Description

Maui Land & Pineapple owns ~ 22,000 acres of land in Maui. Our estimate of fair value is ~ $79 per share, or nearly 6x where the shares currently trade (~$14/share).   Furthermore, this fair value estimate is predicated on over 75% of MLP’s acreage (and 80% of their West Maui acreage) being attributed a value of $0 per acre.  There is also net cash at the business (no debt) and the current operating assets (retail/industrial properties in Maui) generally cover the costs of operating the business today.  MLP’s properties were not impacted directly by the recent fires in Maui.  Furthermore, we anticipate that over the next few months, MLP’s new leadership will clarify for investors (1) What MLP Owns  (2) What Their Plans Are To Do With It and (3) An Anticipated Timeline for Development.  Our efforts here are to clarify for the VIC community where we believe management is directionally heading and highlight underappreciated assets/local real estate dynamics before their strategy is announced since our view is that the limited float (62% of the company is controlled by Steve Case) will make accumulating shares much more challenging once the vision for the future of MLP is broadly disseminated.  

While we assume no direct value to MLP for all of their land currently zoned conservation and much of their agricultural land, these acres have tremendous value to Maui…and its regulators and stakeholders know this. In particular, The Pu’u Kukui Watershed Preserve is owned by MLP and managed in conjunction with the State of Hawaii and the County of Maui  (https://www.puukukui.org/watershed-partners/).  As one of the wettest places on earth, the water captured in the Watershed is transmitted through infrastructure (often owned/controlled by MLP) to the residents and tourists and businesses of West Maui.  It is critical infrastructure that we believe the State/County/Environmental Groups would gladly assume (for free) in exchange for entitlements on 3000 former pineapple farm acres which MLP owns in West Maui.  We believe that these 3000 acres, which MLP paid a grand total of ~$9000 in property taxes on in 2022 has value in excess of $500M+ upon the option realization (~$32/share).   And land in Maui with the attributes of this vast acreage like the western sunset views of the Pacific Ocean and two other Hawaiian Islands with little obstruction from one property to the next due to the vast and gently sloping former farm terrain should appreciate (on average) a few percent per year.  In light of the tremendous housing shortage and increasingly vocal advocacy for reforming the regulatory hurdles in Maui before the fires in neighboring Lahaina (which only exacerbated this situation), we believe incentives are aligned for a ‘big trade’ of controlled critical infrastructure for additional development rights.  

In the meanwhile, MLP has existing entitlements to develop over 1300 housing units (including up to 500 short-term rentals) and commercial properties/amenities in two special property districts.  These entitlements, which cover 880 acres in ritzy Kapalua are worth ~ $40-$45 per share (Lahaina Project District ~ $20/share and Kapalua Mauka ~ $23/share) and only account for ~ 4% of MLP’s acreage.  Across all parcels, our estimate of value assumes that MLP sells lots, but doesn’t take on development risk (outside of the cost of infrastructure).  

Finally, Steve Case clarified his intentions with 3 new additions to the Board over the past 18 months as well as a new CEO.  Besides adding John Sabin (his right-hand man at Revolution LLC) and Glyn Aeppel (Boards of Simon Property and Avalon Bay), the addition of Scot Sellers as Chairman and Race Randle as CEO provides ample confidence that Case sees an opportunity to build the world’s greatest luxury master planned community (MPC) in Maui.  For his part, Scot Sellers built Archstone from a $100M multifamily operator into a $22B multifamily behemoth which he timely sold to Lehman/Tishman Speyer in 2007.  He not only was the former Chair of NAREIT but also sits on the Boards of top MPCs including The Irvine Company and Howard Hughes.  It appears that he brought in Race Randle to be CEO.  Race oversaw the development of Honolulu’s Ward Villages, the “Best-Planned Community in the United States” (Architectural Digest) and the “2018 Master Planned Community of the Year” by National Association of Homebuilders.  Thereafter, he was EVP of Planning for a 15,000 acre project for Google Ventures/LendLease.  In summary, Case has finally brought the A quality management team to deliver on the promise of the A quality assets.  Fortunately, we are still able to buy incredibly A quality goods at a vastly discounted price!  

Here is a basic overview of the Assets and Assumptions along with a sensitivity analysis table.  We shall provide much greater detail in the write-up below.  

Why Has This Taken So Long and How Can We Be Confident That Controlling Shareholder (Steve Case) Wants To Develop? 

