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Alico Unlocks The Value Of Its Ranch Land Fueling Impressive Dividend Growth

Oct. 05, 2021 7:00 AM ETAlico, Inc. (ALCO)33 Comments


  • Alico is the top grower for Tropicana.
  • Recent plantings should lead to nice market share growth.
  • It trades at just over half the value of its land.
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Orange tree plantation

paulobaqueta/iStock via Getty Images

Alico (NASDAQ:ALCO) is an undervalued citrus grower operating in Florida. At current pricing it has a dividend yield of about 5.5% and a normalized price to earnings ratio of about 17x. This multiple seems opportunistically cheap given the multiple levers of growth over the coming years

  • Recent plantings coming online
  • Sustaining higher level of orange juice pricing
  • Recycling ranch land into more accretive uses of capital
  • 3rd party asset management business

Land as an asset class tends to trade at significantly higher multiples due to its low maintenance costs and inflation hedging capabilities. There are not many ways to pick up land these days at this kind of yield so let us dig in.

Land value

ALCO has 49K acres of citrus land and 48K acres of ranch land as per the 3/31 10-Q. The company values these acres as follows.

Table Description automatically generated

Source: ALCO

If these valuations are correct, ALCO stock is severely undervalued with a market cap of $263 million. With 7.526 million shares outstanding, the implied price per share is $49.80-$69.20. Even the low end of that range provides quite a bit of upside from today’s $35 price.

Companies of course, present themselves in the best light possible, so I don’t want to just take these numbers at face value. Here are some recent transactions:

In April of 2021, Alico sold 5734 acres of ranch land to the state of Florida for $14.4 million.

Graphical user interface, text, application, email Description automatically generated

Source: SNL Financial

That is a price of $2511 per acre which supports the $2000 to $3000 estimate. Alico’s earnings release reveals a few more sales were made this year:

“In the nine months ended June 30, 2021, the Company recorded gain on sales of real estate, property and equipment and assets held for sale of approximately $33.6 million relating primarily to the sale of approximately 18,500 acres from the Alico Ranch to several third parties”

Those too are in a similar range.

As for the value of citrus land, Alico is trying to increase its acreage so it does not have sales to reference. Instead, we can turn to an industry observer. Citrus Industry News reports:

The citrus report started with a look at Polk, DeSoto, Hardee, Hillsborough, Okeechobee, Manatee, Highlands, Lake, Collier and Hendry counties. Grove sale sizes reported for those counties ranged from 5 to 1,500 net tree acres. The average size of grove sales was 69 net tree acres with a midpoint of 30 acres. Approximately 5,731 gross acres and 4,666 net tree acres were included in 68 selected 2019 sales totaling $48 million. The net tree citrus acres had a price range of $3,532 to $15,464 per acre. The average for these sales was $8,442 per gross acre and $10,369 per net tree acre, with $8,000 per net tree acre as the midpoint.

So the aggregated sales data shows a midpoint per acre of $8000 which is the low end of Alico’s proposed range.

There are 2 aspects that make the $8000-$10000 plausible to me.

  1. The above data is from 2019, so there are a couple years of appreciation that could be added
  2. Public companies tend to own assets of above median quality and Alico is no exception with industry leading margins

Sales comps seem to confirm this land valuation indicating ALCO is trading at a substantial discount to the value of its land assets. Discounted valuation alone is of course not enough to justify investment, so what are the pathways for investors to realize the land value?

Well, the most obvious means would be a sale of the company, but I don’t see that as likely. The approach I think Alico is more likely to take is to use the valuable assets to build a growing stream of cashflows.

Growth drivers

The aforementioned ranchland sales are at extremely low cap rates as the ranch land generates minimal revenue. Thus, their sale generates significant amounts of dry powder with minimal cost to earnings. As the proceeds get reinvested through other channels the net effect on earnings should be strongly positive.

The first and biggest pathway of reinvestment is citrus plantings.

Citrus plantings

Since 2018, Alico has ramped up its plantings on both existing citrus land and newly acquired citrus land.

