Aggressive New Management : Newhall Land Sheds Slow-Growth Image
Lots of firms talk about assets, but how many own a ranch the size of San Francisco? For Newhall Land & Farming, that’s just one spread. With another tract twice as big as Manhattan, and six smaller properties as well, Newhall is among California’s top 10 landowners.
Change does not come easily to a 103-year-old real estate and farming business that has evolved only gradually since Henry Mayo Newhall started buying distressed Spanish ranchos in the 1870s. But in recent years it has been undergoing a transformation.
The Newhall family is slowly losing control of the partnership, whose emphasis shifted long ago from cattle to condominiums. More of the company’s assets are being sold. Leadership is passing from the family’s hand-picked chairman to a younger man. And management is moving faster to develop Valencia, the company’s home base 35 miles north of downtown Los Angeles in the Santa Clarita Valley.
Wall Street Favorably Impressed
“You’re seeing a more aggressive approach to development,” said Newhall President Thomas L. Lee. “But you’ll also continue to see a conservative management style.”
The changes have found favor on Wall Street, where Newhall partnership units closed Monday at $37.125, up 140% from two years ago.
But not all of the changes have met with approval from all of the Newhalls, who have seen their stake in the company decline from 97% to about 40% in the past 20 years. All recognize as well that “the wages of history,” as 72-year-old Scott Newhall put it, will further erode his family’s control of the firm and its 123,200 acres.
The company’s transformation really began 20 years ago, when it built its first homes at Valencia. Development brought the need for increased capital at the same time that pressure for liquidity was mounting from the growing Newhall family and its offshoots. So the company went public in 1969. In the past few years, its management has restructured the business to boost its value on the New York and Pacific stock exchanges.
From 1980 to 1982, the company bought back one-third of its outstanding stock. In 1983, Newhall spun off two partnerships, one for its oil and gas holdings and another to liquidate the shopping centers, commercial buildings and other developments that it owned.
And on Jan. 8, 1985, in a move opposed by at least two family members, Newhall became a partnership. That enabled the company to sell assets and pass through earnings to investors without paying corporate income taxes, but it also turned the shareholders into limited partners, reducing their influence.
Newhall also faces a change in leadership. Last June, in typical fashion, Newhall began preparing for the mandatory retirement of James F. Dickason, chairman of the management company that runs the partnership--even though he won’t be leaving until July 1, 1987.
Dickason was replaced as president by Lee, a quiet, 43-year-old Midwesterner who was senior vice president for real estate. Newhall’s gregarious chairman remains chief executive, but Lee will succeed him in those jobs.
Such personnel changes do not come lightly to Newhall. Dickason has spent his entire working career there, and Lee has been with the firm for 16 years. Both hold MBAs from Stanford, which has supplied a dozen MBAs to the firm, including former Newhall executives Thomas H. Nielsen and Peter Kremer, the current and former presidents of Irvine Corp.
Prefer Low-Key Style
“They don’t leap ahead and do things in a flamboyant way,” said Kenneth Campbell, president of Audit Investments, a New York securities firm that has recommended investing in Newhall for the past two years. “But population and time are on their side.”
So is Wall Street, apparently. Encouraged by the strong market, the company raised $25 million early in March to help finance $100 million in new commercial development at Valencia, Newhall’s 10,000-acre, master-planned community on the 37,650-acre Newhall Ranch.
Newhall has paid cash distributions without interruption for more than 50 years, but it is still “an all-time asset play,” Campbell said. Its vast holdings were worth $510 million on Dec. 31, 1985, according to the most recent appraisal, or roughly $26.25 a unit.
The company also has shown strong profits and revenue. Earnings in its first full year as a partnership were $37.5 million, up 63% from the 10-month period ended Dec. 31, 1984. Revenue rose 38% to $152.3 million.
Not everything, however, is coming up roses at Newhall. It got 27% of its revenue from agriculture last year, raising cattle and growing a range of crops dominated by cotton and wheat. As its annual report says succinctly: “Results for the agriculture group have been depressed for three years.”
Newhall Resources, the spinoff oil and gas partnership, also has been buffetted by falling prices.
The company hopes that its current emphasis on development, which accounted for 71% of its revenue last year, will enable it to exploit low interest rates and strong demand for new homes in Southern California.
“Our long-term strategy is to maintain control of our tremendous real estate assets, to enhance the value of our land and, finally, to accelerate the development of Valencia,” Lee said.
The company also is selling more assets--$15.8 million worth last year versus $7.1 million the year before--to finance its growth. One of the major Newhall properties, the Merced Ranch in the San Joaquin Valley, is for sale now.
Asset sales are nothing new for Newhall. In 1976 and 1977, it sold two San Joaquin Valley ranches totaling 22,000 acres for $32 million, and in 1978 it sold its Magic Mountain amusement park for $51 million.
The current core of Newhall’s business goes back to the 1960s, when the company hired Victor Gruen, a well-known planner, to lay out Valencia in an unincorporated portion of Los Angeles County that was originally a Spanish land grant called Rancho San Francisco. In 1875, Henry Newhall bought what was then a 46,000-acre property for $96,000. The current value is estimated at several hundred million dollars.
Only 3,000 of Valencia’s 10,000 acres have been developed so far, and these include apartments, condominiums, homes, stores and industrial properties. An estimated 100,000 people live in Valencia now, with 187,000 projected by the year 2000.
Valencia is generally well regarded by planners for its open spaces, clustered homes and system of walkways insulating pedestrians from traffic.
It is criticized for lacking a town center or focal point but praised as an alternative to the miles of tract houses on gridiron streets that characterize the San Fernando Valley.
Now that Newhall is a partnership, its operations have changed. It has no annual meetings, for example, because partnerships that act like corporations get treated as such by the Internal Revenue Service, and tax-avoidance was the main reason for the switch.
The partnership is run by general partners Newhall Management Corp., Dickason and Lee. Newhall Management’s board is dominated by the Newhall family and its offshoots but also includes Ezra K. Zilkha, a New York investor described as “an honorary cousin” by Scott Newhall.
The Zilkha family’s 6.6% stake is the second biggest in the company.
Conversion to partnership did have its headaches. When the company exchanged its shares for partnership units, shareholders were considered for tax purposes to have sold their stock for $39.625 per share, its price on the conversion day.
To gain shareholder approval for the plan, Newhall paid them $86.6 million, or $9.56 a share, to cover their capital gains taxes.