MLP’s history stems back to the 1830s when the Baldwin family moved to Maui as missionaries.  It has a deep legacy on the island.  In 1999, Steve Case acquired a 41% stake while still CEO of AOL.  He joined the Board but had no active role.  He described this purchase as a “long-term personal investment”.   The pineapple operations (which averaged nearly $100M per year in revenue in the late 1990s/early 2000s) continued to be a cash drain.  Losses from 2003-2009 were ~ $120M despite ~$20M invested in a new packing facility.  Along with poorly structured and timed real estate investments, the company exited 2009 with ~$120M of underfunded pension and net debt.  They closed the pineapple operations in 2009 and Steve Case added another $30M+ in 2010 (increasing his ownership to ~63%).   With only modest operating cash flow (see below) and large legacy responsibilities, it took many years to stabilize the company.  From 2002 through 2022, MLP sold ~20% of their acreage including 2100 acres in West Maui and 4200 acres in Upcountry.  We would argue that the restructuring period ended in mid-2022 when MLP made a $5.7M contribution to their DB pension Plan following the sale of two parcels.  

From our research on Steve Case ranging from former colleagues at AOL to co-investors on deals related to his Revolution LLC (“Rise of Rest”) and public statements/publications, it is clear that Steve Case can operate with a long-term time horizon.  What some might perceive as indifference is often an exercise in patience.  In a Forbes article published in early 2023 entitled “Billionaire Steve Case on Bringing a Waldorf Astoria Hotel to Costa Rica”, we get insight into Case’s approach to a parcel of undeveloped land that Revolution Places (his firm) acquired in 2007.  After purchasing the property in 2007, the project just broke ground on what will be a 190-room Waldorf Astoria hotel with luxury branded residences called Waldorf Astoria Guanacaste.  The five star resort will open in 2025.  When asked “what took so long”, here is what Steve Case said, “I kept hearing about this spectacular undeveloped parcel.   We bought and held on to it for 15 years because we wanted to develop it in the right way…I viewed it as a long term legacy project….It was more important to do it right.  So we spent more than a decade finding the right partners who wanted to honor this special place”.  

https://www.forbes.com/sites/carriecoolidge/2023/01/25/revolution-places-bringing-waldorf-astoria-hotel-and-residences-to-costa-rica/?sh=c3b9aaa7ace7

Why Do We Believe The Company Is Transitioning To Its Development Phase? 

On July 18, 2022, MLP changed its state of incorporation from Hawaii to Delaware. According to the 10Q In the Q3 2022 filing, the Company wrote “the principal reasons to reincorporate were: 1) the predictability, flexibility, and responsiveness of Delaware law, 2) assess to specialized courts, and 3) the enhanced ability to attract and retain qualified candidates for our Board of Directors and management.”  

Concomitant with the reincorporation, MLP launched its process of bringing on its “A Team” by adding two new Board Members.  In the spring of 2023, they brought on a new Chairman and new CEO.  These proactive steps (including paying signing bonuses and severances) indicate a pivot.  We believe that new management is incredibly impressive for a company with a ~$265M EV and reflects the scope of the opportunity which Steve Case and his new management sees at MLP.  By the way, it is worthwhile to note that Steve Case has extensive ties in Hawaii.  His father was an influential attorney, his cousin is Ed Case (Blue Dog Democrat serving Hawaii in US House of Representatives), and his other cousin is Suzanne Case (former Chairperson of Hawaii Land and Natural Resources https://www.hawaii.edu/news/2023/09/12/suzanne-case-uh/).  He owns another huge parcel (non-public) called Grove Farms in Kaua’i (https://www.grovefarm.com/)

The new leadership of MLP includes (our interest really perked up with the 2023 appointments):

• Glyn Aeppel (BOD July 2022): CEO/Founder of Glencove Capital with over 30 years of senior global experience in developing luxury real estate hotels and brands (e.g. Marriott, Le Meridien, Fairmont, Loews, etc.).  She sits on the Boards of Simon Property Group and Avalon Bay.   

• John Sabin (BOD July 2022): Steve Case’s ‘right hand man’ as CFO of Revolution LLC and Case Foundation for over 12 years.  Has served in legal and finance executive capacity at various real estate and hospitality organizations.  

• Scot Sellers (Chair of BOD March 2023): As CEO, Scot built Archstone from a ~$100M company in 1997 to its sale in 2007 for ~$22B to Lehman/Tishman Speyer.  He remained CEO of Archstone through 2013.  He sits on the Board of The Irvine Company and Howard Hughes (perhaps the two leading Master Planned Community (MPC) companies in the United States).  He is the former Chair of NAREIT and sits on the Boards of Habitat for Humanity International and Trust for Public Land.