Timeline Description automatically generated with medium confidence

Source: Alico

Newly planted trees take a few years to become fruit bearing so the 2018 and 2019 plantings are the ones that are going to hit the revenue stream in the near term.

These plantings are going to increase ALCO’s citrus production in an environment where U.S. production is generally declining with overall output down 12% this year from the 2019-2020 season according to the USDA National Agricultural Statistics Service.

Some of the decline is just a lower yielding crop year but a decent chunk of it is permanently lost supply with Florida citrus acreage being converted to developments.

Citrus Industry reports:

Florida’s citrus acreage declined another 3% in 2021, to 407,348 acres, the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS) reported Sept. 8. That’s the lowest level since the NASS started keeping track of the acreage in 1966.

With ALCO increasing production and overall production declining there are likely to be significant market share gains.

Prices for orange juice have been quite strong with the pandemic causing a significant increase in demand for not-from-concentrate orange juice. With demand high and supply low, prices have been rather high as of late.

Graphical user interface, chart Description automatically generated

Source: Trading Economics

Over time, I would anticipate demand dropping back toward pre-pandemic levels as people return to restaurants rather than eating from home, but so far, the post-pandemic demand has been stickier than expected. Even if the demand drops back to normal it is possible prices will remain at the higher level because of the aforementioned supply decreases.

Producers, including Alico, are battling with a pervasive citrus tree disease called Huanglongbing. I am not a botanist, so please consult scientific journals for a better explanation, but essentially this inhibits a tree’s ability to absorb nutrients causing trees to degrade and the fruits to stay green rather than the orange color we are used to.

As of today there is no cure, but there are treatments in which frequent and expensive tree nourishment can keep the trees healthy enough to bear high quality food grade fruit.

This disease is ubiquitous, affecting just about every citrus tree in Florida as well as hitting other major citrus regions like Brazil. It is also not a new thing, having majorly affected the industry for over a decade.

It is manageable but increases operating costs. Some industry participants have gone out of business which is part of the reason for the supply declines. Others adapted, tightening up their cost structures to maintain margins.

Alico falls into that second category with its cost reduction strategy called Alico 2.0.

Chart, treemap chart Description automatically generated

Source: ALCO

With costs in check, it has been able to keep decent margins in the low 20s with some volatility from weather and hurricanes.

Chart, bar chart Description automatically generated

Source: SNL Financial

The new plantings should increase market share within the industry and assuming flat margins will significantly grow earnings per share.

The other main uses of the capital freed up from recent and future ranch land sales are share buybacks and debt repayment. The accretion math on this is quite simple. Ranch land is producing so little revenue presently that the sales are at sub 2% cap rates. Buybacks at current market pricing would be at cap rates of about 5.8%. Debt repayments at around a 4% cost of debt are also accretive.

ALCO intends to lower debt to around $88 million and has been on that path for a few years.

Chart, bar chart Description automatically generated

Source: SNL Financial

I would anticipate a larger portion of sales to go toward debt paydown and citrus plantings/acquisitions and a fairly small chunk to go to buybacks. As each of these uses of capital is accretive, the net result would be higher earnings per share and less debt.

S&P Capital IQ reports consensus normalized earnings estimates for Alico rising to $2.07 in 2023.

Graphical user interface, text, application Description automatically generated

Source: SNL Financial

This may look like a drop given the GAAP earnings estimate of $4.28 in 2021, but note that most of that is from the gain on sale of sold ranch land which is on the books at well below fair value. Netting out the 1 time items, it is significant growth.

Because of the volatility inherent in crop cycles and commodity pricing it is unlikely earnings will come in at exactly the number analysts have put forward, but I think that is a fairly good midpoint. This $2.07 covers the massively raised dividend at $0.50 quarterly.

Table Description automatically generated

Source: SNL Financial

Summary of buy thesis

Alico is trading at just over half the value of its land. This land is highly productive and even if not liquidated it is producing outsized earnings for shareholders. A 5.5% dividend yield and 17x earnings multiple strikes me as inappropriately cheap for a land play with growing earnings. It is a great income vehicle with the potential for significant capital appreciation as well.

