Third Avenue Real Estate Fund’s Investment In Newhall Ranch in trouble? Not a good month for the firm…
First a prior quote from Third Avenue on Newhall – followed by the latest news…
It is wise to avoid borrowing money against assets that do not generate predictable cash flow. During the 2008-09 financial crisis, very few leveraged land owners escaped bankruptcy, foreclosure or restructuring. High quality assets with inappropriate debt levels create opportunities for distress investors to buy the fulcrum security (the most senior issue in a capital structure that will participate in a reorganization) at a discount to intrinsic value and then exert influence over the restructuring process. In 2008, Third Avenue acquired the senior secured bank debt of Landsource, which owned one of the most prime land banks in the U.S., with the expectation that we would influence and participate in the reorganization under a Chapter 11 bankruptcy proceeding. The company emerged from bankruptcy in 2009 with no debt (our debt securities were converted into equity).
Third Avenue is one of the largest equity owners and has representation on the board of directors. Not only did we have influence over the restructuring process and long-term business plan, but we continue to have a seat at the table to help the company implement its business plan.
Newhall’s primary asset consists of 27,850 homesites and 681 commercial acres in Valencia/Newhall Ranch, located approximately 30 miles north of downtown Los Angeles. The company also owns the Valencia Water Company, a public utility that presently services approximately 115,000 people and will be the water provider for all future customers in the district.
A simple approach to understanding Newhall’s current valuation would be to subtract $175 million (estimated value of Valencia Water Company, non-Newhall assets and cash) from the market cap, resulting in a $237 million valuation for Newhall’s 27,850 homesites and 681commercial acres. Using a conservative valuation of $100,000 per acre for commercial land, the implied valuation for Newhall’s homesites is $169 million, or about $6,000 per homesite. Finished lots for single family homes in Valencia are selling for an average of $225,000 and multifamily units are $150,000. Improvement costs and fees (the costs of converting unimproved land to finished, builder-ready lots) are roughly $150,000 for single family and $125,000 for multifamily. Simple math reveals that homesites (paper lots) should be worth $75,000 for single family and $25,000 for multifamily based on current market conditions. It would be improbable to bulk-sell over 27,000 lots (probably a 20-year supply) for the same price as if selling a few hundred lots. Therefore a bulk discount should be applied. Applying a 50% discount to the above “paper lot” values, and assuming two-thirds of the lots are single family and one-third are multifamily, the implied value for Newhall’s 27,850 lots is about $812 million, or $643 million greater than the value implied by the market price of Newhall Units. This “back-of-the-envelope” calculation results in a total equity value of over $1 billion.
Residual land value analysis is used extensively by appraisers, homebuilders and developers to estimate the underlying value of land. The formula for estimating land value is: Revenue – Profit Margin – Costs = Land Value. Applying residual land value analysis illustrates why land value is so sensitive to home prices. If home prices increase, land values tend to increase more dramatically, particularly if fixed costs (e.g., land improvement and building costs) are relatively stable. The opposite also holds true: as home prices decline, land values decline more dramatically. In 2009, for example, it could be argued that some land actually had negative value, because the costs to develop buildable lots exceeded what a home builder would be willing to pay for them.
The obvious question anyone should ask is: with all of the hidden value in Newhall, when will that value be realized by the Fund or recognized by the market? Based on first-hand knowledge, the business plan is on schedule and the company expects to begin selling the first lots in Newhall Ranch by the end of 2014. Prior to that time, the company will need to raise capital to begin construction of infrastructure (grading, utilities, roads, etc.). The company is exploring raising private capital as well as public equity (initial public offering), among other options (including business combinations with other owners of large master- planned communities). We expect that any such transaction would serve to crystalize value and establish a market price more in line with intrinsic value.
Newhall Ranch – The Past And The Future?
“And by that destiny to perform an act
Whereof what’s past is prologue, what to come
In yours and my discharge.”
Antonio, in Shakespeare’s Tempest, urges Sebastian to murder his father, rationalizing that all that has happened is merely an introduction to what could be Sebastian’s future as the ruler of an empire.
This may resonate with the folks at Newhall Land and Farm (NLF) after they read the Supreme Court’s decision in the case concerning their proposed Newhall Ranch development.
Unfortunately for them, however, the prologue, which is the Supreme Court’s opinion, does not bode well for the project’s future.
For those few who are unaware of Newhall Ranch, it’s NLF’s vision of what 21,000 homes along the 126 freeway with 58,000 residents looks like. Approved by Los Angeles County twelve years ago, it’s been ping-ponging between courts, delaying its groundbreaking almost indefinitely.
Rather than looking at what the court said in a “top-down” analysis of the opinion, let’s look at how they fashioned their order, sending the matter back to the Court of Appeal to reconsider how to give the trial court direction about how to proceed further.
In its concluding paragraph to an opinion ranging over 42 pages, the majority perhaps provided a glimpse into the future, “Finally, one should not assume a sizeable new housing development planned for a site relatively far from major urban centers, to be built largely on undeveloped land with habitat for several sensitive species, will have comparatively minor impacts either on greenhouse gas emissions or on fish and wildlife.”
See full article here.
Plans For A New City In The Santa Clarita Valley Hit Another Roadblock
by Maura Dolan, Louis Sahagun and Abby Sewell, Los Angeles Times
For two decades, the Newhall Land & Farming Co. has envisioned a new city rising in the foothills north of Los Angeles.
Situated on nearly 12,000 acres along the Santa Clara River, the planned community would house 58,000 people and offer stores, golf courses, schools and recreational centers. Los Angeles County’s elected supervisors approved the project 12 years ago, prompting experts to declare that the Santa Clarita Valley would soon be home to other major developments.
A mammoth, 5,828-page environmental impact report won court approval a year ago, and a Newhall official declared that the project had been vindicated.
But the plans hit a major roadblock Monday when the California Supreme Court rejected the environmental report, a decision that was expected to further delay the project — one justice said it might add years — but not kill it.
See full article here.
Newhall Ranch case
IN THE SUPREME COURT OF CALIFORNIA
This case presents three issues regarding the adequacy of an environmental impact report for a large land development in northwest Los Angeles County, each issue arising under the California Environmental Quality Act (CEQA; Pub. Resources Code, § 21000 et seq.): (1) Does the environmental impact report validly determine the development would not significantly impact the environment by its discharge of greenhouse gases? (2) Are mitigation measures adopted for protection of a freshwater fish, the unarmored threespine stickleback, improper because they involve taking of the fish prohibited by the Fish and Game Code?
(3) Were plaintiffs‘ comments on two other areas of disputed impact submitted too late in the environmental review process to exhaust their administrative remedies under Public Resources Code section 21177?
We conclude, first, that as to greenhouse gas emissions the environmental impact report employs a legally permissible criterion of significance—whether the project was consistent with meeting statewide emission reduction goals—but the report‘s finding that the project‘s emissions would not be significant under that criterion is not supported by a reasoned explanation based on substantial evidence. Second, we conclude the report‘s mitigation measures calling for capture and relocation of the stickleback, a fully protected species under Fish and Game Code section 5515, subdivision (b)(9), themselves constitute a taking prohibited under subdivision (a) of the same statute. Finally, we hold that under the circumstances of this case plaintiffs exhausted their administrative remedies regarding certain claims of deficiency by raising them during an optional comment period on the final report.
See full PDF below.