Description

Introduction: Alico Inc. (“Alico”, “ALCO” or the “Company”) was previously written up in 2020 by natty813.  That write-up provides a more complete background and history of the company, which I encourage readers to reference for a more thorough overview.  Following natty813’s writeup, Alico shares initially performed well.  Alico’s citrus farming operations were quite profitable, and the company sold over $110 million in non-core ranch land.  These cash flows were utilized to reinvest in Alico’s citrus operations, repay nearly $50 million in debt, and increase the Company’s quarterly dividend from $0.18/share to $0.50/share.  Alico’s shares reached a multi-year high of over $42/share in May 2022.  Since then, the Company’s share price has fallen sharply, due largely to the damage inflicted on Alico and the Florida citrus industry by Hurricane Ian.  We have followed Alico for nearly a decade and in early 2020, were able to meet with company management and tour several of the company’s orange groves.  While we generally found the company’s valuation to be attractive, we also recognized that the economics of citrus farming could fluctuate dramatically from year-to-year due to extreme weather events.  We built a meaningful position after shares collapsed following the landfall of Hurricane Ian.  Alico currently has a market capitalization of $190 million and an enterprise value of $315 million.  While near-term operating results are expected to be weak, we suspect today could be an ideal time for long-term investors to purchase valuable Florida real estate assets at attractive prices (currently implied at $4,300/acre). 

Company Overview: Alico owns and operates approximately 73,000 acres of land in the state of Florida. Alico utilizes almost 49,000 acres of land for citrus farming, with the primary product being oranges for the fresh orange juice market.  Alico is one of the largest owners of citrus farmland in Florida, producing approximately 13% of the state’s orange crop.  Alico’s largest customer is Tropicana, which represents nearly 90% of the Company’s citrus sales.  Alico also owns approximately 23,000 acres of ranch land primarily in southern Florida that the Company is actively marketing for sale.  Alico also owns 90,000 acres of mineral rights throughout the state of Florida.  These mineral rights include the rights to several sand/aggregates mines as well as land for the potential exploitation of oil or natural gas, although no wells have been drilled to date.  Alico was incorporated in 1960 and is headquartered in Fort Myers, Florida.  Alico has 206 full-time employees and utilizes a temporary workforce during harvest season. 

Investment Thesis:

• Alico owns nearly 49,000 acres of valuable Florida citrus farmland that should increase in value over time.

• In September 2022, the landfall of Hurricane Ian decimated the Florida citrus industry.  Following the storm, Alico’s share price fell sharply as the Company forecasted substantial operating losses in Fiscal 2023, increased its capital spending budget, reduced its dividend from $0.50/quarter to $0.05/quarter, and was late in filing its annual report.  We expect most of these events to be temporary in nature and proceeds from insurance and Federal relief efforts to cover the losses. 

• Citrus farmland economics in Florida has been hampered in recent years by the bacterial disease known as citrus greening.   Potential treatments for citrus greening are currently being developed and tested. 

• The Company’s citrus acres have the potential for higher and better use opportunities.

• Management is highly incentivized to increase shareholder value with the CEO’s bonus plan tied to Alico’s share price with additional awards if the Company is sold.   

• There are 23,000 acres of non-core Ranch Land held for sale which could provide over $100 million in cash proceeds. 

Citrus Acreage: Alico is one of the largest citrus growers in the United States, with 48,900 acres devoted to citrus production across seven Florida counties (Polk, Hardee, Highlands, DeSoto, Charlotte, Hendry, and Collier).  The citrus acreage includes 35,295 net plantable acres and 13,572 support acreage that is utilized for road, barns, and water retention.  Citrus production on Alico’s land represents approximately 13% of total Florida production.  A map of the Company’s citrus acres is provided below. 

Alico’s citrus groves are used to produce Early and Mid-Season orange varietals (harvested from November through February) and Valencia oranges (harvested from March through June).  These oranges are sold to processors and are used almost exclusively for the production of Not from Concentrate Orange Juice (“NFC”).  Juice produced from Florida oranges is typically NFC and competes primarily with frozen concentrated orange juice (FCOJ) from Brazil and Mexico as well as NFC juice from Brazil.  Alico sells most of its orange juice to Tropicana, which accounted for nearly 90% of citrus sales in fiscal 2022.  Alico has two pricing contracts with Tropicana, with both utilizing floor and ceiling prices to manage commodity risk for both parties.  Processors including Tropicana typically buy the citrus crop on a pound solids basis, which measures the soluble solids including sugars and acids contained in a box of fruit.  The productivity of an acre of citrus land is determined by the number of boxes harvested (90 pounds/box in Florida) multiplied by the pound solids / box. 

