Recession Manageable for Builder of Valencia : Development: Commercial and industrial projects buoy Newhall Land & Farming Co. But anti-growth sentiment may hurt the company.
As chairman of Newhall Land & Farming Co., Thomas Lee has watched his company’s profit and revenue plunge 51% and 38%, respectively, through the first nine months of 1991 because of the anemic real estate market.
It’s been a year to forget for many developers. But most should have Lee’s problems.
Despite the declines, Newhall still managed to wring 16 cents of profit out of each dollar of revenue in the nine months, and that figure should climb because Lee expects the fourth quarter to be Newhall’s strongest this year.
The company’s housing sales are at a near standstill, but its commercial and industrial projects are healthy enough to let Lee, 49, wait out the residential market’s slump without anxiety. Newhall, which earned $13.7 million on revenue of $88.2 million in the nine months that ended Sept. 30, also has an extremely strong balance sheet that gives the company a financial cushion against the recession.
Newhall is a real estate and agricultural concern whose crown jewel is Valencia, a master-planned community (population currently 30,000) the company is developing in the Santa Clarita Valley.
Valencia, part of which sits within the recently formed city of Santa Clarita, eventually would sprawl across 10,000 acres under Newhall’s plan; about 5,000 acres are developed so far and include Newhall’s headquarters. The community also includes housing units, an office center, a hotel and an industrial park, and a regional shopping center is due to open in late 1992.
Valencia sits within the Newhall Ranch, a 37,300-acre parcel that Newhall owns outright-- meaning it has no debt to pay on the land. The ranch is part of the 119,000 acres Newhall owns overall in California--holdings the company’s founders began accumulating a century ago by purchasing Spanish land grants.
Because homes aren’t selling today, Lee simply isn’t building any. Unlike other developers who borrowed money to buy their land and have to sell homes--perhaps at cut-rate prices--to meet their carrying costs, Lee can sit tight until housing demand starts back up, which Lee expects to happen next spring.
“We don’t have to go through a fire sale to generate cash,” he said.
In the meantime, Newhall and Hilton Hotels Corp., as joint-venture partners, last week opened a 152-room hotel in Valencia. Newhall also is pressing ahead to finish the $80-million shopping center and other commercial projects in the area that will pump up Newhall’s rental income beginning next year.
Newhall also has the financial well-being to make its own mortgages to businesses that want to occupy lots in Newhall’s commercial projects, if those businesses can’t get cash from conventional lenders.
But the clean-cut Lee faces obstacles nonetheless. Part of Newhall’s residential strategy is to sell land that’s already received regulatory clearance, or “entitlements,” to outside builders. The idea is to keep Newhall’s own housing stock to a minimum and so reduce its risk of being stuck with unsold houses when sales again drop off.
Trouble is, the current market has been so weak that no builder has wanted to buy any of Newhall’s land for the past two years. “It’s difficult for them to borrow the money” to make the purchases, Lee said, adding that the same problem is limiting Newhall’s sale of industrial and commercial land.
Those factors have put downward pressure on Newhall’s units. (The company is organized as a publicly traded partnership, whose units are similar to stock.) The units, closing Monday at $17 per unit in New York Stock Exchange composite trading, have lost nearly 50% of their value since mid-1990.
And even if the real estate market picks up next year, Lee faces a larger problem: Anti-growth sentiment is swelling in the Santa Clarita Valley, and that’s making it tougher for Newhall to get the regulatory approval needed to develop the rest of Valencia.
In an ironic twist, the same growth that Newhall fostered by creating Valencia now threatens to crimp its future expansion, or at least to add to Newhall’s costs by delaying its ability to get approval for projects.
“The scrutiny of Newhall Land is definitely growing,” said Jill Klajic, a member of Santa Clarita’s City Council and a supporter of growth restrictions in the region. “People are beginning to feel the crunch, the massiveness of the whole master plan” envisioned by Newhall, she said.
Lee acknowledged that as a “long-term player” in the valley’s development, “you’re building in some of your own opposition as you go. You could probably make that statement any place where there’s been a lot of development.”
One group, Citizens Assn. for a Responsible Residential Initiative on Growth (CARRING), is trying to get a measure on the April ballot that would allow only 475 housing units to be built in Santa Clarita annually for the next 10 years.
If passed, the measure wouldn’t have a direct impact on Newhall because most of the company’s undeveloped land is outside the Santa Clarita city limits. But the proposal illustrates the changing political environment Newhall faces in the valley.
“The regulatory climate in the area is not as friendly to developers as it used to be because of this outcry about growth,” said Santa Clarita Mayor Carl Boyer III.
Then there’s the Westridge portion of Valencia that Newhall has proposed. Westridge would include 1,880 housing units and a golf course on 800 acres west of the Golden State Freeway. Los Angeles County planning regulators have forced Newhall to twice revise its plans because Westridge would be built on portions of 310 acres identified 11 years ago as one of the county’s Significant Ecological Areas (SEAs).
Lee accepts such setbacks as part of “the political process,” but calmly complains that “we have had more than our share” of extra work to get the project cleared. “This is a case where the rules seem to have changed as we’ve gone through the process,” he said. “The rules are always changing.”
Make no mistake: Newhall Land & Farming remains an enormous power in the Santa Clarita Valley simply by virtue of being Valencia’s developer, and therefore the biggest developer in the valley. Just last week, Newhall got tentative clearance from the county’s Regional Planning Commission to build 1,815 housing units in the second phase of its North River division of Valencia. Final approval is expected from the Board of Supervisors in coming months.
But even Newhall’s influence can work against the company. Its proposals are increasingly encountering resistance from residents and politicians because Newhall does cast such a large shadow over the region. That’s because major parts of the region are affected by Newhall’s development while being outside of Newhall’s master plan.
“Los Angeles County and the Board of Supervisors have not planned for the impact on the rest of this valley” of Newhall’s growth, “and that’s been a major concern of mine,” Klajic said.
But Boyer said much of the criticism of Newhall is sour grapes. “There are a lot of people in Santa Clarita that are under the impression that somehow the city of Santa Clarita favors Valencia and spends more money on Valencia than it does in other parts of the city, and this is simply not true,” Boyer said. “But it’s created a problem of civic jealousy.”
It’s an argument that’s likely to intensify in the years ahead as Newhall works to complete Valencia, but one Lee is prepared to challenge.
“Because we’re big and because we’ve done well in the past, both the county and the city set higher standards for us,” he said. “You have to do a better job of convincing the powers that be that it’s not all negatives, that there’s real benefits to what we’re trying to do.”
Newhall Land & Farming Co. at a Glance
Newhall Land & Farming Co. is a real estate and agricultural concern that is developing the community of Valencia in the Santa Clarita Valley. The Valencia-based company overall owns 119,000 acres of land on seven ranches in California.
For fiscal years ended Dec. 31; In millions
Source: Company reports
