Newhall Land Is Treated Like Dirt
Despite a year of record earnings, record revenues and record land sales, Newhall Land & Farming Co. isn’t getting much respect on Wall Street.
The price of Newhall Land shares, or units, has been under $25 for most of the first quarter, down from a 52-week high of about $32 a year ago.
And the Street failed to react last week when the Los Angeles County Board of Supervisors gave final approval to the environmental impact report for the proposed Newhall Ranch development--a 21,000-home “new town” that, when complete, will be the largest single housing project in Los Angeles County history.
Why isn’t Newhall Land getting more attention? Analysts, and even some shareholders, said it’s partly because of Wall Street’s current preference for anything.com over anything in the real estate sector, including home builders and real estate investment trusts.
“Real estate stocks in general haven’t been treated very well in this market,” said Leonard Diamond, an analyst with New York-based Josephthal & Co. “Newhall is obviously doing very well but it hasn’t been treated very well.”
Tom Lee, chairman and chief executive officer of Valencia-based Newhall Land, thinks Wall Street has a vision problem.
“We clearly are undervalued in the marketplace,” said Lee, noting that the company’s annual appraisal would put the unit value (similar to book value) at $30, a figure he thinks is conservative. Even so, that’s 26% higher than Monday’s closing price of $23.88.
This despite what the company describes as a “year of records.”
The company, which went public in 1969, posted earnings per share of $1.86 in 1998, the fifth consecutive year of earnings growth, according to Newhall Land’s annual report. It boasts of paying uninterrupted quarterly cash distributions since 1936.
And then there’s the land. Newhall Land owns roughly 90,000 acres in California, 70,000 of which was originally part of the vast holdings pooled by descendants of Henry Mayo Newhall to form the company.
The company sold a record 111 acres of industrial land last year and Lee said the land typically sells for at least double its appraised value.
And the company has plenty of actual sales data to go on, since it has stepped up the pace of land sales in part to fund an aggressive stock buyback program. Analysts say the repurchase effort has kept the stock from sliding even further.
This month the company announced that an unnamed developer has opened escrow for $31.8 million on a 32.9-acre site zoned for up to 900 high-end apartments adjacent to the Valencia Town Center mall.
“Previously we would have planned to build those ourselves,” said Lee. But given the stock position, using proceeds from the sale to scoop up more shares seemed the wiser investment.
Since August 1998, the company has repurchased 2 million shares and Lee said the goal is to buy back another 2 million this year at a cost of about $45 to $50 million.
The share price has yet to show an obvious reaction to the repurchase program, but analysts said the strategy is an effective one that will likely bolster the price in the long run.
“What the company is doing is exploiting Wall Street’s neglect,” said analyst and shareholder Diamond, who thinks it could “conceivably” be worth up to $34 per share. “If they can buy stock below what the [appraised] value is, they increase value for the remaining stockholders.”
Though Lee said the aim of the repurchase program is not to move the stock price, “Over time . . . you hope to get to a point where the market would realize what a great hidden value this is and start paying more attention to the stock.”
In addition to the stock repurchase, the company is beefing up its commercial portfolio, a move that answers some criticism that the company’s main asset--land--was not producing a steady revenue stream.
The value of the company’s commercial holdings, including the flagship Valencia Town Center, has grown from $280 million in 1994 to $435 million at the end of 1998. Five years from now, the aim is to craft a commercial package valued at $1.5 billion, Lee said.
“That represents a significant increase in our commercial property value,” Lee said.
Even that is not a sure lure for investors.
“The value of commercial property is based on the cash flow that they generate and that changes with the economy,” said Stephen Percoco, an analyst with Lark Research Inc., a Rahway, N.J., real estate research firm, explaining why investors may be shying away.
He said that in the next economic downturn, revenue from the firm’s commercial properties and appraised land values could slip.
Percoco thought the company’s aggressive stock repurchase might ultimately have a negative effect on its debt load.
Aside from him, most of the analysts contacted supported the buyback program, but none listed Newhall Land as a buy.
“While I own it, I’m not aggressively going out and pushing it,” said Diamond, “because I don’t think I can get anyone interested.”
A wild card in the company’s future is development of Newhall Ranch. While the project has the potential to boost profits, it won’t happen without a fight.
Concerns over feared water shortages, air pollution and gridlocked traffic on the Golden State Freeway have motivated a number of public and private bodies, from Ventura County to the Santa Clarita Organization for Planning and Environment, to talk openly about suing to try to halt the mammoth development.
Lynne Plambeck, vice president of SCOPE, said her board has yet to officially vote on a suit but she believes legal action is inevitable.
“Our goal would be to stop the project until the issues such as water and air pollution impacts are fully mitigated and resolved,” said Plambeck.
So far, however, the controversy over Newhall Ranch doesn’t seem to have registered with investors either.
“The approval was expected and the [threatened] lawsuits don’t surprise me either,” said Brett Hendrickson, a research analyst at the B. Riley & Co. brokerage firm in Los Angeles, who tracks Newhall’s stock (NHL;NYSE). “I would almost be surprised if there weren’t continuing levels of red tape.”
Valley @ Work runs each Tuesday. Karen Robinson-Jacobs can be reached at Karen.Robinson@latimes.com
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Southern California Landholdings
Valencia-based Newhall Land & Farming Co., one of the biggest landlords in Southern California, owns about 90,000 acres of land in the state, including 43,000 in Northern Los Angeles and Ventura counties. While major developments are planned forthe Los Angeles County land, the Ventura County remains agricultural.
* Newhall Ranch: 12,000 acres
* Valencia: 15,300 acres (7,225 acres remain to be developed)
* Ventura County: 16,000 acres
