37,000-Acre Asset : Value of Newhall Ranch at Heart of Investor Dispute

Tom Lee stops his 1988 Lincoln Continental at the top of a small hill in Valencia, an hour northwest of downtown Los Angeles, and points to the right side of the street. There, workers are building a row of $500,000 houses alongside an arroyo.

To Lee’s left, a block away, is a row of smaller houses priced from $160,000 to $200,000. “We purposely mix them here,” said Lee, president and chief executive of Newhall Land & Farming Co., which for the past 21 years has been developing Valencia as a master-planned community. “We think it’s important there be a lot of diversity in a neighborhood,” Lee said.

Newhall’s “neighborhood” is longer than an evening stroll. The housing tract is part of the 37,000-acre Newhall Ranch on which Valenica is being developed. The ranch, stretching west from Valencia into Ventura County, covers 58 square miles, or about twice the area of Manhattan.

Newhall ranks as one of California’s biggest landowners, with 123,200 acres in all, including seven real estate parcels in Central and Northern California devoted to agriculture. But the crown jewel is Newhall Ranch. Into the next century, as long as people buy homes in the Los Angeles area, this property should be the equivalent of a real estate annuity, with profits continuing to roll in.

Last year, Newhall’s Valencia’s residential and commercial development accounted for 75%, of the company’s $183.3 million in revenue, and 93%, of its $48.1 million in pretax operating income.

Valencia now covers 3,500 acres of the ranch, but Newhall’s master plan calls for the town to spread over 10,000 acres. There are 8,000 single-family houses and condominiums in Valencia and another 3,000 either being built or approved for construction, with enough room to build 50,000 overall.

Lee, 46, figures that he can work another 20 years, then retire and there will still be land left to develop. “Obviously we’ve got a long way to go,” he said.

In 1875, the land was known as El Rancho San Francisco and covered about 46,000 acres when Henry Mayo Newhall, a transplanted Yankee, bought the property for $90,000, or less than $2 an acre.

It’s the value of this land today that has provoked a nasty dispute among Newhall’s investors. The company first sold stock to the public in 1969. It converted to a partnership in 1984, and its partnership units trade on the New York Stock Exchange. Newhall officers and directors now own 21% and Newhall family members own an additional 16%. In March, to preempt the threat of a potential hostile takeover, the company asked its unit holders to adopt defensive measures. One key proposal requires 75% of Newhall’s units to be voted in favor of a takeover, up from a simple majority vote.

One of its major investors, the Chicago investment firm O’Connor Securities, fought back by running several full-page newspaper ads claiming that the proposals, by blocking unfriendly merger bids, would deprive investors of getting a higher price for their units.

The proposals passed in May, but another group of dissident investors sued velNewhall in Los Angeles Superior Court to have the provisions thrown out. Both sides are still in court, and much of the squabbling centers on how much Newhall is worth.

There’s no argument, though, about why someone would want the company.

Valencia is still smaller than the Orange County master-planned communities of Mission Viejo (8,500 acres developed) and Irvine (6,000 acres). Those developments surged in the 1960s and 1970s as people fled Los Angeles and headed south toward the Pacific Ocean.

But now that Orange County is crowded, people are looking north to find affordable housing and a bit of space--and there sits Newhall Land with Valencia, “waiting our turn” as Lee put it.

“A lot of their good fortune is what’s called luck,” said Jon Fosheim, president of Green Street Advisors, a Newport Beach research firm that follows publicly held real state companies. The luck, he said, is that Newhall owns one of the last big parcels of undeveloped real estate near Los Angeles.

As a master-planned community, Valencia is intended to be self-contained, with stores, parks, hospitals and schools. The idea has been around since since the 1940s, when William J. Levitt revolutionized suburbia by building 17,447 nearly identical houses on Long Island, N.Y.

“Levittown,” was unusual because it was not centered around an industry or other source of employment. Valencia, however, offers a variety of housing, from $75,000 condominiums on up. Newhall also is building an industrial park that currently houses 300 companies and their 8,500 employees. Although Newhall builds nearly all of its houses, it sells much of the land for industrial and commercial development.

