Land Grab. How I Own A Share Of More Than 4.1 Million Acres.
Land & Water. The only true inflation beneficiaries.
Welcome to the ROI club.
Here I share an insight which for me has been an epiphany. The realisation is simple, yet so profound that it has led me to heavily tilt my investment philosophy in its favour.
A superior business model is a superior investment.
Obvious?
Perhaps.
Well understood? Not a chance.
Are there other factors which can influence the equation short-medium term such as: price/value, multiple expansion etc? Naturally.
However in the fullness of time, the following tends to be true:
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”
-Charlie Munger.
Yes, I know, cigar-butt type investing still works very well for enterprising investors and I myself still practice it with ~20% of my capital allocated towards that end.
I understand the appeal of taking advantage of the irrational discrepancies in price-value offered by the market in unfavourable or cyclical sectors. This is basically what most ‘deep value’ or ‘contrarian’ investing involves.
My thought piece today revolves around the notion - what if you can buy the highest quality business models known to humans that are also currently ‘contrarian’ or at least relatively under-appreciated?
So what is a superior business asset?
Today’s example is land.
Land is the longest-lived business asset and (along with water) probably the only perpetuity business asset that’s inflation-benefitting over the fullness of time.
Contrary to popular belief, commodities are not.
Gold is inflation-robust, not anti-fragile to inflation.
Outside of the aforementioned, commodities themselves have negative real rates of return over the fullness of time and are not businesses in and of themselves.
Land and water are exceptional.
They are commodities, business assets and inflation beneficiaries all in one.
Land can be improved, sub divided and value added in many ways. Water too, and has a natural refresh rate with not storage cost in the case of sub-surface aquifers and both can form various royalty instruments generating a multitude of inflation-protected revenue streams.
Over the last 100 years raw English farmland generated a real return of 2% per annum.
There exist examples of higher value-added land compounding at 19% annually and during higher periods of inflation this assets does better compared to most assets which do worse in such times.
You would think that such an asset with the ability to serve progressively higher functions over time with no acquisition cost would be better appreciated.
Interestingly, aside from REITs and timberland companies which have far less attractive economics, there really aren’t that many publicly investible ‘pure’ land plays.
Here are some of the land companies I own (mineral royalty cos excluded) in one of my portfolios which you can invest in here.
• Texas Pacific Land Corporation (TPL): 880,000 acres
• LandBridge LLC (LB): 272,000 acres
• Viper Energy Partners (VNOM): 7,300 net royalty acres
• Cresud S.A.C.I.F. y A (CRESY): 2,500,000 acres
• Tejon Ranch Co. (TRC): 270,000 acres
• The St. Joe Company (JOE): 171,000 acres
Total aggregated acreage: 4,100,300 acres
Aggregate Market Cap: $51.21 billion
*Note* I could add in the acreage and mineral rights owned by the precious metals royalty and streamers + San Juan Trust but it would just get ridiculous. My Private and paywalled portfolios also include the likes of Prairiesky royalties, which alone holds 9.7 million royalty acres.
If the above were one, consolidated entity, you’d be buying a vast amount of land for the equivalent of $12,489 per acre.
Deep enough value?
Lennar, the USA’s largest home builder owns roughly 24,000 acres with a Market Cap of $44 Billion alone. True, that land is at a higher rung of the value-add ladder, but Lennar must indulge in the capex and opex to develop it and does not hold the land for good. It’s return on equity (ROE) is quite decent at 15%, yet, if my sources are correct, you’re paying $1,833,333.33 per acre for land that does not enjoy the capital-light compounding of royalty and streaming.
The following shows the ROE for my select land companies:
• Texas Pacific Land Corporation (TPL): 40.61%
• LandBridge LLC (LB): 35.03%
• Viper Energy Partners (VNOM): 25.83%
• Cresud S.A.C.I.F. y A (CRESY): -0.81%
• Tejon Ranch Co. (TRC): 0.78%
• The St. Joe Company (JOE): 9.67%
The average ROE here is 18.52% yet this is understated imho because there are some details that you don’t see purely in the numbers.
TPL, the quintessential land company, paid precisely $0 for their land. That’s right, it was literally given to it when it was founded as a trust to inherit the Texas Pacific Railway. It is also the only company on the list included in the SP500.
Contrarian enough?
CRESY’s latest shows negative ROE due to yearly fluctuations but it often puts up 30%+, additionally it owns 65% of the Argentine Co, IRSA. IRSA has been operating since 1889 and owns the best real commercial real estate in Argentina.
In this brilliant piece, the
details just how insanely cheap Argentina’s commercial real estate market is valued:
The current and rapid reforms in Argentina have led to a rapid rise in m2 prices for residential and provide a massive tail wind to CRESY.
Additionally, given the strong link between president Milei and Eduardo Elsztain -CRESY’s CEO, it’s not hard to imagine CRESY getting first pick of the best state-owned buildings in Buenos Aires as they are privatised.
If the above theoretical, consolidated company was a mining shitco or out of favour service provider with anaemic ROE, but was trading at a ‘discount to NAV’ and simply in an ‘out of favour’ sector ‘due to turn around soon’, the pundits on X would be losing their minds.
Instead, I find myself exactly where I’m most at home, in the silence and solitude that comes with foresight and thinking differently.
In closing, ~$12,000 per acre with a variety of income streams (mostly free of capex and opex) plus a ton of future call options certainly doesn’t seem an unreasonable price to pay in order to acquire a share in a land package greater in size than Hawaii.
All the best.
Benjamin
The ROI Club
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