Mental Models: a Changing of the Guard

A Tontine!

A Tontine is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th centuries. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases.

Posts like the one above reflect the old mental model of TPL.  (Though I never tire about thinking about tontines.  Tontines are the investment/insurance product that that the world doesn’t know it needs.)

Anyhow, the old mental model goes like this: TPL sells land and collects miscellaneous income.  Proceeds are used to repurchase and cancel shares.  The guy to hold the last share out wins whatever is left.

I’d argue that the new mental model is more growth oriented:  TPL is growing a water business which to me seems ripe for a spin-off (tax free!) or a sale at some point.  Royalty interests are growing in value at a pace far greater than inflation (thanks technology!).  Land not used for water has many uses in other oil extraction and logistics activities.  The stock is painfully illiquid and hard to repurchase (thus lower repurchases).  The company pays a dividend and has signaled an intention to make it regular.  What we have here is an asset rich growth stock! 

All signs point to liquidation and repurchase being pretty low on the priority list.  Growing (top line, bottom line, capex, head count, etc) appears to be the main focus.

How are you reconciling the two? I admit to having some trouble as I worry/think about the growth trajectory/asset value tops of the land and its associated income product (though these two things are a circular value).  Does TPL not do its best for the trust if it doesn’t sell all or materially all of its assets at the top?  Is there a new agency problem that needs to be explored with the growth? Employees don’t want to fire themselves; the internal incentive to liquidate has to be lower.  In my estimation, we’ve got a beautiful push/pull going on.  It’s going to be fun watching from here on out.