• Race Randle (CEO March 2023): A native of Hawaii, Race served as SVP of Development of Ward Villages for Howard Hughes where he oversaw the planning and redevelopment of a MPC which should, ultimately, deliver 9.3 million square feet including over 4300 homes over 60 acres in Honolulu.  This project was awarded the “Best-Planned Community in the United States” (Architectural Digest) and the “2018 Master Planned Community of the Year” (National Association of Home Builders).  In 2021, Race joined as EVP at Lendlease, leading a partnership with Google on a $15B undertaking to transform Google’s landholdings in San Jose, Sunnyvale, and Mountain View into innovated mixed-use communities.  He also is the vice chair of the Trust for Public Land, an organization that creates parks and protects land for people, ensuring healthy, livable communities.  

It has been a long road to this point, but the Company has preserved core assets and maintained its core role in the West Maui ecosystem.  

Brief Summary of MLP’s West Maui Land

We anticipate disclosures to improve over the balance of 2023 and into early 2024.  The company’s 10K reports their land as follows: 

Besides the 1500 (largely contiguous) acres between Makawao/Hali’imaile in Upcountry, MLP’s acreage is in West Maui.  I hope this map is helpful for broad context.  

• Lahaina Project District: The two small white parcels (~80 acres near arrows) represent the remaining acreage in the Lahaina Project District in Kapalua.  Here is the zoning code for the broader district.  It is our understanding that the entitlements include 700 housing units (including up to 500 residential units approved for short-term rentals) and related commercial developments. These entitlements are fungible (transferable) within the District including to the neighboring Ritz Carlton property.

 https://library.municode.com/hi/county_of_maui/codes/code_of_ordinances?nodeId=TIT19ZO_ARTIVREMIAR_CH19.73LAPRDI1KA

• Kapalua Mauka: The yellow parcel (~800 acres) is the Kapalua Mauka Project District which is currently entitled for 639 homes and other commercial/amenities (e.g. golf course)

https://library.municode.com/hi/county_of_maui/codes/code_of_ordinances?nodeId=TIT19ZO_ARTIVREMIAR_CH19.92WEMAPRDI2KAMA

The Lahaina Project District and Kapalua Mauka represent all of MLP’s existing entitlements, but only ~4% of their overall acres and ~4.3% of their West Maui Acres.  

• West Maui Agricultural Lands and Lands Set for Donation/Conservation: The remaining 95.7% of their West Maui acres falls into the lands that is a blend of agricultural (much of ~ 5900 acres in green) and land that we divide into expected Conservation Lands (~5370 acres in purple) or Pu’u Kukui Watershed Preserve (~8600 acres in Blue).  The Pu’u Kukui Watershed Preserve is the largest private nature preserve in Hawaii and is home to some of the rarest endangered flora and fauna in the state.  As its website states “this pristine area is a vital water source for Maui’s community and one of the wettest spots on earth” https://www.puukukui.org/  This important asset is managed by MLP in conjunction with Hawaii’s Department of Land and Natural Resources and Maui’s Department of Water Supply https://www.puukukui.org/watershed-partners/

Combined, the green/purple/blue parcels are roughly 20,000 acres.  Our analysis assumes that roughly 3000 acres, or ~15% of this broader land mass, is ultimately developed (first sales in 2035) with the remaining 85% of the land being donated/conserved in an ‘exchange of value’ between MLP and the government/environmental groups.  

Why is MLP Well Positioned Develop the Premier Global Luxury Master Planned Community

While VIC members tend to be familiar with Master Planned Communities, our understanding of ‘best practices’ were influenced by these three sources.  

Interview with Donald Bren (Irvine Company): https://www.youtube.com/watch?v=XTLz2v88zWs&t=7s

Presentation by Bill Ackman (Howard Hughes): https://www.youtube.com/watch?v=BmlAcz8rSJA&t=18s

Reforming Suburbia by Ann Forsyth: https://www.ucpress.edu/book/9780520241664/reforming-suburbia

The key takeaways include the following best practices:

1. Many MPCs Failures Stem from Acquisition Funding and Land Debt 

2. You Don’t Want to Be the “First Guy In”

3. Long-Term Development to Control Timing and Release of Land

4. Long-Term in Stewardship where you reinvest to make the MPC a Safe & Happy Place to Live

5. Most Important: “Location Location Location” – Donald Bren

Let’s see how MLP stands on these five best practices:

