Monday, 1 August 2016

TWC Enterprises Ltd. Quasi-REIT or real estate development company?

Entering into the world of small caps (again), and scouring the landscape for illiquid and under followed ideas, I've stumbled across TWC Enterprises Ltd.

The history is interesting.  Prior to buying a controlling stake in the previous public incarnation of Club-Link (LNK), Raj Sahi (Morguard) via Tri-White, accumulated just under a 30% stake and engaged in a tug of war with the previous management team for control.  In 2007, Tri-White upped it's stake in LNK to 70%, and finally, took control of LNK in 2009.

In it's current incarnation, the company operates in two distinct businesses: 1) golf club and resort operation and 2) Alaskan shipping port and railway tours, but any possible catalyst in terms of uncovering possible hidden value stems from a third somewhat related business namely, 3) real estate development. The key here is trying to value the third business on a stand alone basis.

Golf club and resort operations and Alaskan shipping port and railway tours are fairly straight forward to attempt to value.  The company reports annual and quarterly results using net operating income as a key performance indicator by segment, so when I see net operating income I automatically think of REIT's.

My very simplistic method of attempting to value a REIT is as follows:
  1. Take NOI divided by a range of possible cap rates. I usually use between 8% & 12% in order to give myself a sufficient margin of safety in terms of discount rates.  I treat NOI as a perpetuity with no growth.  Arguably, I should use a lower cap rate given the current interest rate environment, but I want to err on the side of conservatism.
  2. Compare the results of 1. above to the reported net asset value of the REIT, and to the current enterprise value of the REIT.  In order to determine net asset value, I take reported income generating assets only (I exclude cash, a/r, other receivables, goodwill or intangibles) and deduct total serviceable debt (current debt + mortgages + other long term debt).  I also compare net asset value of the REIT to current market cap.
  3. If 1. > 2, I believe there is a margin of safety implicit in buying the REIT.  I found that during Jan/Feb 2016, H&R REIT, Artis REIT and Boardwalk Equities REIT were all being valued in the market at less than the net asset value of each REIT.  Hindsight being 20/20, Jan/Feb was a great time to buy these particular REITs.
The Issues as I See Them:
  • Golf club and resort operation is a highly competitive business with limited pricing power.  The company currently runs just under 60 golf clubs located primarily in Ontario, Quebec, and Florida. The company recently entered the Florida market in 2010 and has grown its presence in the South Florida market since then, however, Florida operations still only represent a small percentage of total revenues and net operating income (16% of golf operating revenue and 5% of golf net operating income). Putting pressure on membership, golf rounds and overall growth is oversupply of available golf courses clustered around the company's core locations. Any catalyst here relates to business 3) discussed above, namely, real estate development, and to a lesser extent, exploring additional Florida golf club purchases at the right price.  
  • The Ontario and Quebec golf clubs under operation have exhibited diminishing growth since 2008, partly due to reduced membership, and partly due to competition from other properties.  Canadian golf NOI has shown a 1.57% cumulative decline since 2008 ($37M in 2008 vs. $32M currently).  Factors contributing to this decline include reduced membership and/or sale, closure or conversion of non-performing clubs into development properties.  My understanding is that management actively attempts to identify poorly performing clubs on an ongoing basis. Here are the summary results over the last 8 years:

  • Here's an excerpt showing current geographical distribution in Ontario and Quebec (You can get an idea as to how clustered the majority of the company's golf club operations are by reading the latest annual report, link here).

  • The Alaskan shipping port and railway tour operation arguably has definitive moat characteristics: the company owns and/or leases ports at Skagway Alaska, and runs railway tours catering to cruise ship passengers along the White Pass & Yukon Route. The issue here? Limited growth.  Cruise ship passenger traffic while steady over time isn't likely going to result in run away growth.  Since 2008, cruise ship operating revenue has grown at 3.82% CAGR, and NOI has grown at 4.36% CAGR.  Respectable low, single digit growth.  Port and rail operating revenue accounted for close to 24% of total operating revenue and 46% of total NOI in 2015.  Arguably, the economics of the port and railway operations outweigh the economics of the golf club operations (rail and port generated $27M NOI on revenue of $50M, vs. $34M golf NOI on revenue of $160M).  The catalyst here could be scaleability if the company can somehow acquire additional cruise ship ports, but this is a stretch given that these types of assets will likely command premium valuations currently, and it's my understanding that Mr. Sahi is not particularly disposed to paying premiums for assets.

