Why Dallas’ Kyle Bass is buying thousands of acres of undeveloped Texas land

Kyle Bass likes to bet big. So it’s fitting that the Dallas-based hedge fund manager, who rose to fame cutting mortgage debt in the run-up to the global financial crisis, is now obsessed with the most abundant commodity in his home state of him: the earth.

The Texas land market, Bass said, “is big and real.”

Bass, 53, is no stranger to bold macro bets. Over the past decade and a half, he has taken on Europe’s sovereign debt market, China’s economy and the Hong Kong dollar, typically using esoteric financial instruments to make his high-risk investments.

These days, it’s buying up swathes of largely undeveloped land in Texas, a much more basic and tangible asset, as a way to attract some of the trillions of dollars earmarked for ESG-related investments that are assessed for their environmental impact, social and government. factors

Conservation Equity Management, an investment firm Bass started last year, has spent $90 million acquiring six properties totaling 37,000 acres. His loot includes a ranch in West Texas with the ruins of a frontier fort, a heavily forested hardwood area in East Texasa wildlife corridor near the Louisiana border, and a tenure in the heart of a $240 million high-tech development outside of Austin.

“I take all of my experience developed over decades of analyzing global macro situations and geopolitical situations and develop a thesis on Texas land as an asset class,” Bass said in an interview with Bloomberg.

The land is attractive because of its almost limitless demand, Bass said, and it helps that Texas has enough of it.

Conservation Equity Management purchased this Chocolate Bay conservation parcel on the Texas Gulf Coast in June. (Conservation Equity Management)

exist 142 million acres of privately owned ranches, farms and forests in the state and values ​​have skyrocketed. The average price per acre of rural land was $4,286 as of the second quarter, an increase of 123% over the past decade, according to the Texas Real Estate Research Center at Texas A&M University. Based on recent average terrain valuesThe state’s wilderness is worth more than $600 billion, and that’s before you factor in potential revenue from sources like renewable energy leases, conservation easements, or carbon credit sales.

Demographics are key to gains in land value, and Bass’s thesis.

The population of Texas grew 42% to nearly 30 million from the turn of the century to 2020. The Texas Demographic Centera statewide entity affiliated with the US Census Bureau, projects it will have 47 million residents by 2050.

“We are in the forefront of a population migration that is going to last at least a decade or more,” said Bass, who was born in Florida but grew up in Texas. “People from the Northeast, people from the West Coast, are constantly going to move to Texas, Tennessee and Florida.”

Potentially threatening that growth is Republican Gov. Greg Abbott’s focus on issues like gun rights and restricting access to abortion, which could dissuade newcomers from typically liberal hubs like New York or San Francisco from moving. The slowdown in the US economy and signs from the Federal Reserve that it will continue to adjust interest rates to fight inflation could also stem the inflow.

“Over the longer horizon, there is some risk that the non-inclusive and restrictive policies recently enacted could discourage knowledge workers from locating in Texas,” said Ray Perryman, chief executive of the Perryman Group, a US-based economic research firm. in Waco. . While his base case is for growth to continue, such a slowdown “could hurt the economy.”

For now, though, the population is booming and open spaces are shrinking. Bass cites research from Texas A&M that shows the state loses a square mile of open space to development every day. The result is that Texas has lost rural land at a faster rate than any other state: nearly 2.2 million acres in the 20 years through 2017.

With breakneck development giving renewed importance to the state’s remaining open land, Bass said he sensed an opportunity.

Pensions, endowments and other institutions have around $17 billion that they are obliged to allocate to investments considered sustainable or socially responsible. That amount could increase by another $40 trillion or so over the next decade, she said.

Opportunities to invest those ESG dollars are slim due to factors ranging from the glacial pace of federal permitting to the nascent development of the ecosystem services industry. Undeveloped land, with its potential to support wildlife, mitigate habitat destruction, host carbon storage facilities, or develop renewable energy, qualifies.

CEM seeks to make a return on its properties by generating income from green strategies, such as regenerative cattle grazing, and eventually selling.