Citrus Farmland Economics: The farming economics of an acre of citrus land are dependent on the yield/acre (as measured in boxes or pound solids) multiplied by the price/pound solid.  An acre of citrus land typically has between 150-200 citrus trees.  Aside from the production declines in 2021 and 2022, Alico’s acres have recently averaged around 200 boxes/acre and approximately 6.0 pound solids per box, resulting in 1,200 pound solids/acre.  The price for Alico’s oranges has recently ranged between $2.50-$3.00/ pound solid, resulting in revenue of $3,000-$3,600 per producing acre.  Operating costs have historically averaged $1,700/acre with an additional $700/acre for harvesting and handling, for a total of $2,400/acre.  This provides for potential gross profit of $600-$1,200/acre. 

Citrus Greening: The productivity and profitability of Florida citrus land has decreased dramatically over the last 20 years, primarily due to a disease known as citrus greening or Huanglongbing.   Citrus greening is a currently incurable bacterial disease that has infected nearly all of the citrus trees in Florida.  Citrus greening causes trees to produce fruit that is green and bitter and generally unsuitable for sale for fruit or juice.  The negative impacts of citrus greening can be mitigated through the use of increased irrigation and fertilizers, which increases the cost of citrus production while only partially offsetting the yield declines caused by the disease.  While many Florida citrus farmers have elected to shut down their farms and utilize their acreage for other farming activities, Alico has looked to reduce the impact of citrus greening by planting new trees and increasing spending on mitigation efforts. 

 The charts below show the decline in both the yield/acre of Florida citrus land and the decrease in acreage devoted to citrus farming in Florida.  The yield/acre of Florida citrus land had declined from nearly 400 boxes/acre in 2000 to under 200 boxes/acre today, primarily due to the damage caused by citrus greening.  This reduction in yield has hurt farming economics and has caused many citrus acres to be converted to other uses.  The number of Florida acreage devoted to citrus production has declined from over 600,000 acres in 2000 to just over 300,000 acres today.  The combination of these two factors has caused Florida citrus production to plumet, from nearly 250 million boxes in 1998 to just 41 million boxes in 2022 with 2023 production expected to fall further to 16 million boxes due to the impact of Hurricane Ian. This decline in productivity has also resulted in a decline in the secondary market price of citrus acres, with the average price/acre for citrus farmland falling from around $12,000-$14,000/acre in 2012 to around $8,000-10,000/acre today. 

Encouragingly, there are a number of treatments and potential cures for citrus greening that are under development.  In 2023, Alico began testing a new application of Oxytetracycline for the treatment of citrus greening, applying it to approximately 10% of its trees.  While the potential benefits of the treatment will not be determined until the 2024 harvest yield, the application of Oxytetracycline or other treatments could dramatically improve the unit economics of citrus land.  Importantly, given the sharp decline in Florida acreage currently devoted to citrus farmland, should a successful cure or treatment be found there is a limited number of remaining farms that could capitalize on the innovation.  Other potential treatments including RNA treatments, antimicrobial peptides, and natural compounds treatments are currently being tested. 

Hurricane Ian: Hurricane Ian made landfall in September 2022, impacting the vast majority of citrus groves in Florida.  The storm damaged citrus trees and also resulted in significant drop of fruit from trees that survived the storm.  Total citrus production for the current growing season is expected to be only 16 million boxes (down from 41 million boxes the prior year), and the economic impact to the Florida citrus industry is estimated to reach up to $675 million.  In response to the hurricane, Alico has taken a number of steps to minimize the economic impact.  The Company looked to preserve liquidity by reducing its quarterly dividend from $0.50/share to $0.05/share.  Alico accelerated the harvesting of fruit in order to minimize the amount of additional fruit drop.  Alico also forecasted both operating losses in Fiscal 2023 as well as an increase in capital expenditures as the Company looks to return to normal operations following the impact from the storm.  Alico anticipates that the hurricane could negatively impact the productivity of its acres through Fiscal 2024.