1. Many MPC Failures Stem from Acquisition Funding and Land Debt: According to Forbes, Donald Bren is the wealthiest real estate professional in the United States (#2 in the world).  So when he said that “Acquisition Funding and Land Debt” is the primary reason why MPCs fail, this is probably an important variable to consider.  Fortunately, MLP currently owns ~22,000 acres and is in a net cash position.  Their existing portfolio of commercial real estate (~ 200,000 square feet of mostly retail/industrial) generates roughly enough NOI to overcome their corporate SG&A, stock based compensation, and modestly negative cash flow amenity business.  In the chart below, we ignore profits from sales of their land portfolio as well as their costs to address their pension (now addressed).  In early 2023, they had ‘one-off’ costs related to the turnover in senior management.  The company recently announced that they hired Colliers to help optimize their real estate portfolio.  

In summary, MLP can generally cover their current operational needs and isn’t burdened by historic debt.  They are in a net cash position and have both developed and undeveloped real estate and infrastructure assets which they could monetize as needed since we assume that 75% of their land is never monetized.   Below is an image of their Merriman’s parcel which sits on its own peninsula in Kapalua. This 5117 sq foot restaurant/wedding venue is situated a 10-15 minute walk from a neighboring peninsula with a 6645 sq foot home that is currently on the market for over $40M (9 Bay Drive).  While we don’t mean to imply that either parcel is worth this amount, there is clearly monetizable value in MLP’s portfolio.  

2. You Don’t Want To Be The “First Guy In”: While MLP might be ‘filling in gaps’ in the commercial components of its MPCs (e.g. a supermarket in Kapalua), its MPCs will not be the ‘first guy in’ from a development perspective.  MLP’s ~80 acres in the Lahaina Project District are the last large developable lots in the District (excluding golf courses/driving ranges).  Their Kapalua Mauka and West Maui Agricultural lands are generally situated on the Mauka (mountainside) of Highway 30 with largely developed communities of Ka’anapali, Napili, and Kapalua just on the other side of the road.  In summary, MLP owns much of the remaining developable land in West Maui.  

3.  Long-Term Development to Control Timing and Release of Land: Management has wonderful experience in MPCs and the controlling shareholder has shown (arguably excessive) patience.   While the cadence will clearly be dictated by management’s view of the opportunity, our read on CEO Randle and Chairman Sellers as well as controlling shareholder Case is that they are focused on maximizing long-term value and are willing to be patient to achieve these ends.  Our model and $79 fair value estimate will be quite imprecise in terms of the cadence of deliveries, but we estimate a range of 80 to 250 lots per year sold between 2025 and 2054 with an average of 183 homes per year (136 in West Maui).   

4. Long-Term in Stewardship where you reinvest to make the MPC a Safe & Happy Place to Live: We believe that MLP leadership is ideally situated to not only build a remarkable community on a remarkable piece of land, but that they all have the right bona fides to balance the competing needs of the environment, the local community, and development.  For example, when Professor Jonathan Scheuer was nominated to join the East Maui Water Board, there were efforts amongst some developers to undermine his approval due to his perceived ‘anti-development’ bias.  In contrast, CEO Randle provided a positive comment on Professor Scheuer in the press release announcing his election.

https://www.civilbeat.org/2023/07/final-answer-johnathan-likeke-scheuer-is-on-the-east-maui-water-board/

Interestingly, our read of the Professor Scheuer’s book “Water and Power in West Maui” left us with a similar view of this controversial figure as described by CEO Randle.  Maui’s CEO said, “I have known Jonathan for several years, during which time I have witnessed his dedicated and thoughtful approach to complex land use matters.  I appreciate how Jonathan worked to achieve balance among community culture and commerce.”  We found this video an interesting insight into Race Randle’s ‘hands-on’ approach to development and community leadership.  

https://www.youtube.com/watch?v=LyNQGUR93W0&t=13s

5. “Location, Location, Location”:  Our view is that this MLP’s West Maui land represents a series of spectacular large scale, luxury development opportunities.  For starters, Kapalua ranks as one of the premier locations for both homes and resorts in Maui which, itself, is a premier resort luxury destination.  In the second link, it is noteworthy that two of the top most ‘luxe’ hotels in Maui are the Montage and Ritz-Carlton which both sit in the Kapalua Central Resort.  

