They say you can’t buy respect, but don’t tell that to Newhall Land & Farming Co. Tired of the company’s lackluster stock performance, the board, in September, launched a plan to repurchase up to 20 percent of the outstanding shares, or about 6.3 million units, by the end of 2000. The cost? A whopping $176 million. To raise the necessary cash and show they’re serious about the program company officials put on the auction block about 50 percent of Newhall Land’s income property, which officials hope will bring in some $240 million in revenue. “We think the prices of our units being traded on the market are way undervalued,” said Thomas L. Lee, chairman and chief executive. “People outside the company have placed a value of $25 to $50 per unit. We would tend to think it’s on the upper end.” The strategy appears to be working. By the end of 1999, Newhall Land had repurchased 3.1 million shares, with officials of the Valencia company on track to buy back the rest by year’s end. The stock has moved up from about $22 when the program began to about $28 last week this at a time when so-called “Old Economy” stocks on the New York Stock Exchange have been pummeled. “The management thinks the company’s stock is undervalued compared to the value of its real estate,” said Brett Hendrickson, an analyst who follows Newhall Land for B. Riley and Co. in Los Angeles. “The only way to demonstrate that to Wall Street is to put your money where your mouth is.” The extent of the buyback program, however, has Hendrickson and others wondering if there’s more to the strategy than just frustration over the share price. “It’s rare to see a buyback that’s this aggressive,” he said. “The end game may be to sell the company.” To that, Lee would say only, “We don’t comment on things like that. I will say it’s highly speculative at best.” To accomplish a buyback of this magnitude, the company will have to sell 1 million square feet of retail space, including Valencia Town Center and its retail shops along Town Center Drive, with the assistance of CB Richard Ellis Inc. The property is worth an estimated $160 million. Also being put on the market are five of the company’s office buildings, including the three buildings leased by Princess Cruises a six-story building already occupied along with a four-story and a five-story building under construction. The holdings are worth an estimated $70 million. Stephen P. Percoco, an analyst with Lark Research Inc., questioned whether it was wise for Newhall Land to sell so much of its income portfolio. By reducing capital reserves, the company will have less money to take advantage of investment opportunities during downturns in the real estate market. “Personally, I’d like to see them maintain strong capital availability,” Percoco said. Lee said the company is just taking advantage of a hot real estate market by selling on an up cycle. “There nothing to it more complicated than that,” he said. By using its capital to acquire shares at what Lee sees as a discount, the company is taking advantage of the price difference as an arbitrage play, he said. Lee noted that the company has been on a roll financially. Newhall Land reported net income for the fourth quarter ended Dec. 31 of $57.5 million ($1.89 per diluted share), compared with $1.8 million (5 cents) in the same period a year earlier. Revenue was $144.0 million vs. $53.6 million. For the year, net income was $90.4 million ($2.85) vs. $64.1 million ($1.86) the year before. Revenues were $322.5 million vs. $304.7 million. Net income jumped sharply during the year in part because the company sold a 36,000-acre ranch spanning San Luis and Santa Barbara counties for $25 million in cash. Also sold were 891 residential lots, 62.8 acres of commercial land and 57.7 acres of industrial land out of the company’s holdings in and around Valencia. Katherine Flores, an analyst with Sutro & Co. in Los Angeles, sees Newhall Land as an attractive long-term play. Los Angeles County’s population is expected to explode over the next two decades, while the real estate market will remain constrained by the lack of land for development.
