Thursday, 10 February 2005

Real Estate: Part 4
California here we come: Tejon Ranch

Ticker: TRC
Price: $46.81

My good friend Jim e-mailed me this morning (Monday 2/7) after noticing real estate related stocks heading higher. Tejon Ranch, he said, among others, was up strongly today (4 points early in the day, settled to finish the day up$.76). Funny, I said, Tejon Ranch is the subject of this week’s report, Part IV in our real estate series. No, really.

Never heard of this company either? Just like previous companies in past real estate reports such as JG Boswell, St. Joes, and PICO Holdings? Not surprising to me, or probably to you either. You are probably getting used to the off the beaten path topics and companies we research here at Cheap Stocks.

Tejon Ranch is primarily a real estate development company, with some agricultural operations as well. Total Revenue for 2003 was $18.3 million, down from $21.7 million in 2003. Net loss was $2.9 million in 2003, down from net income of $243 thousand in 2002. Nothing spectacular on that front. But, it’s not about sales and earnings with this company. It’s about the underlying assets.

The underlying assets are a nice piece of California land. Tejon Ranch owns 270,000 acres, which includes land in the San Joaquin Valley, Tehachapi Mountains, and Antelope Valley, 60 miles northwest of Los Angeles, California. According to the company’s 2003 10K, 247,000 of the acres are in Kern County, the other 23,000 in Los Angeles County. To put 270,000 acres into perspective, it’s the equivalent of 422 square miles, an area 20.5 miles by 20.5 miles. That’s about one third the size of Rhode Island in terms of square miles.

As we discussed in prior real estate reports on PICO holdings, JG Boswell, and St. Joes Corp, quantity of land is not always the most important factor, it’s location that really matters. In Tejon’s case, Interstate 5, considered to be one of the nation’s most heavily traveled highways, runs through company owned land. In fact, the company owns 16 miles of frontage on both sides of the freeway. Sixteen miles!

The company’s general strategy is best described by the following, from the 2003 10 K:

“We are a diversified, growth oriented land development and agribusiness company whose strategy is to increase the value of our real estate and resource holdings in order to increase stockholders’ value. Operations consist primarily of land planning and entitlement, land development, commercial sales and leasing, income portfolio management, and farming. Our prime asset is approximately 270,000 acres of contiguous, largely undeveloped land that, at its most southerly border, is 60 miles north of Los Angeles and, at its most northerly border, is 15 miles east of Bakersfield.

Over the last several years, we have been implementing a strategy that has led to our transformation from an agricultural operations based company to a real estate development company. In order to implement our strategy we began to pursue joint venture agreements for the development of portions of our land, began conceptual planning and land entitlement projects, and undertook a program of divesting non-strategic assets. “

Tejon, which has just 10 full-time employees, currently has no analyst coverage. It does, however, have significant institutional ownership. Third Avenue Management (as in Marty Whitman, who also holds St. Joe’s) owns 27 percent. Several other institutions own smaller stakes, including Fidelity (7 percent), Highbridge Capital (3 percent), and Wellington Management (2.7 percent), to name a few.

With just 16.2 million shares outstanding, and a float of 12.8 million, volume averages less than 25,000 shares per day. Current market cap is around $775 million, while Enterprise Value is about $719 million (the company has $55 million in cash, with no debt).

If you read our prior real estate pieces, you’ve heard us wax on about the calculation of enterprise value/acres. In Tejon’s case, that amounts to $2610, and is calculated as follows:

Enterprise Value: (in millions)
Market Cap: $759
Debt: $.6
Cash: $54.8
Enterprise Value: $704.8
Acres: 270,000

Your editor picked up shares of Tejon within the past year at around $35 per share. At its current price of $46.81, the story is still very interesting. I’d urge you to do your own research. Check out the company’s 10 q and 10k filings, as well as the company website. The website does an excellent job of putting the company land holdings into perspective.

This marks the fourth and final piece in our real estate series. Each of these reports featured companies that are part of my portfolio. There are several others that I’ve been following, and we’ll publish research on some of these in the coming months.

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