Friday, 21 January 2005

Real Estate: Part 3

PICO Holdings:

Mini-Berkshire Hathaway?

What do you get when you cross water, land, medical liability insurance, property and casualty insurance, software, and various other investments? A business with no identity and a lack of focus? No, you get PICO Holdings (NASDAQ, ticker: PICO) a small, La Jolla, California based holding company, which just happens to operate in all the aforementioned businesses. It also bears a resemblance, however small, to Berkshire Hathaway.

PICO caught my attention 2 years ago, when my research indicated that the company was the largest private landholder in the state of Nevada, with some 1.2 million acres at the time. Now, by this time, I’d already become a land baron in Florida with my holdings in St. Joe’s Corp and in California, with my handful of JG Boswell shares, and was looking to expand my real estate "empire" (See archives for those reports). PICO’s market cap at the time was around $150 million, and that in itself was compelling, considering that market cap divided by acres owned was $125! That calculation placed all of the value on the land, and excluded any other assets, including water rights, insurance segments, cash and securities. Mind you, that is an extremely unsophisticated calculation, and just a starting point, but $125 per acre seemed cheap for land. (The EV/acre calculation we’ve used in past real estate articles came out to about $35 per acre, but this is not meaningful in this case, more on that later). Keep in mind, though, that this is Nevada land, much of it former railroad land. I t is not the same quality as what St. Joes holds, nor what JG Boswell holds. Its uses are fewer, it is not located near a coast, and is located in some relatively unpopulated areas. Nonetheless, it seemed appropriate to further research this company, (and I ultimately purchased shares in July, 2003, at about $13.00 per share.)

What I found was a somewhat odd assortment of businesses. Well, for me, it was the insurance businesses that were odd, but that is mainly because I don’t have a great understanding of how that industry operates. Furthermore, land and water seemed to be a good fit, but insurance?

That question answered itself. In March of 2003, PICO sold its last “active” insurance company, Sequoia. Its other insurance companies, Physicians Insurance, and Citation Insurance are in “run-off”. Insurance companies in “run-off” no longer write new policies, but operate to satisfy claims on existing policies. For instance, in Physicians case, the company reports that claims on current policies can be reported until 2017.

To satisfy claims for each of the companies in “run-off”, PICO has investment assets, which are in place to cover claims. PICO benefits from any excess income generated by these investments over and above claims. (This is an over-simplification, I know.) But ultimately, PICO should be out of the insurance business, once time runs out on possible claims. In Fiscal year 2003, the insurance operations generated $3.2 million, about 10 percent of total revenue

Other Businesses: Summary (See the company’s 10K for more detail)

Vidler Water is the largest private holder of water rights in Arizona and Nevada. For fiscal year 2003, it represented 51 percent ($16.8 million) of Pico’s revenue. Among Vidler’s assets is 49,500 acre-feet of ground water in the Harquahala valley, near Phoenix. Much of Vidler’s revenue ($11.4 million in 2003) is generated from the sale of water rights and land.

Nevada Land Resource Company is the largest private landholder in Nevada, which currently owns about 1.1 million acres. In 2003, this segment generated $5.9 million, or 18 percent of revenue. At the company’s current market cap of $263 million, that’s about $239 per acre (market cap/acres). As mentioned above, the EV/acre calculation is not meaningful in this case, because much of the company’s marketable securities, which are backed out in order to calculate EV, are tied to the insurance operations in run-off. The company is actively selling land, but as was previously mentioned, this land is not as valuable as some held by other companies we’ve previously discussed. For instance, in 2003, PICO sold 75,131 acres for $4.1 million. That’s equivalent to $54.58 per acre.

The Business Acquisitions and Financing segment generated $5.6 million, or 17 percent of revenue in 2003. This segment holds a portfolio of equity securities, mainly European companies, but does not disclose all of the actual holdings. The company does disclose that the largest holding is its 23 % ownership of a Swiss railway company, Jungfraubahn Holding AG, followed by Raetia Energy AG.

Hyperfeed Technologies, develops and provides software, ticker plant technologies, and managed services to the financial markets industry. Hyperfeed, 51% owned by PICO, is a publicly traded company (ticker:HYPD).

While PICO has not had a profitable quarter since June, 2003, that’s not the story here. The story is the land, water, cash and marketable securities. Cash and marketable securities totaled $182 million as of the last reported quarter (Sept, 2004). The company has no long term debt, and at the current price of $20.95, has a market cap of $259 million.

Finally, you are probably wondering how your editor has the audacity to compare this tiny company to Berkshire Hathaway. Its simply that the management team has assembled an interesting assortment of businesses and valuable assets, much like Warren Buffet has, and has seemingly done so at low cost. The managers claim to buy undervalued businesses based on Graham and Dodd principles, and it appears that this philosophy has paid off. It certainly has for your editor.

A company like PICO is somewhat difficult to evaluate. You can’t base valuation on earnings, you’ve got to dig deeper to try and value the individual business units, or assets. The company offers an excellent company profile on their website, which does a great job of describing the businesses, and company philosophy. There are no analysts currently covering this company, and you aren’t likely to find much information outside of SEC filings. But that’s where the fun begins.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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