Although the damage was immense, we expect Alico to recover the vast majority (or more) of the expected losses caused by Hurricane Ian.  The damage inflicted by Hurricane Ian is comparable to the damage caused by Hurricane Irma that hit Florida in September 2017.  Following Hurricane Irma, Alico received $26.9 million in Federal Relief Block Grants (approximately $745 per producing acre) and an additional $10 million in insurance proceeds.  Through March 31, 2023, Alico had received $4.8 million in insurance proceeds for Hurricane Ian with an additional $9.7 million in insurance proceeds received after quarter-end.  Alico is actively working with its insurers for potential additional insurance proceeds.  The U.S. Congress is currently progressing the with a bipartisan agriculture relief bill called the Restore Agricultural Investment, Stability and Expansion (RAISE) Act of 2023, which will help American farmers recover after natural disasters by issuing block grants.  While the result of any legislation remains uncertain, based on the damage caused by Hurricane Ian and the proceeds received from Hurricane Irma, we expect Alico could receive Federal relief funds in excess of $30 million over the next 3-5 years.  This is in addition to the $15+ million that is expected from insurance proceeds.  We expect these proceeds to fully offset the Company for losses sustained from Hurricane Ian with proceeds likely utilized to reduce debt. 

In addition to the potential insurance and Federal relief proceeds, Hurricane Ian has also resulted in sharply higher orange juice prices.  Orange juice inventories for both Frozen Orange Juice from Concentrate and Not From Concentrate juice are at historically low levels. 

The decrease in Florida orange juice production combined with historically low inventory levels has resulted in a sharp increase in orange juice prices.  While there is no tradeable secondary market for the Not From Concentrate juice market associated with Alico’s orange production, there is an active futures market for Frozen Concentrated Orange Juice.  FCOJ prices have increased from $1.91/pound solid on September 30, 2022, to over $2.75/pound solid today.  Alico’s NFC juice has historically garnered a substantial pricing premium over FCOJ juice.  Even with its current floor and ceiling price contracts with Tropicana, we expect Alico to capture higher orange juice prices through its contract expiration in 2024 and likely lock-in higher future prices when the contract renews in 2024. 

Higher and Better Use: Despite challenges within the citrus industry, land prices in Florida have steadily increased as a pleasant climate, low taxes, and business-friendly policies have attracted people to the state.  Earlier in 2022, Alico announced that it would be exploring the potential for higher and better uses across all of its citrus portfolio.  We have tracked much of the Company’s land holdings and believe that many properties could be attractive for residential or commercial developments.  Some of these potential developments include the Corkscrew farm in Collier County, the Frostproof Groves in Polk County, and the Saddlebag Grove in Polk County.  Converted citrus land can command prices from $10,000/acre up to $50,000/acre.  Should our anticipated improvements to citrus farmland not materialize, we suspect that Alico could realize considerable value through HBU opportunities. 

Ranchland and Mineral Rights: Alico currently owns 23,000 acres of ranchland in its portfolio that is being utilized for cattle grazing, recreational hunting, farming leases, mining, and the management of native pastureland.  Alico has been actively monetizing this land and has sold approximately 44,000 acres of land since 2019 for $116 million in proceeds or $2,700/acre.  This total includes several large sales of less economical land (including wetlands), with most of the Company’s recent ranchland sales occurring at $5,000/acre or higher.  Alico is actively marketing the remaining 23,000 acres of land and expects to receive over $5,000/acre, or $115 million when the land is sold. 

In addition to the ranchland, Alico also owns 90,000 acres of minerals rights, mostly comprised of oil and natural gas and sand.  Mining activity on the Company’s mineral rights currently takes place at two sand mines including the Bronson Mine and the Keri Mine.  While not material today, Alico is also exploring opportunities for both oil and natural gas leases in Hendry County.  We suspect there could be opportunities for renewable energy activity in the future. 

