have the company's developed properties, which are for office and industrial uses:
Griffin Land & Nurseries - Developed Properties, Source: 10-K
The first thing that should jump out is that this is a lot of land. It amounts to 3,043 acres of residential development land, 1,850 acres of nurseries, and 2,540,000 sq. ft. of developed commercial/industrial space. The company carries all of this on its books at $116.3 million.
How can we assess the market value of this land? One thing we can do is look at the company's recent transactions to get a range of values. The caveat here is that real estate assets are unique and comparable transactions may overlook differences that can have a material impact on the property values. Here we will just try to get a (very) rough idea of the value of this property. If we like what we see, then we can investigate further by looking at tax assessments, gathering more datapoints on the individual real estate markets, etc.
Let's start with the undeveloped land. In fiscal 2011, the company sold one 165 acre parcel for $3 million, or $18,200 per acre and two other parcels which amounted to 67 acres (mainly wetlands) for $1 million, or $14,900 per acre. Using the midpoint of $16,550 per acre, we get a (very) rough value of $50.4 million pre-tax.
Turning to the nursery business, we see that the company shut down its Quincy, Florida nursery in 2009 and began leasing the space to another grower. In 2010 and 2011, the company received $482,000 and $474,000, respectively, as rent for this land. This works out to a whopping $450 per acre in rent, which is far higher than what would normally be paid for agricultural land. Rather than assuming this high rent could be applied across the rest of its nurseries, let's look for another data source. This USDA report provides some aggregate and regional data for United States farmland values, and we see that the highest farm real estate values are in the Northeast (GRIF's property is split between Connecticut and Florida). If we use the USDA's high value per acre for the Connecticut land and US average value for the Florida land, we get a value of $6.2 million pre-tax, or $3,342 per acre. I am much more comfortable with this figure.
The remaining real estate is the industrial/commercial property. Again, let's look at the company's recent transactions. Subsequent to the most recent financial statements, the company sold its industrial building at 61 Chapel Road in Manchester, CT. This property is 307,700 sq. ft. and was sold for $16 million or $52 per square foot. This is a reasonable price for industrial/commercial property, so let's go with it. After the sale, the company still has 2,232,300 sq. ft. of developed properties. If we apply the same sale price per square foot, this would amount to $116.1 million in value, on a pre-tax basis. This is approximately the same as the $116.3 million that the company carries all of its real estate assets (including the raw land and nursery assets).
Adding all of this up, we get $172.7 million in real estate value, pre-tax. These will be capital gains which receive preferential tax treatment, and the company carries these properties at $116.3 million net of depreciation. As long-term holdings, we'll use 15% as the rate, which gives us after-tax value of $164.24 million. This works out to an after-tax gain of $48 million not recognized on the balance sheet.
Though this unrealized value is not enough to validate the claim that GRIF's real estate value exceeds its EV, it is indeed quite a substantial "hidden" asset. Despite this, there may be more value in keeping some of the business operating. For example, while the company's nursery division is highly unprofitable, losing 18 cents for every dollar of revenue (which is understated, since I have not included the associated corporate office expenses), the property segment is doing well considering the real estate market, generating $6.5 million in operating income last year (before its share of corporate expense). Furthermore, selling the non-nursery properties now would be a terrible idea, as vacancy rates are at their cyclical peaks (though improving) and residential real estate is suffering from oversupply and low demand. If the company can keep its real estate development segment profitable while waiting for the real estate market to pick up, and divest of the nursery business, this could pay off well for investors.
One more thing to note: Mario Gabelli's funds own 30.8% of the company.
What do you think of GRIF?
Author Disclosure: None