19th Century Holdover With Real Growth Potential
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Investors with an interest in the real estate market might wish to take a break from traditional residential and commercial REITs to focus on an unusual and possibly unique player in the space: Texas Pacific Land Trust (NYSE: TPL). As a real estate management firm that has been charged with managing and eventually winding down the real estate assets of the long-bankrupt Texas Pacific Railway, this Dallas-based company is a holdover from the Wild West.
Unlike many REITs, land trusts and real estate management firms, Texas Pacific does not pay a large dividend or look for new properties to accrue. Instead, it derives income from sales of its existing tracts as well as gas royalty agreements that it maintains with various drilling and exploration firms that work on its properties. Investors who wish to gain access to an energy-rich slice of North America's rural real estate market would do well to examine this unorthodox but potentially lucrative outfit in greater detail.
Texas Pacific Land Trust: How Does It Compare to Similar Names?
Due to its unusual structure and business model, Texas Pacific Land Trust does not have many direct competitors. However, it is certainly possible to compare it to any number of REITs and real estate management firms that hold commercial and residential assets in the United States. This comparison will examine two well-known REITs: Boston Properties Group (NYSE: BXP) and Simon Property Group (NYSE: SPG).
Texas Pacific Land Trust has a market capitalization of about $725 million. This compares to a valuation of about $16.7 billion for Boston and a market cap of $52 billion for Simon. Of course, it is crucial to remember that Texas does not own the sorts of high-value commercial developments in which its two competitors specialize. Nevertheless, the company is quite profitable: In 2012, it earned over $17 million on just $29 million in revenue. This equated to a final profit margin of about 60 percent. By comparison, Boston earned $240 million on about $2 billion in revenues to produce a margin of just under 15 percent. Simon raked in $1.1 billion on revenues of $5 billion for a margin of just over 20 percent.
Unlike its competitors, Texas has no long-term debt. Simon's debt load of $22.6 billion dwarfs its cash hoard by a factor of 25, and Boston's nearly $9 billion debt tranche exceeds its reserves by a factor of 10. Although Texas's price-to-book ratio of over 45 is far higher than Boston's 3.3 and Simon's 8.9, this eye-popping figure does not factor in asset depreciation and amortization over time. Texas's "true" book value is probably several times higher than this figure implies.
History and Primary Functions
Texas Pacific Land Trust holds nearly a million acres of land in 18 West Texas counties. Although it once held nearly 5 million acres of land across a broad swathe of Texas, including in some densely populated metropolitan areas, it has sold off the bulk of these holdings over the past 13 decades. The company continues to manage its land and engage in passive sales as opportunities arise. It also earns royalty income from oil and gas leases on about half of its total acreage. While its holdings are quite energy-rich, it is important to note that they are not expected to be fully developed in the near future.
Asset Values and Endgame
Although Texas Pacific is not primarily focused on energy exploration and development, royalties do provide a major slice of its revenue. Much of its land sits near the heart of the Permian Basin, and companies like Devon Energy (DVN) and Occidental Petroleum (OXY) have major plays on it. If prices for oil and natural gas increase substantially, Texas Pacific's royalty revenues will grow as well.
This will enable it to accelerate its ongoing program of stock buybacks with the ultimate goal of buying all of its outstanding shares. It is unclear whether the company will complete its ongoing buyback program before selling off all of its holdings. In the recent past, the company has bought back 2 to 4% of its outstanding shares per year. Since its land sale program is wholly passive, this aspect of its business model has been more erratic. However, the benefit of its ongoing buyback program should be clear. Rather than issue a large dividend, Texas Pacific has chosen to return capital to its shareholders via an appreciating stock price.
Long-Term Outlook and Possible Plays
It is important to note that Texas Pacific has issued energy leases for just about half of its total holdings. Moreover, the vast majority of the land to which it owns surface rights is virtually useless desert and semi-desert. Although the company does permit grazing on most of its land, its grazing fees and short-term financing agreements with local ranchers collectively account for just 10 percent of its income. While long-term developments like a major spaceport or multiple wind farm developments could boost the value of some of its land, investors should be cautious about assuming that rising residential real estate values will benefit Texas Pacific. West Texas is one of the least densely populated places in the continental United States, and it is likely to stay that way for the foreseeable future.
In sum, Texas Pacific provides long-term investors with an unusual opportunity to profit from a perpetual stock-buyback program, ongoing energy royalties and stable ranching activities. Although the company's stock price has risen sharply in recent months, many market-watchers believe that it has not yet reached its fair value. Over the coming decade, Texas Pacific could prove to be an integral part of a balanced portfolio.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!