https://www.mauieliteproperty.com/blog/3-best-communities-for-luxury-homes-on-maui.html

https://www.thetravel.com/most-luxe-hotels-in-maui/#four-seasons-resort-maui

After speaking with land planners and developers with extensive experience in West Maui, we have come to appreciate the special development attributes of the Kapalua Mauka and West Maui Agricultural lands.  For context, it is important to understand (google earth helps) that West Maui rises from the ocean to the peak point of the watershed at 5800 feet.   As former agricultural lands, Kapalua Mauka and the West Maui Agricultural lands are mostly a gentle slope with topsoil and irrigation infrastructure.  The huge parcel (and expected low density) should enable homes to offer expansive lanais with unobstructed westerly, sunset views of 2 neighboring islands (Lanai and Molokai).  In Maui, there is a real estate adage that “views of another island add $1M to property value”.  So what premium comes with the view of 2 islands?  For context, think of a city where your best views (and highest price per square foot) are in the “penthouse”.  Yes, it might take you a bit longer to get the street/beach, but you have access (all beaches in Maui are public) and can enjoy the quiet pleasures of your private pool/lanai and unparalleled ocean views in a master planned community when not at the beach.  One broker commented that unless you are beachfront, the views drive per square foot value in a place like West Maui.  

The yellow box in the image below largely encapsulates the broader area including the Lahaina Project District/Kapalua Mauka/West Maui Agricultural Lands that we anticipate MLP will be able to develop (~ 4000 contiguous acres).  

If you can see the land from the ocean, then you should be able to see the ocean from the land.  

Another way to look at the ‘value of location’ is to look at the premium transaction price for land/housing in this area.  For starters, Hawaii has the highest Median Home Value in the U.S.

https://uhero.hawaii.edu/the-hawaii-housing-factbook/

Within Hawaii, Maui County (along with Honolulu County) is one of the two most expensive Counties.  Lahaina is one of the most expensive zip codes for Single Family Homes.

According to a Federal Housing Finance Agency report from 2019 that is entitled “The Price of Residential Land for Counties, Zip Codes, and Census in the United States.” (https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/wp1901.aspx), Lahaina’s Zip Code of 96761 has a land value per acre of $1,971,000 compared to the US Zip Median of $234,900.  The average median single family home on an acre of land is ~ $4,541,475 compared to ~ $838,929 in the U.S. Median.  Illustrative of the premium valuation placed on homes in Lahaina, the median acre of land for single family development is 8.4x higher in Lahaina than in the United States as a whole.  Once you place a home on that land, the value of that home is 5.4x the median home in the United States as a whole.  Relevant for our analysis later, this implies that the land value is roughly 28% of the median home value in the United States, but 43% of the completed home value in Lahaina.  Since 2019, the median single-family home in Hawaii has increased by 35%.  Hawaii residential real estate has benefited from trends toward remote work as more still employed professionals have found it practical to spend significant time in Hawaii.  While we will focus on valuation later, assuming that acreage has increased by roughly 40% since early 2019 (using single family homes as a proxy), this implies $2.8M per acre.  Even assuming a 50% discount to this figure (~$1.4M per acre), this implies that ~ 1% of MLP’s acreage might support today’s valuation.  This is how valuable their land appears to be (more on this below) compared to current valuation.  

While we only assume that MLP’s West Maui land is ~30% of finished housing value, this may prove conservative based on not only the information above but also:

• Research from the University of Hawaii indicating that land is ~ 60% of the value of Hawaiian home value (and structure is ~ 40%)

https://uhero.hawaii.edu/wp-content/uploads/2019/08/LaCroix-Land_Housing.1.27.pdf

• Research from The Federal Reserve Board

https://www.federalreserve.gov/pubs/feds/2006/200625/200625pap.pdf

• Research from Redfin (higher cost metros have high land share)

https://www.redfin.com/news/value-of-house-vs-land/

• Conversations with various real estate professionals have indicated that development costs (hard costs and developer profit) can range from $250-$600 per square foot for housing.  Assuming higher end finishes and heightened contractor profits reach ~$800 per square foot, there is ample “residual land value” when the final sale price is ~ $1500/sq foot and you already own the land. Furthermore, as a large developer, MLP might be able to reduce costs a bit through scale.  In summary, we think our estimate of 30% is likely conservative in light of local conditions and the scale with which MLP will be able to develop.  Here is a sensitivity analysis of MLP’s Fair Value per share under different Residual Land Value shares (all other variables held constant).  

