Buck Hill Falls: a ridiculously cheap oddball

Long time readers know that I have a strong affection for unknown and unloved stocks.  Sometimes these companies make great investments, but no matter the quality of the company I love the process of researching these companies.  For some reason I find it enjoyable to go hunting for hard to find information.  At times the destination is worth the journey, but mostly the journey is enjoyable on its own.

I enjoy a good hunt, some people enjoy hunting down certain vintages of wine, for others parts for old cars, and for others memorabilia.  I enjoy collecting annual reports for unlisted companies that are hard to obtain.  The process is never the same, but usually follows a general flow.  I purchase a single share with my broker.  Then I contact the company and ask for a copy of the annual report, sometimes I'm ignored, other times I receive something in the mail a few days or weeks later.  I usually need to furnish proof of shareholding, and other times I've had to register shares in my own name.

My hunt for the Buck Hill Falls annual report was as unusual as this company is.  I purchased a share, but when I tried to contact their investor relations contact I was met with a full voice mail box.  I found another number allegedly assigned to them, but it was disconnected.  I didn't do anything further for months.  Then out of the blue I received a letter from the company and a proxy voting form, but no annual report.  I wrote a letter to the Chairman and sent a copy of my proxy as proof of shareholding, days later I was holding the annual report.

Buck Hill Falls is a private 4,500 acre resort community in the area of Pennsylvania called The Poconos.  The Poconos are beautiful mountains, I've driven through the area, and vacationed there as a child.  The area is close to New York, Philadelphia, and Scranton, but yet remote enough that it feels far away from civilization.

From the company's website their community looks very nice, they have a golf course, a pool, fishing, hunting, and hiking, as well as on site restaurants.  The resort is completely private, which means they have to pave their own roads, and provide their own water service.  I believe this is why the resort is public, they went public to raise capital for community improvements.  There is a blurb in the 2002 Walkers Manual that mentions the company sold shares to residents and shareholders for $20 apiece.

From an investment perspective the company does appear interesting.  They have a book value of $3.1m, which has just about doubled since 1998, which implies book value growth of 4.6%.  The company is trading at a steep discount to book value, their market cap is $1.19m. The company trades for 30% of book value.  Suddenly that 4.6% growth looks reasonable at a 70% discount, becoming 15% growth on an investment at today's prices.

The company has two classes of shares, Class A and Class B.  The Class A shares were issued during a stock offering in the late 1990s at $20 a share.  The shares are non-transferable unless they are converted into Class B stock.  A resident or shareholder in 1997 who purchased stock at $20 has to convert their shares to Class B to liquidate at the current price of $9, quite a hassle to lock in a loss.  My guess is most of the liquidity for this stock is coming from residents and former shareholders finally liquidating their positions.

The company earned a small net income of $54k last year, and $90k in 2012, but my sense is that the company isn't being run to maximize income, or shareholder value.  Rather the purpose of the company is to support its residents.  The company has a few million dollars in debt all related to infrastructure improvements.  They are re-paving roads, re-paving parking lots, upgrading the swimming pool, and upgrading their sewer infrastructure.  The problem for shareholders is none of these expenses do anything to actually increase profits.  At the most these expenses are required maintenance to keep the value of the property stable.  At worst they're frivolous expenditures that benefit residents and destroy shareholder value.

As I read and thought about the company I realized that while this is attractively priced it might never make a good investment.  Even though the company has public shares, and public shareholders, the company's true owners are the residents.  The company provides a way for the residents to own a piece of where they live and vote on certain matters.  It's like a publicly traded homeowners association (HOA).  I'm sure my realization isn't original, that's most likely the reason the company trades at such a depressed valuation.

An investor squinting very hard might see value in the company's water utility, or in the 4,000 acres of undeveloped timberland held on the books at pre 1940s prices.  The question I ask is what good is 4,000 acres of timber if the company never plans to develop it, and only harvests a small portion each year?  The company's assets might be valuable, and if they were all priced today the company might be selling at a ridiculous valuation of 5-10% of book value, but does that matter if the company never does anything with them?  For me Buck Hill Falls will remain a fascination, but it's unlikely I will ever increase my one share position, and unless I continually write letters I might not even receive another annual report.

Disclosure: One share of BUHF