‘More mitigation’

The Texas boom has spawned many projects to offset. The state’s economy is fueled by hubs like the Permian Basin (the nation’s most oil prodigious area) and the expansion of petrochemical manufacturing facilities along the Gulf Coast, in addition to its own power grid and stretch of longest interstate highway.

All of the industrial expansion “is going to require a lot more mitigation,” Bass said. He sees companies that can meet corporate ESG mandates by benefiting from an endless stream of investments.

“Why not institutionalize this business right now?” he said. “We are charging those who are violating the most, and they are happy to pay it.”

ESG has been under increasing fire for misleading claims and bad returns. Bass himself recently blamed skyrocketing energy prices in part on world leaders “following the political lead of NGOs and teenagers.” He acknowledges there is little regulatory oversight, but said the “tailor-made” nature of the market is part of what makes it attractive.

Bass’s view assumes that ESG mandates are here to stay, said Charles Gilliland, an economist at Texas A&M. Real Estate Center. However, the idea, both in principle and in practice, is becoming increasingly politicized. Texas itself has been at the forefront of the backlash, threatening to blacklist asset managers ditching fossil fuels.

Bass made a name for himself with large-scale, aggressive wagers formed through dogged and sometimes controversial research. His bet against subprime mortgages in 2008 brought him instant fortune and credibility, drawing a torrent of money to his fund, Hayman Capital, and an invitation to testify before Congress as an expert witness.

He then turned his sights to China, shorting the yuan, and to the European Union, betting its sovereign debt would collapse. None of the predictions panned out. A crusade to challenge pharmaceutical patents that he says led to higher drug prices has largely failed. In the five years to 2019, Hayman’s assets shrank by more than 80%.

Chocolate Bay Conservation, just west of Galveston, is a 5,403-acre piece of land that serves as...
Chocolate Bay Conservation, just west of Galveston, is a 5,403-acre tract that serves as an ecological bridge between the Chocolate Bay Preserve to the east and the 44,413-acre Brazoria National Wildlife Refuge to the west.(Conservation Equity Management)

logical extension

Despite the global slant of Bass’s earlier interests, he insists his new venture is a logical extension of the skills he honed on Wall Street.

“Buying farms and ranches is not as efficient a market as buying a piece of Microsoft,” he said. “He does not have the millions or hundreds of millions of eyes and analyzes that are being done on him. The number of analysts looking at stuff like this you could probably put it on one hand.”

He quoted the Chocolate Bay Conservation Parcel, which CEM acquired in June for an undisclosed price, as an example. Located on the Gulf Coast just west of Galveston, the 5,403-acre stretch is a mix of upland and wetland habitat that serves as a refuge for the endangered black-cheeked bird and an ecological bridge between the Chocolate Bay Preserve of 4,714 acres to the east and the 44,413-acre Brazoria National Wildlife Refuge to the west.

Companies like Toyota Motor North America, Tesla Inc. and, more recently, caterpillar inc who moved to the Lone Star State in recent years, lured by low taxes and relaxed regulations. Texas gained 170,307 net residents from internal migration last year, census data shows, more than any state apart from Florida.

In a peculiar twist, one of the main assets of the Chocolate Bay parcel is actually man-made: four natural gas wells. Each is a candidate to be a carbon capture and storage facility, a process in which carbon dioxide emissions are injected into deep rock formations to reduce CO2 emissions into the atmosphere. Bass said projections show that each well could sequester up to 2 million tons of carbon a year for up to 15 years, all without altering the aesthetics of the landscape.

The package, which was never released, was explored by Bass’s partner at CEM, Terry Anderson. A trained forester who specializes in wildlife management and owner of seven ranches, he has spent the last three decades working with landowners, regulators and investors on wetland conservation or mitigation projects. Most of CEM’s acquisitions have been off-market and occurred because of the personal connections of Anderson and others in the company.

“If it was a Connecticut company, I never would have been able to buy this property,” Bass said. “A bunch of guys from Harvard with a billion dollars couldn’t do it.”

Eric O’Keefe and Devon Pendleton, Bloomberg

Kyle Bass made $30 million by short selling a Grapevine real estate fund. He is now spending millions to prove his point in court.

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