All that said, there are some risks of which investors should be aware.

Risks to Alico

The citrus tree disease is a very well known risk in the industry. It is unknown if or when a cure will be found so it will likely continue to have adverse impacts on costs and yields. While Alico has adapted to this environment and has stayed profitable through it there is potential for it to become worse via affecting competitors differently.

For example, if Florida continues to struggle while other orange growing regions are able to beat the disease it might put Florida growers at a competitive disadvantage.

More specific to Alico is the risk of its revenue concentration. Roughly 87% of Alico’s revenues come from Tropicana. This is largely a good thing as Tropicana is a healthy counterparty, but it has the potential to create lumpiness. Rather than a small percent of contracts coming up for renewal each year, the majority of Alico’s contract revenue is going to be up for renewal in the same year.

At this point it looks like it will be a clean renewal with maybe a slight bump up in pricing to account for the now higher market rate, but it could depend on how the industry conditions look as it comes due.

Alico of course has the option to sign with other counterparties and will probably go to whomever offers the best price/pound, it could just be lumpy when so much is rolling over all at once.

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This article was written by

Dane Bowler profile picture

2nd Market Capital Advisory specializes in the analysis and trading of real estate securities. Through a selective process and consideration of market dynamics, we aim to construct portfolios for rising streams of dividend income and capital appreciation.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ALCO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (33)

Thank you for the write up. Technicals look to be breaking out at this point from a multi year consolidation in the 30's with major volume coming on the heels of the dividend raise. So my guess is a decent % of float probably has been reduced.

What I see from a market standpoint is a renewed focus on cash flows and real assets. Alico has land in one of the hottest markets in the USA which could be sold off for substantial cash right now compared to their market cap. If they continue to sell off land and add to their dividend or share buybacks I think investors will continue to have a decent margin of safety. If inflation keeps pushing things higher, what does that do to their replacement costs of the citrus and value of their ranch holdings...Up is my guess.
i see in Portugal that there is very little money made in citrus . They change land to advocado's and other fruits ( rasberries, blue berries, peaches )
@Dane Bowler and all - I took a 1/2 position in Alico enthusiastically - it looked so solid on multiple fronts. But then I looked at the Dividend history, and the current yield of ~5.7% is a recent jump with just 2 quarters of history at that new level of payment. It seems timed as per the sale of the land - which is not a sustainable model. Is the dividend dependent on land sales continuing smoothly?
Dane Bowler profile picture
@LearnFirst Recurring earnings are expected to cover the dividend based on consensus estimates.
@Dane Bowler Thanks for the insight!
kendodo profile picture
I found this stock in my own research but did a double take on the land value backed up by sales. Came to SA to see if there was any commentary. Glad my eyes weren't deceiving me! If they go through on selling the ranch land, they could buy most of the company back!
@Dane Bowler Thanks for another good, informative article. But I'm struggling some with this after giving it only a cursory look. Would appreciate any further insight.

1st, what do you see as the catalyst for cap appreciation? I get theses of selling ranch land & channeling cash into buyback, debt drawdown, & new groves. But how do those prompt unlocking land value of groves? Dividend was 9 cents less than a year ago & without doing math it looked as if cash flow was negative all around last quarter in absence of land sale. Btw, land sales...one already had a conservation easement on it & company had received some cash (~$1800/acre) at time of entering that agreement. Not sure how wide spread that is, but would seem to affect theses of undervalued land? Another (small) sale was to an employee, but doesn't sound as if there is a hot market for selling this land right now.