Master Planned Community Descriptions and Valuation Estimates

• Lahaina Project District: This project is 80 acres split ~40 acres on either side of the Ritz Carlton Hotel and Residences (yellow) in Kapalua.  Management tends to describe the ~40 acre contiguous parcels nestled between the Ritz and Fleming Beach as “Lot 1-D” (light blue) and the ~40 acres between the Ritz and highway 30 (away from the beach) as Kapalua Central Resort (purple).  These acres are part of “envelope zoning” where the 700 total units of residential (including up to 500 for ‘short-term rental’) are able to be utilizd throughout the broader Lahaina Project District.  Obviously, MLP will try to use them on their own acres but could, if it makes sense, sell entitlement rights to neighboring parcels like the Ritz Carlton.  In addition, it is expected that the company will add retail amenities to this area. Only weeks after assuming the CEO role, Race Randle decided to terminate the agreement to sell the Kapalua Central Resort property (and 192 of the 700 entitled housing units) for $40M.  Management claimed $40M didn’t make sense using back of the envelope math.  While this was the less good of the two 40-acre parcels and only represented ~ 25% of the housing units (and most likely the non-short-term rental ones), Randle’s ‘back of the envelope math’ was likely quite solid.  We do think this parcel, which has a partial “low area” without good ocean views, would be ideal for certain commercial development (e.g. supermarket) to support the local community.  

So what do we think can be done with these ~ 80 acres?  After reviewing the zoning and speaking with various local professionals (e.g. architects with master planning background, local realtors and developers, etc.) we estimate that this land could support 500 apartment/condo (short-term rental units) at an average ~ 1600sq ft. at $1850/sq ft. as well as 200 single family homes which would average ~ 3000sq ft. at ~$1400/sq ft.   In summary, there would be ~$2.3 billion of deliverable value.  These structures would account for ~ 60% of the allowable FAR (.65x FAR) and, at an average of 2 stories, necessitate about 20% of the total acreage.  We also expect a village community to be built with high-end restaurants and other community services (e.g. supermarket) but don’t incorporate any of this into our estimate of value creation.  The commercial additions to the community should support local real estate values since one of the critiques of Kapalua is its current shortage of retail.  

The estimates on price per square foot basis are derived from properties that transacted in the Kapalua community over the past 3 years and current Zillow estimates on the properties.  Here is a summary of the 132 real estate transactions since late 2020 in various Communities in Kapalua.  

Here are recent single-family transactions near the Kapalua Central Resort Property.  

In summary, we believe that the 80 acres in the Lahaina Project District are worth ~ $380 or $19.56 per share applying the following assumptions.  

• Kapalua Mauka – An 800 acre community perched above the Kapalua Central Resort, this MPC should sell for a premium value to neighboring lots that lack the same communal amenities that this resort will almost certainly offer.  While the property is entitled for up to 27 holes of golf, we have the sense that the new management team is considering an ecotourism type environment that leverages not only the natural beauty of Kapalua and the Pacific Ocean below it, but also the Pu’u kukui Watershed that stretches uphill above it (e.g. hiking/biking paths).    

To our understanding all critical infrastructure is located near the property and the company is guaranteed water/sewer service as part of its sale of the Kapalua Water Company and Kapalua Waste Treatment Company to the State of Hawaii Public Utilities Commission.  We arrive at a fair value of ~ $470M (or ~ $24/share) for these assets based on the assumptions below.  Amongst other considerations, we looked at 35 recent home lot sales in the vicinity of Kapalua Mauka over the past few years.   

• Upcounty Maui - While we have spent less time focused on Upcountry Maui, MLP is in early stages of securing State and County land use entitlements to develop 290 acre community in Upcountry Maui.  This community would be classified as “Small Town” in the long-range County of Maui Island Plan.  This designation would allow for residential, industrial and commercial development at a moderate density.  While much of MLP’s property in Upcountry has good site-lines for residential development, we would anticipate that the price per square foot for residential in this area would be closer to $600-$900 per square foot (if developed today) and with lower cost materials/finishings with homes.  This is based on 40 recent home transactions in the Makawao area and lots for sale/housing for sale/sold in neighboring communities.  For those looking to dig a bit deeper, the neighboring Hoku’ula community (https://hokuulamaui.com/site-map/) is a reasonable comparable.  Due to the lower price per square foot and our lack of understanding regarding infrastructure/regulatory challenges with MLP’s Upcountry area, we also assumed a lower residual land share (25%), a higher discount rate (12%), and higher costs as a percent of sale proceeds (40%).   For these 1500 acres, we arrive at a valuation of ~ $108M, or ~$5.50/share.  