Can’t Build Willy-Nilly

Last year, Valencia (pop. 25,000), Newhall, Saugus and Canyon Country were incorporated into one city called Santa Clarita. The population of the entire Santa Clarita Valley now exceeds 125,000 and could reach 358,000 by 2010, a recent Los Angeles County Regional Planning Commission report estimated.

Despite the growing interest in Valencia, Newhall can’t build houses willy-nilly. Government clearance for a new tract can take up to five years. And Newhall has occasionally misjudged the housing market.

“Back in the late ‘60s there were a couple of months when the first Valencia project was the hottest selling housing project in the whole United States,” Lee said. “So everybody sat down with their calculators and figured out that if you extrapolated that sales rate of a couple of months over the next 20 years. . . . It just didn’t happen.”

Three recessions between 1969 and 1982 didn’t help housing sales, nor did the double-digit mortgage rates in the early 1980s.

Then there was the earthquake centered in nearby Sylmar in 1971, which registered 6.5 on the Richter scale and killed 56 people. The quake “scared everybody,” recalled Scott Newhall, a Newhall Land director and 74-year-old great-grandson of Henry Mayo Newhall. “We went into a terrible decline for a while. But we kept going.”

Hard to Assess Value

Only last month did Newhall unveil plans for Valencia’s first major shopping center, a $180-million mall scheduled to open in 1991. Newhall originally expected a shopping mall to be built in 1975, but there weren’t enough people to attract the stores.

To help buffer itself from economic setbacks, in March the company sold a 33-acre residential parcel in Valencia to an Orange County builder, Warmington Homes, for $17.5 million. By selling the land, Newhall got a cash infusion and simultaneously cut its risk of having an excess housing inventory. “We would expect to do more of this” in the future, Lee said.

Those irregular land sales and the economy’s cycles also make it hard to place an exact value on Newhall, giving the company and its dissident investors plenty of room for argument.

Each year, Newhall hires an independent firm to appraise the value of its holdings, and the value totaled $707 million at the end of 1987 (of which the Newhall Ranch accounted for 83%). The 1987 valuation equals $35.35 per Newhall unit, based on Newhall’s 20 million units outstanding. But the stock market--reacting to the recent takeover speculation--valued Newhall as of Monday’s close at $42.125 per unit, down 37.5 cents from Friday.

Rocky History

Some other recent valuations, disclosed in the court battle between Newhall and the dissident investors, have placed Newhall’s value as high as $92 per unit. But Fosheim scoffed at such appraisals, saying they’re based on “gigantic variables” such as future land use regulations, which could include slow growth initiatives that would crimp Newhall’s business.

Local planning rules were of little concern to Henry Newhall when he bought the land a century ago. Newhall made a fortune as an auctioneer and railroad financier in San Francisco.

After Newhall died in 1882 from a horse-riding accident, his five sons formed Newhall Land & Farming in 1883 to manage the land. Early on, they used the land mostly for cattle ranching.

The company’s first major setback came in 1928, when the St. Francis Dam north of the ranch burst, killing 100 people on the ranch and burying Newhall’s fields under tons of sand. Then the stock market crashed and the Depression set in, bankrupting some Newhall family members who had borrowed heavily from the company.

But just as the company neared ruin, the City of Los Angeles agreed to pay the company $750,000 in damages for the dam disaster. That kept Newhall alive, and the firm again prospered after oil was found on Newhall Ranch in the late 1930s.

Freeway Helped

It wasn’t until the early 1960s that Newhall decided to build homes in response to a new tax law, which called for Newhall’s property taxes to be levied on the “highest and best use” of the land--which meant housing. So Newhall decided that it might as well use the land for that purpose. The construction of Interstate 5 at that time also helped spur Newhall’s development.

The company hired planner Victor Gruen to design a master-planned community, construction began in 1965 and the first residents moved in two years later. Scott Newhall, who with his wife owns 1% of Newhall Land, knows better than most how the Newhall Ranch has changed.

After spending 20 years as editor of the San Francisco Chronicle, he returned to his roots. Recently, as he drove a reporter down state Highway 126 to his home in Piru, about 15 miles west of Valencia on Newhall Ranch, Scott Newhall recalled how Valencia once was little more than onion fields.

“There wasn’t anything, just like that there,” he said, motioning toward the barren hills in the distance.