I respect your opinion & so was surprised you didn't feel a sale of the company likely & would be interested in hearing more. That might explain why they are selling assets & increasing dividend -- that is, whittling it down. The insider holdings/transactions would require more investigation. Over 45% owned by insider...& in last 6 months they've been net sellers. Some of this might be explained by seasonality (cash flow, insider selling of excess shares perhaps previously awarded as compensation, etc)??
Dane Bowler profile picture
@mcgreg99 Most of the selling is coming form Arlon Valencia Holdings which has been a long term holder. There has been no announcement as to why they are selling.
What you are referring to is called Citrus Greening. I have first hand experience with it. I have 4 trees in my back yard, 2 are infected and 2 are not. It is a progressive disease that effects the roots, caused by bacteria from fruit flys. I also was a partner in a grove. It is the real deal. Good news is there are now some new rootstock that is more tolerant of the disease, but not completely resistant. In the old days, groves would last 50 years or more. Now, more like 20-30. They have made strides on the rootstock, but no resistant rootstock yet. With that said, tolerant rootstock will make money for the grower, and there is a huge demand for citrus, with a dwindling supply. I live in Florida and I sell to the retail stores that sell fresh oranges, so I have first hand experience. You can still get some fruit from trees that infected, but the yield goes down every year. Here is a link to a blog from the University of Florida, which has other links of interest.

Dane Bowler profile picture
@KevinF2848 Good info. Thanks for sharing
Capt. Spaulding profile picture
@KevinF2848 Thank you for the first-hand information and the link. Much appreciated.
Mr. Polymath profile picture
I owned CTO based on the same analysis from the late 80s, when FL land prices were appreciating and produce was also appreciating. After 20 years, I sold it despite its balance sheet getting fatter and fatter, but the stock price lagged. Despite both theses continuing through present day, its stock price has continued to lag the major indices.
Good article, accurate - but might not yield the desired results, because unlocking the value might not materialized for decades, if ever.
Florida real estate can be tricky. Danced with St. Joe Company for 30+years. Sold my Alico when PepsiCo got rid of Tropicana. Not up for another 30 years.
What about ownership concentration? Many times with land holding companies there is substantial ownership concentration by the CEO and management tends to operate for the benefit of the CEO instead of the remaining shareholders. I am thinking of MLP, SVIN, and the old Castle & Cooke as examples.
Dane Bowler profile picture
@PreCambrian While there is high insider ownership, this CEO has only been in the position for about 4 years and has only a moderate position. So far the decisions made seem quite shareholder friendly such as the jacked up dividend.
NL Steve profile picture
@Dane Bowler I'm trying to understand how it was prudent to increase the dividend more than 4 fold in a year, to way beyond current earnings. Thoughts on that?
Dane Bowler profile picture
@NL Steve Perhaps it was a bit aggressive to raise that much, but I think their plan is to quickly grow into them. Stabilized earnings for 2023 are expected to be $2.07 which would cover the dividend. It is mostly a matter of new tree plantings maturing into fruit bearing years, so the growth is largely already in place.
Dane, great article. Thinking that citrus disease may be a real concern. Please expand upon.
Dane Bowler profile picture
@Turkey Trot All I know is from what I looked up online as I have no background in botany. It seems to be affecting every tree in Florida and has been for over a decade.

They are able to operate through it, it just takes a higher amount of expense to care for the trees. So far there are somewhat effective treatments but no cure. Scientists are working on a cure, but they have been for a long time and so far no real solution.
@Dane Bowler Thank you!
@Dane Bowler That sounds like an environment that puts larger, more sophisticated operators (like Alico) at an advantage. Not only that, if a cure ever is found it should be a dynamite catalyst for further appreciation in citrus cropland.
farmed out profile picture
I bought into ALCO a few days ago. The bullish thesis the author presents here seems solid to me.
GrowWealth30 profile picture
Thanks for the article.
WallStPirate profile picture
I was looking for some non real estate reits for diversification for my mother in law This could fit the bill. Any thoughts about how inflation could impact this.

Dane Bowler profile picture

Thanks for the question. Just to be clear, this is not a REIT but the assets are REITable which means REIT conversion is a possibility down the road.

As for inflation, most land plays tend to do very well in an inflationary environment. Historically, land has appreciated at a rate faster than inflation. Who knows what will happen in the future, but my guess is this would handle inflation better than most.
WallStPirate profile picture
@Dane Bowler The land should go up. I hope the prices of citrus rise to as I am sure their expenses will rise and that divy is very nice.

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