Ranch Investor Found His Inefficient Market in Big Sky Country

(Bloomberg Markets) -- Beartooth Group invests in ranches. The Bozeman, Mont.-based investment manager has raised a total of about $100 million in a series of private equity funds to buy distressed properties in states such as Colorado, Idaho, Montana, and Wyoming. It typically does conservation work to restore the land and aims to sell the ranches at a profit.

Managing principal Robert Keith took a circuitous path to the business. When he was growing up in Minneapolis, his family fell in love with the West after vacationing in Jackson Hole in Wyoming. His parents eventually bought a ranch in the state as a second home, Keith says, and they moved there around the time he went to Yale.

After working as an equity analyst at Morgan Stanley in New York during the dot-com boom, Keith left for Stanford Graduate School of Business. Wanting to become an investor, he was looking for a market that was less efficient than the Wall Street equities world. Courses on environmental management and entrepreneurship resonated with him, providing examples of companies that gained competitive advantages from doing good for the planet. Keith went to work for a venture firm in California after getting his MBA. “On my nights and weekends, I was trying to create a ranch index to better understand this ranch investing world because there was zero information out there on it,” he says. Public disclosure of real estate sale prices isn’t required in states such as Idaho, Montana, and Wyoming. Keith quit his VC job before co-founding Beartooth with a friend from Stanford in 2004.

Keith, 46, spoke with Bloomberg Markets in October. The interview has been condensed and edited for clarity.

JON ASMUNDSSON: You built a ranch index before starting Beartooth. What did the index consist of?

ROBERT KEITH: What I tried to do is put together a whole series of paired sales. If a ranch sold—and I’m making up numbers here—in 1987 for a million bucks, and the same exact ranch sold again in 1995 for $2 million, then I could say, “OK, that ranch on average appreciated this much per year.” And I’ve got one data point. Then I just overlapped a ton of different data points from paired ranch sales. Certainly not statistically significant, but it gave me something to go on: a solid, steady, inflation-plus-a-couple-of-points appreciation rate, which makes sense because effectively you’re dealing with an asset that is limited in supply.

Second—and this is where I really got excited, because I’m kind of a portfolio geek and I hate risk—the correlation with other asset classes was just shocking. Or I should say, the lack of correlation—­meaning that for volatile asset classes like venture, international equities, the ranch market was actually inversely correlated. And for assets you’d think it would be closely correlated with, it was a shockingly low figure. The closest correlation was timber and farmland, and they were only 0.4 correlation.

JA: If ranchland was inversely correlated with international ­equities, have there been drops in ranch prices?

RK: Yeah. There certainly have been periods when the ranch ­market’s been down. As of the time I did that work, and I’m a few years from having re-upped it, what I looked at was a typical holding period for a ranch, which is not a year. It’s more like 20 years. So how long is my holding period going to be as an investor? When I looked at that, as long as I said three to five years or more, there was no three- to five-year holding period when you would have lost money.

These are not up-to-date figures because, frankly, I haven’t had time to do anything with this in a while. But the idea was, look, I’ve got an asset that’s effectively moving differently than most other assets. It has kind of a slow and steady-as-she-goes ­investment profile. If I’m comfortable holding it for a couple of years, it’s—I don’t want to say it’s hard to lose money—but the probability is pretty darn low.

The whole concept of Beartooth is: inefficient market. And within an inefficient market, we can find distressed ranch ­properties that are owned generally by distressed sellers. So we can get a nice price on the way in, and then we can add value through habitat restoration and resell them. We can drive our financial returns with the environmental work we’re doing.

JA: Can I draw you out a little bit about what makes these ­properties distressed?

RK: Well, so at one end of the spectrum: gold mining, coal mining, hazardous chemical spills—we’ve cleaned up all those things. Meth labs.

JA: Wow.

RK: Yeah, it’s pretty brutal stuff. Nobody wants to touch it, right? What we’re looking for is the scenario where it looks like a really horrible cleanup. It looks like it’s going to be a gazillion dollars to do it and the liability is going to be atrocious. But once you dig into it, you can put a price on that risk.

JA: Have you ever come across properties that are too risky?

RK: No. But there is stuff that is too much: Superfund site or something like that. Most of our stuff isn’t. I mean, it sounds horrible, but it’s not that bad. The advantage we have is that in this marketplace, most buyers, the folks we would be competing against to buy that property, are wealthy individuals, and they don’t want to touch that with a 10-foot pole. When that seller who’s got the formerly gold mines piece of property that still has hazardous materials on it is really needing to sell, we can step in.

The other area where we seem to thrive is where the owner of the ranch has a unique situation. I liken it to a lower-middle-­market buyout fund or something, meaning that we’re willing to work with owners to take them entirely out—just buy the whole ranch from them—but we’re also willing to partner with them to try and give them more money on an eventual sale. So maybe they want to hang on to a piece of the ranch. We can work with those types of people. Absolutely. We take on what they don’t want to own anymore.

The other thing we’ve done a lot is work with ranch owners’ accountants from a tax standpoint, because, particularly if it’s been in the family for a while, the basis for an owner of a ranch is really, really low. That’s going to result in just gargantuan taxes. Often the ranch is the only source of wealth, so it’s a tough conundrum for a lot of folks. But we work with expert tax planners and others to help ranchers understand how they might be able to maximize their net after-tax proceeds rather than just get the highest sale price possible. The nice thing about this market is there aren’t many people doing that except for us.

