By Meena Krishnamsetty - October 10, 2012 | Tickers: ALEX, ASEI, GY, GEOY | 0 Comments

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Marcato Capital Management is a two-year old firm managing $750 million that focuses on value investments across various sectors. The firms sweet spot is $1 billion $5 billion market cap companies. Last Monday Mick McGuire, founder of Marcato and former analyst for Bill Ackman and Pershing Square Capital, gave a presentation at the Value Investing Congress that focused on three hidden real estate value plays.

Alexander & Baldwin (NYSE: ALEX) is a real estate and agricultural company that focuses on real estate development and commercial housing in Hawaii. McGuire believes that the land on Alexanders books is held at a value much lower than its potential market value. Most of the plots are farmland, but Alexander believes the value could be unlocked through residential or industrial development.

Alexander represented over 20% of Marcatos 2Q portfolio, and was the firms second largest holding. This included a 33% increase from the first quarter. However, McGuire was topped by mentor Bill Ackman in share ownership amongst the funds we track, with Marcato owning 1.3 million shares and Ackman 3.6 million.

McGuire noted in his presentation that the net asset value on Alexanders commercial real estate should total just over $900 million, versus the book value of around $800 million. Marcato also completed a DCF on each of Alexanders development properties, calculating the aggregate of all properties to be around $300 million. Including a net asset value on joint-venture assets with the other values puts the net asset value around $30 a share, while the company currently trades around $29.

McGuire then took his analysis a step further by accounting for Alexanders current cash flow from operations, adding another $17 to the valuation. This puts the fair value of Alexanders shares at $47, compared to the companys current sub-$30 trading price.

Gencorp (NYSE: GY) is McGuires second pick. The company is a manufacturer of aerospace and defense products and systems, but also focuses on re-zoning, entitlement, sale and leasing of excess real estate assets. McGuire believes the key to GenCorps land value is in a California region that once acted as a buffer between residential areas and test sites for devices. GenCorp has permits to develop around 6,000 acres, with most estimates putting the land value at $50,000-$60,000 per acre. In addition to its California assets, McGuire also places the value of the companys excess office space at a $66 million based on net operating income of $5 million.

For 2Q, the company reported that cash from operating activities was $29.3 million, compared to $14.6 million in the second quarter of fiscal 2011. Also worth noting is the companys trailing P/E of 101 and its forward P/E of 25. However, McGuire believes that earnings are understated due to non-cash accounting treatments, and so he believes the company trades at P/E of 8x true economic earnings.

This is probably the most hidden real estate playhaving less evident ties to the real estate market when compared to McGuires other two picks. GenCorp competes with a couple other key defense product manufacturers that trade above the company on a P/S basis. GenCorp trades at a 0.6, while American Science & Engineering (NASDAQ: ASEI) trades at 2.9x and GeoEye (NASDAQ: GEOY) 1.9x.

Read the original post:
3 Hidden Real Estate Value Plays for Strong Long-Term Gains