Changes Loosen Newhall Family’s Company Roots
Lots of firms talk about assets, but how many own a ranch the size of San Francisco? For Newhall Land & Farming Co., that’s just one spread. With another tract twice as big as Manhattan, and six smaller properties as well, conservative old 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 to buy 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, which long ago shifted its emphasis 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 northwest of downtown Los Angeles in the Santa Clarita Valley.
“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.”
Finds Favor on Wall Street
The changes have found favor on Wall Street, where Newhall partnership units closed Monday at $37.125, up 140% in two years.
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. They recognize as well that “the wages of history,” as 72-year-old journalist 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 in 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 scions.
So the company went public in 1969. In the past few years, its traditionally starchy management has restructured the business to increase its value on the New York and Pacific stock exchanges.
From 1980 to 1982, the company bought back a third of its outstanding stock. In 1983, Newhall Land & Farming spun off two partnerships, one for its oil and gas holdings, and another to liquidate some of its shopping centers, commercial buildings and other developments.
Partnership Move Opposed
And on Jan. 8, 1985, in a move opposed by at least two family members, Newhall Land & Farming became a partnership. The partnership enables 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 the investors’ influence.
The company also faces a change in leadership. In typical fashion last June, Newhall Land & Farming 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. The gregarious Dickason remains chief executive, but Lee will succeed him.
Such personnel changes do not come lightly to Newhall Land & Farming. Dickason has spent his entire working career there, and Lee has been with the firm 16 years. Both hold MBAs from Stanford, which has supplied a dozen MBAs to the firm, including former Newhall executives Thomas H. Neilson and Peter Kremer, the current and former presidents of Irvine Corp.
Not Known for Flamboyance
“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 last 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, a 10,000-acre, master-planned community on the 37,650-acre Newhall Ranch.
Newhall Land & Farming has paid cash distributions without interruption for over 50 years, but it is still “an all-time asset play,” Campbell said. Its vast holdings were worth $510 million on Dec. 31, according to the most recent appraisal, or about $26.25 a unit. (A unit is roughly equivalent to a share.)
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 Land & Farming. It received 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.”
Petroleum Partnership Suffers
Newhall Resources, the spin-off oil and gas partnership, also has been buffeted by falling prices.
But Newhall Land & Farming isn’t hurting much. Its corporate brand of farming suffers less than that of family farmers. The company expects, like the land itself, to outlast any agricultural slump, no matter how prolonged.
And the company hopes its current emphasis on development, which accounted for 71% of its revenue last year, will enable it to exploit lower 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 its major properties, the Merced Ranch in the San Joaquin Valley, is up for sale.
Asset sales are nothing new for Newhall Land & Farming. In 1976 and 1977, it sold two San Joaquin Valley ranches totaling 22,000 acres for $32 million. In 1978, it sold Magic Mountain amusement park, never a good performer financially, for $51 million.
Planner Hired for Valencia
The core of the company’s current business goes back to the 1960s, when it hired planner Victor Gruen to lay out Valencia in an unincorporated part of Los Angeles County that was originally a Spanish land grant called Rancho San Francisco. In 1875, Henry Mayo Newhall bought what was then a 46,000-acre property for $96,000, a price dwarfed by the current value of several hundred million.
Only 3,000 of Valencia’s 10,000 acres have been developed, and these include apartments, condominiums, homes, stores and industrial properties. About 100,000 people live in Valencia now, with a population of 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 parts of the San Fernando Valley.
Now that Newhall Land & Farming is a partnership, its operations have changed. It has no annual meeting, 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.
‘Honorary Cousin’ Has Stake
The partnership is run by general partners Newhall Management Corp., Dickason and Lee. Newhall Management’s board is dominated by the original and extended Newhall family, 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-largest 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 a share, its price on the conversion day.
To gain shareholder approval for the plan, Newhall Land & Farming paid them $86.6 million, or $9.56 a share, to cover their capital gains taxes. Robert Wilke, the company’s chief financial officer, suggests that the tax-exempt distribution was half windfall, since most non-family shareholders didn’t inherit their stock, and so had far smaller capital gains.