JA: There are none except for you?

RK: Yeah, I’m sure a few individual owners are, but it’s really a retail market in which if you own a ranch and you need money, you sell the ranch. So when we come in and say, “Well, sure, you may think that’s the only option now, but what if you kept the back 40, where Grandpa is buried, and you wanted to hang on to a house?” We can do that. We can work on the rest of the ranch. It opens a lot of doors when we’re able to say we do so much more than just buy your property.

JA: In one of your videos you mentioned buying a property in central Idaho and opening up a stream to allow chinook salmon to reach their spawning grounds.

RK: Yeah, that was a long time ago, probably a 2008 investment. The ranch was called Big Springs Creek Ranch, on the ­Pahsimeroi River. There is still today a population of salmon, anadromous salmon, that come from the Pacific up the Columbia and somehow get over the dams and up the Snake River and then into the Pahsimeroi.

The Nature Conservancy of Idaho and Trout Unlimited of Idaho and the state of Idaho were concerned because the key part of keeping that alive is the small tributaries that feed those big rivers. We worked with those organizations to restore this amazing creek that literally is a spring. It comes out of the ground right there on our ranch to form this amazing clear, clean water source. We worked with those partners to remove obstructions—some dams that were in the creek on the ranch—and to really rehab the creek banks to make it more suitable for spawning. As a result, the number of redds—basically biologists come through and count the different areas where eggs have been deposited—went from like two in the years prior to our work to 30 immediately there­after. It’s not going to change the fate of salmon in the Northwest, but if you did enough of these, it certainly would.

JA: Could you tell me a little bit more about the actual physical work of restoring rivers?

RK: I know enough to be dangerous about that, and our team internally knows enough to be dangerous, but we’re not the experts. I’m not a biologist; I’m an investor. The key is that we know people who are experts in those areas. The most recent creek restoration project was two summers ago, just west of Bozeman. We worked with Trout Unlimited Montana, we worked with Montana Fish, Wildlife and Parks, which is our wildlife agency, and got those partners out on the property to look at it. Effectively, what we were dealing with is a mountain stream that flows into a major river. After this [record hot] summer in particular, one of their major goals is to get cold water into the major rivers from these mountain streams, vs. warmer water, and to have really good habitat in these mountain streams. This mountain stream had been severely degraded. The whole property had been managed in a way that—when they started truly managing it 100 years ago, 50 years ago, even 20 years ago—probably was the highest and best use from an economic standpoint. They farmed the heck out of it and removed trees and bushes. Every inch that could be farmed was farmed, every inch that could hold cattle held cattle. Those were the incentives that made the most sense. I don’t blame anybody for having treated it that way.

The broker priced it as an agricultural type of property. We saw something different. We got our partners out there and kind of got everybody around the table. You’ve got the best and the brightest biologists, both from the public sector and the private sector, saying, “Here’s the treatment we would recommend to make this creek have better and more habitat and to have colder water.” In this case, it was taking a 30-foot-wide creek that was a foot deep and had no vegetation on its banks and turning it into a 10-foot-wide creek with deep holes and riffles and runs and a whole bunch of willows and cottonwoods and aspen on its banks.

JA: Your business model is to some extent dependent on wealthy people who want to buy ranches. What’s been happening during Covid?

RK: In late February, early March of 2020, when we in the U.S. were kind of waking up to the fact that Covid was here, I sent a note to our investors saying, “Hey, this is going to be bad. No one’s going to be traveling. No one’s going to be wanting to go to Montana. I don’t know when I’m going to sell these things. Get ready for a bumpy ride here.” Then we all went into—I don’t want to call it lockdown, but whatever we went into—quarantine-ish thing. It was about May before it seemed like most of the country was kind of emerging. I wrote another letter to investors saying, “Oh my gosh, I was so wrong.” What happened was, I think if you imagine you have gazillions of dollars and you’d at one point in time considered buying a ranch, all you can think about while you’re locked up in your apartment is getting the heck out of there. It really unleashed a flood of what I’m going to call—and this is not meant in any kind of pejorative way—but like panicked buyers. A lot of people started entering the ranch market or certainly got far more serious about buying a place. So, yeah, high-net-worth individuals were all over the ranch market all summer 2020 into the fall and winter and spring of 2021.

JA: From the time you started 20 years ago, has there been any shift in the market?

RK: Certainly, yes. I think probably if you went back 10 or 15 years ago, buyers were very focused on fly-fishing properties. That was really where the value lay. And this was partly driven by A River Runs Through It and The Horse Whisperer.

Probably 10 or so years ago, I started to wonder, “Is the market deeper than just fishing buyers?” There’s always a big elk hunter part of it as well. Where I think we’ve now seen the market go is, you’re not buying a ranch, you’re buying a place to have amazing experiences with your best friends and family. For you, that could be a condo in Hawaii; for others, it’s a house in the Hamptons; but for a certain segment—and it’s a lot bigger than I’d realized—it’s a big, wide open space that they want.

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