Newhall Land Seeks to Grow, but Roots Remain in Valencia
When Newhall Land & Farming’s directors met recently to replace James F. Dickason, who retires Saturday as chairman and chief executive, they not unexpectedly named the company’s president, Thomas L. Lee, the new chief executive.
But Lee was not immediately elected to succeed Dickason as chairman of the board. Not that Newhall plans to bring in an outsider; Lee is expected to gain that post as well, and the chairmanship simply remains vacant in the meantime.
It’s just that at 104-year-old Newhall Land, where relatives of the founding Newhall family still control 30% of the company, change comes gradually.
“Jim (Dickason) was CEO for six years before he gained the chairman’s title,” said Lee, 45. “You earn your stripes.”
And true to Newhall’s conservative style, Lee will try to earn his by staying close to the company’s current strategy of focusing its resources on Valencia, the 10,000-acre master-planned community Newhall Land has been developing for more than 20 years in the Santa Clarita Valley.
“We don’t really have any big changes in the works,” Lee said in a recent interview at Newhall’s Valencia headquarters. “We think we’re on a good course.”
Which does not mean Lee is averse to any change. One item on his agenda is to have the company acquire additional land to build another planned community, which would be Newhall’s first major land acquisition in 28 years.
“We have the money and it’s a question of finding the right piece” of land, he said, adding that Newhall Land would prefer to find another ranch in Southern California.
Newhall Land already is one of California’s largest landowners, developers and farmers. It owns 123,500 acres spread over eight ranches in the state. Seven of the ranches are used for raising cattle and for growing two dozen crops, and the other is the 37,250-acre Newhall ranch that encompasses Valencia.
About 3,500 of the 10,000 acres slated for development in the Valencia area alone have been developed so far. Earlier this month, the Los Angeles County Board of Supervisors approved Newhall’s plan to start its next major residential project, Northbridge, which calls for 1,830 homes to be built on 605 acres.
Costs of new housing in Valencia range from $70,000 condominiums to $400,000 single-family homes. The company places Valencia’s current population at about 20,000, and the population of the Santa Clarita Valley overall at 105,000.
Newhall last year earned $43.7 million on revenue of $169.2 million, with about 75% of the revenue generated by real estate activities and the balance from farming. On the real estate side, Newhall builds the homes it sells, develops commercial properties to generate leasing income and sells land for commercial and industrial use.
Publicly Held Partnership
In early 1985, Newhall converted from a corporation to a publicly held partnership, whose 20.7 million units are traded on the New York and Pacific stock exchanges like shares of stock. But unlike a corporation, the partnership’s earnings and other income flow directly to the limited partners without first being taxed at the corporate level.
The market value of Newhall’s land and other assets was roughly $565 million as of Dec. 31 (or $27.30 per unit), up from $510 million a year earlier, according to an appraisal done for the company each year.
Investors, however, assign a higher value--about $823 million based on the unit’s closing price Monday of $39.75--on the expectation that the ongoing development of Valencia will enhance Newhall’s overall growth.
Newhall Land and many other real estate companies are known in Wall Street parlance as “asset plays,” that is, companies whose attraction as investments reflects the expectation that their overall property values will rise steadily even if their quarterly earnings do not.
“Earnings on a quarterly basis mean little, just so long as your cash flow is covered and so long as you feel comfortable that the long-term trend of values in the Valencia area is still up,” said Kenneth Campbell, president of Audit Investments, a securities research firm in Montvale, N.J., that recommends Newhall’s units.
Year-to-year comparisons of Newhall Land’s financial results often are difficult because its sales of land and developed property can be erratic.
Strong Land Sales
For example, the firm expects to sell 25 to 30 acres of industrial land this year. Ordinarily that would be a brisk sales rate, except that sales in 1985 and 1986 were an especially strong 67 acres and 52.5 acres, respectively.
So with industrial land sales trailing last year’s pace, Newhall Land’s first-half 1987 profit fell 28% from a year earlier to $11.7 million from $16.3 million, and revenue slipped 5% to $64.4 million from $68.1 million.
On the other hand, Newhall’s home sales appear to be picking up, and the company forecasts home closings to exceed the 517 recorded last year. And as Valencia’s residential population goes up, “more businesses probably will be drawn to the area,” Value Line Investment Survey, a securities research firm in New York, said in a recent report.
Lee said that although he plans no major policy changes at Newhall, the job of continuing to develop Valencia is challenging enough.
Infrastructure Costs Rising
One hurdle is the cost of Valencia’s infrastructure--the roads, sewers, water systems and so forth. Lee said Newhall Land and other developers each year are having to pay more to pick up infrastructure costs that are not covered by government, costs that the company adds on to the price of its homes.
But each time those costs are passed on to the home buyer, Newhall Land risks losing customers.
“If you increase the price of all housing in this valley by several thousand dollars (to cover infrastructure costs), there’s just a whole bunch of people in the marketplace that can no longer afford to buy,” he said.
“The challenge that faces us is to continue to get houses built and industrial land available for sale without incurring those costs unnecessarily,” he said.
And like any developer, Newhall Land has to keep a close eye on the housing market, trying to ensure it does not have rows of newly built homes sitting empty when interest rates soar and demand plunges.
Newhall Land has an advantage even then, however. “We’ve owned this land forever; we don’t have heavy carrying costs associated with the land, so we don’t have to force sales activity to take place when the market goes to hell,” Lee said. “We can ride out the storm and wait for it get better again.”
NEWHALL LAND & FARMING CO. AT A GLANCE Newhall Land & Farming Co., which traces its roots to 1875, is one of California’s biggest landowners and the developer of Valencia, a “master-planned” community 35 miles northwest of Los Angeles. The company, with 550 employees, owns 123,500 acres in the state. Newhall also has a major farming business involved in cattle, two dozen crops and feed commodities.
In 1984 the company changed from a corporation to a limited partnership whose investment units are publicly traded. Newhall also changed the end of its financial-reporting year from Feb. 28 to Dec. 31, or a calendar year; In millions.