Real Estate Development

One of the benefits of owning prime development land clustered around Southern Ontario is the potential for converting existing golf club locations into residential and commercial use property. As I've articulated above, I don't believe there's much growth potential behind the company pursuing existing Canadian golf club operations, so any premium built into the shares must reflect investor sentiment towards any real estate value inherent in the company's existing properties.

Here's my analysis of current valuation:

Comparing avg market cap to net asset value of properties only, I estimate that TWC currently trades at a slight premium of 8.5%, up from a discount of 36% back in 2008, and my thoughts are that this premium must be reflective of the value of the real estate development potential inherent in the stock.

Looking at valuation using capitalized NOI vs. EV, I estimate that at an 8% cap rate, capitalized NOI of say, $59M, works out to around $739M vs. current EV of $636M, or a 14% discount to EV. The higher the cap rate goes, the the lower my capitalized NOI becomes, but as I mentioned previously, arguably, I should use a lower cap rate given the current interest rate environment, and a cap rate of 12% is likely too conservative given that the cash flows from golf, port, and rail operations are not likely risky cash flows.  

Even so, I can't see a compelling reason to simply buy the diminishing returns demonstrated by virtue of golf club operation.

This leads me to attempt to value the real estate conversion potential of the golf club operations (which is no easy task) the clearest example of which has been the company's recent announcement that it has filed to redevelop its Glen Abbey golf club into a residential community.  Here's a recent piece on the development filing, courtesy of the globe and mail.

From my understanding, Glenn Abbey is around 230-acres, and the company intends to unlock the real estate value by virtue of developing 3,000 homes.  The company has not yet obtained approval for this proposed development, but if it does, there has to be some way to estimate a range of values attributable to this development potential.

The way I approached this is was by reference to a number of economic development reports, including the 2015 Oakville Economic Development Annual Report and the following Fall 2015 Colliers GTA Land Report, link here.

The Oakville report provides an average estimated value per acre for employment lands of $679K, while the Colliers report provides details on a specific transaction reported during 2015 whereby York Downs golf club was sold for about $1M per acre (City of Markham).

Now, employment lands are different use lands than residential development lands, so my simplistic (and hopefully conservative) method of ascribing a possible value to Glen Abbey is to take the mid-point between the two reported amounts, so $840K.

At 230 acres x $840K per acre, I get around $193M attributable to Glen Abbey as a stand alone development, or around 30% of current EV.  If use $679K, I get 230 acres x $679K per acre, or $156M, or around 25% of current EV.

On a per share basis, at $840K per acre, this works out to around $7 per share, and at $679K per acre, this works out to around $5.8 per share.

Update, August 2, 2016

After I wrote this initial analysis, I started thinking that my per share estimates were too aggressive. I should really have taken per acre value based on % of EV.  The way I initially calculated per share development value was too simplistic. In this case, I get $3 per share at $840K per acre, and $2.46 per share at $679K per acre.  To me, these estimates seem much more conservative than my initial estimates. The idea still remains compelling despite my reduced development estimates, and I feel slightly more comfortable with a lower range of development potential (especially if the Glen Abbey development does not get approved).

Concluding Thoughts

Full disclosure, I bought shares in one of the accounts I manage as I believe the real estate development potential has merit and is not fully reflected in the current share price.  Strong caveat, there are significant risks to my thesis and conclusions drawn, including the company's failure to secure development approval, and/or a significant real estate correction in the GTA which would result in per acre estimates used being too high.


  1. Hi Daniel. Great blog, you've piqued my interest in TWH.

    One thought I had after reading the company's AIF: the company describes its golf operations as a clustered network offering reciprocal play privileges. I believe this means that if you are a member of one golf course, you get access to the other coursed in Clublink's network.

    So while the development of Glen Abbey is a positive development, it slightly reduces the value of the Clublink network since it removes Glen Abbey. I don't know how to quantify this... it may not be very significant relative to the value of converting the entire golf network into residential property.

    1. Great insight JP, I agree, I also think another related issue is the loss of prestige/recognition attributable to not hosting the Canadian open at Glen Abbey any longer, post development. I'm not sure how to quantify the impact either.