• West Maui Agricultural Lands - As a former pineapple farming operation with considerable scale, the West Maui Agricultural Lands have much of the core infrastructure for future development either on the property or near the property.  For example, here is material from Kahana Solar Project that is expected to be placed on the property.  When speaking with Race Randle, you get the sense that he is thinking about the long-term development timeline of this property and looking to better utilize the property until MLP receives entitlements for development.  

This 3000 acre parcel roughly runs on the Mauka side of Highway 30 from Kapalua Mauka (parcel in “U”) to the (“Kapalua Airport”).  The map below tries to highlight the area that we are roughly referring to.  

The development and economics will likely resemble Kapalua Mauka but we do assume slightly smaller homes with slightly greater density.  Similar to Kapalua Mauka, we exclude any retail or commercial development but would expect a significant amount in a development of this size.   We also assume a 12% discount rate to account for the uncertainty associated with this development which effectively cuts the NAV of this MPC by ~50% due to the long duration of overall development.  Our estimate of fair value is ~ $30 per share or $580M for this 3000 acre parcel.  While the timing around this property’s likely development are uncertain and we employ a 12% discount rate to reflect that uncertainty, the practical costs to carry the land is roughly 1 basis point per year (5 parcels that encompass land have ~$9000 in property taxes in 2022).  So while the math of a 12% discount rate and a 4% accretion of land value per year results in a declining fair value as time goes by, this seems like an incredible store of value with a high likelihood of the optionality paying off compared to a market capitalization of ~ 275M. 

Regulatory Environment

There are many factors which are supportive of the development of the ~ 3000 acres of former pineapple acreage at MLP.  First of all, it is important to remember that we assume development begins in 2035.  Over the next 12 years, the well regarded and connected (in Maui/Hawaii) executive management can develop its two projects with existing entitlements while continuing to build their relationships with members of the Maui community and work toward rezoning their other acreage.  Here is a summary of key features that support the rezoning thesis.

• The West Maui Agricultural Lands fall within the general growth planning trajectory of the island.  In general, the areas with ‘boxes’ reflect the areas where local Maui government is supportive of future development.  It is important to note that (to our understanding) Native Hawaiians are less concerned with development on the western half of Maui than the eastern half of Maui for cultural and historical reasons.  Furthermore, we try to overlap MLP’s acreage (in green) with the direction of development supported by the local government. 

• Note: Some of MLP’s acreage in Upcountry (noted in green above) has been sold

More specifically, the link below shows a map of development projects in West Maui (specifically the Kapalua/North Lahaina area).  The mauka area is largely in various stages of planning/development except MLP’s West Maui Agricultural Lands which sit between Kapalua Mauka (to the north) and Honokowai Department of Home Lands (DHHL) to the south.  https://files.hawaii.gov/dlnr/cwrm/gwma/lahaina/20220608_Lahaina_AppL.pdf

Interestingly, the master plan for the Honokowai DHHL project (which borders MLP’s West Maui Agricultural Lands) seeks to create 356 SFH, 573 multi-family units, and 252 agricultural homestead lots on roughly 454 acres.  In total, the project is expected to have nearly 1200 housing units on roughly 700 acres with infrastructure costs of roughly $50M-$59M (or $50k per housing unit).  The engineering design phase is set to be completed in early 2025 with construction to follow.  

• As discussed above, agricultural acres that are not in active production provide little value to society with de minimis tax receipts (~$3/acre/year) and no job creation.  The housing shortage is not ameliorated.

• The regulatory environment was shifting prior to the tragic fires in Lahaina.  The fires exacerbate the challenges and should lead to an expedited focus on streamlining regulatory hurdles toward development in certain areas.  The shortage of housing supply has its roots in a lengthy and complex entitlement process which includes roughly 3-5 years for County General Plan Inclusion, 3-5 Years for State Land Use Urban Designation, and 3-5 Years for County Urban Zoning.  So the current process might include a 9-15 year process to get entitlements.  As the chart below illustrates, the total housing stock in Maui County was increasing at ~ 3% per annum prior to the GFC and then at ~ .5%-1% per annum from 2010 through 2019.  

According to the University of Hawaii Housing Factbook, published in June of 2023, the net housing units added over the past 5 years was actually negative!  

https://uhero.hawaii.edu/wp-content/uploads/2023/06/TheHawaiiHousingFactbook.pdf

This decline is partially due to State and County Legislative Funding for Affordable Housing in Maui which declined significantly since 2015.  

According to a 2019 Report, it was estimated that West Maui would need an incremental 6923 homes by 2040 (or ~ 350 per year) to meet demand.  We are a few years into this process and the supply response has been negative (before the fires in Lahaina).