Management Incentives: Alico is led by CEO John Kiernan, who we believe is highly incentivized to increase shareholder value.  In the event of a sale of the Company, Mr. Kiernan is entitled to a bonus that is based on a percentage of the market capitalization of the Company in the event of a sale. At a potential sale price of $50/share, Mr. Kiernan’s bonus would be approximately $3.8 million. 

Mr. Kiernan is also entitled to a bonus in the event the Company’s share price exceeds $35.00/share and is entitled to additional compensation for selling ranchland and returning capital to shareholders.  In addition, the Company’s board of directors recently elected to receive all of their compensation in the form of common stock. 

Outstanding Debt: As of March 31, 2023, Alico had approximately $125 million of outstanding debt.  The Company’s debt consists of $70 million of 3.85% fixed rate notes due in 2029 (payable to Met Life), $19 million floating rate notes at SOFR+175 bps due in 2029 (payable to Met Life), a $4 million 5.28% term loan due in 2029 (payable to Met Life), $12 million 5.35% fixed rate notes due in 2029 and 2023 (payable to Prudential), and a $21 million working capital line of credit at SOFR+175 bps due in 2025 (payable to Rabobank).  While we generally invest in companies with little or no financial leverage, we are comfortable with Alico’s debt balance given its strong base of owned asset, history of paying off debt ahead of maturity, and a long-dated maturity schedule (with predominately fixed rate debt). 

Valuation: While we recognize that Alico is subject to further weather risk, the company’s current valuation ($190 million market capitalization and $315 million enterprise value) appears very attractive.  The market price of citrus farmland is currently $8-10,000/acre, and we believe Alico’s share price trades at a sizeable discount.  We expect that Alico could be the recipient of an additional $40-50 million of Federal relief payments and insurance proceeds stemming from Hurricane Ian (including almost $10 million in insurance proceeds received after March 31, 2023.  Alico is also marketing over 23,000 acres of ranchland for sale, which we expect to generate $115 million in sales proceeds.  These two potential cash inflows would allow Alico to either entirely eliminate its $125 million net debt balance or repurchase over 75% of outstanding shares at current prices.  We utilized a DCF analysis on the Company’s 49,000 acres devoted to citrus to obtain a value of $300 million for the Company’s citrus operations, or approximately $6,000/acre.  This analysis is based on Alico producing 220 boxes/acre and 5.75 pounds solid per box at a price of $3.10/pound solid.  Annual operating costs are estimated at $2,400/acre, annual SG&A is estimated at $10 million, and a 26% tax rate is applied.  This analysis provides no benefit for either a successful treatment for citrus greening or the sale of citrus land for higher and better uses.  We combine the value of the citrus acreage, ranchland, and Hurricane Ian insurance proceeds (currently excluding any potential Federal relief payments) to obtain a target enterprise value of $415 million, or ~$5,700/acre.  We subtract $125 million of net debt for a target equity value of $290 million, or $38.00/share.  This represents over 50% upside from the current price of $25.20. 

In addition to our DCF-based valuation, Alico’s valuation appears very attractive versus several other publicly traded real estate firms.  Farmland REITs including Gladstone Land (LAND) and Farmland Partners (FPI) trade at a significant premium on a price/acre basis while having considerably more leverage than Alico.  Valuation metrics for St. Joe (JOE) are also included to show the potential valuation premium of higher-and-better-use land in Florida. 

Conclusion: The destructive impact caused by Hurricane Ian has created a unique opportunity to purchase Alico, one of the largest holders of Florida real estate, at a steep discount to net asset value.  Alico is currently marketing its 23,000 acres of non-core ranchland for sale, with potential proceeds exceeding $115 million.  We also anticipate that Alico could receive an additional $40-$50 million of cash through Federal relief funds and insurance proceeds over the next 3-5 years.  The economics of Alico’s citrus operations should improve due to higher orange juice prices and should further benefit over time as new treatments for citrus greening are developed and implemented.  Alico’s citrus lands also provide numerous opportunities for HBU alternatives.  Management is incentivized to both increase the Company’s share price and pursue strategic alternatives.  Our price target of $38.00/share provides over 50% upside from the current share price.  Alico’s large land ownership position provides a margin of safety to help mitigate downside risk.  

Catalyst

Receipt of insurance proceeds and Federal relief payments

Sale of ranchland

Successful treatment of citrus greening