The lack of supply response over the past few years implied (pre-fire) a need for an additional ~ 400 new homes per year in West Maui through 2040.  Furthermore, net new demand does not account for replacing aging homes (or those recently destroyed).  

Even before the tragedy in Lahaina, leading government officials were starting to focus on the supply issue and the regulatory challenges which hindered the supply response.  Both the former Mayor of Maui (Michael Victorino) and the current Mayor of Maui (Richard Bissen) shared a focus on this.  Local community leaders as well as Governor Green acknowledged the need for regulatory reform and further development too.  

https://www.civilbeat.org/2022/10/this-is-how-the-candidates-for-maui-mayor-want-to-tackle-the-housing-crisis/

https://www.civilbeat.org/2023/04/bissens-spending-plan-for-maui-targets-affordable-housing-and-a-rainy-day-fund/

https://www.civilbeat.org/2023/07/hawaii-gov-takes-dramatic-action-to-solve-housing-crisis-but-is-he-going-too-far/

While politicians cite the affordability crisis, based on FRED data going back to 1977, Maui housing does not appear any less affordable than its history.  The chart below shows housing price and per capita income growth over the last 45 years.  The housing affordability ratio (House Price – to – Per Capita Income) appears to be historically average.  In summary, Maui tends to have premium priced housing and low affordability.  From our end, higher end homes in Maui tend to be predominantly cash buyers.  

https://fred.stlouisfed.org/series/PCPI15901

https://fred.stlouisfed.org/series/ATNHPIUS15009A

• In 2021, MLP sold Kapalua Water Company and Kapalua Waste Treatment Company located in the Kapalua Resort to the State of Hawaii Public Utilities Commission via an Asset Purchase Agreement.  As part of the agreement: Hawaii Water Service will serve future expansion of Kapalua including Kapalua Mauka (and Lahaina Project District) as the projects are developed.  Kapalua Water Company will continue to buy/source its water from MLP. The Water Company will pay MLP for all water delivered to Water Company at the initial rate of $260.00 per million gallons (i.e., $0.26 per thousand gallons) plus the Hawaii general excise tax thereon.  Since the Pu’u Kukui Watershed summit averages over 300 inches per year in rain (versus 13 inches in Lahaina), MLP’s ownership (through a complex system of water rights and Public Trust Doctrine) leaves it in control of the prodigious Honokohau.  The Honokohau Ditch diverts roughly 13M gallons per day which would support ~ 20,000 households in West Maui based on average household consumption.  This is more than all of the housing units projected in West Maui in 2040.  In another example of infrastructure controlled by MLP, a recent Commission hearing focused on improving potable and non-potable access in the Lahaina Aquifer Sector.  The government official placed with making suggestions to the Committee offered two options including repurposing the Honokowai Development Tunnel which would include replacing a pipeline to pump water to the Field 140 Reservoir. From the Field 140 Reservoir, water could efficiently be transported throughout the region.  This reservoir, owned by MLP and previously used to blend water for agricultural irrigation, sits on the 3000 acres of land which we refer to as the West Maui Agricultural Lands.

In the chart below, the trajectory of the ditch running from the top of Kapalua Mauka (gray “urban” area with “188” and “189” included) across the area we define as West Maui Agricultural Lands.

Risks to the Thesis

Hawaii has historically had the lowest effective property taxes in the United States and the lowest insurance rates in the United States.  While we expect insurance costs to increase as a result of the Lahaina fires, our understanding (after speaking with geologists) is that Hawaii/Maui is actually a very low risk area when it comes to natural disasters.  Hence, the historically low cost despite higher home values.  

The local Maui economy and, in particular, the West Maui economy relies on tourism.  While Lahaina was a significant visitor attraction and a very special historic town, it wasn’t typically the reason for a Maui vacation.  Most tourists would make a day trip but would stay elsewhere (e.g. Ka’anapali/Kapalua).  But the local economy is definitely impacted in the short-term by the tragedy on the island.  In this regard, a review of google trends related to natural disasters shows a 1-2 month focus.  In this regard, we assume that travel and the local economy will return to a fairly normal cadence by some point this winter.  

Finally, perhaps our read on the regulatory tea leaves will prove incorrect or the management team will mismanage their existing entitlements relative to economic and real estate conditions.  

Catalyst

We anticipate that over the next few months, the new leadership at MLP will clarify for investors (1) What MLP Owns (2) What MLP Plans To Do With It (3) An Anticipated Timeline For Development.  This should clarify not only management intentions,but also the potential value that they anticipate will be created.