TPL - Horizon Kinetics - Tejon Ranch: Just About Large As L.A Shares No Higher Today Than In 1985
2023-05-10 22:15:00 ET
Summary
- Tejon Ranch says its 270,000 contiguous acres are the largest such in California.
- In asset-light fashion, Tejon Ranch does not engage in direct development, but contributes land to develops, typically for a 50% ownership position.
- The shares are no higher today than they were in 1985; they have been as much as 3x higher, but not an awful lot lower.
The following segment was excerpted from this fund letter.
Tejon Ranch Co. ( TRC )
Like Texas Pacific Land Corp ( TPL ), Tejon Ranch was not mentioned in the lists of largest U.S. landowners. Similar to the TPL ranking in Texas, while there are larger landholders in California, those are comprised of separate properties. Tejon Ranch says its 270,000 contiguous acres are the largest such in the state. The property is located a bit more than 60 miles north of Los Angeles, along I-5, the state’s major north-south highway.
The strategic value of this land is linked to its strategic location. Los Angeles is the nation’s largest port city and, related, a major center for e-commerce shipments. However, its high rents, property prices, congestion and regulations impede expansion or development of warehouse and logistics facilities. That has enabled Tejon Ranch to develop over 8 million square feet of commercial, industrial, and retail space, including distribution centers, right outside L.A. Lessors include companies like Ikea, Dollar General, and Caterpillar. Paradoxically, Tejon Ranch is just about the same size as L.A.
The property also includes one of the largest, busiest travel plaza/truck stops in the nation, the scale of which has not been experienced by most travelers. A way to get a sense of the scale is through the annual fuel revenue. It is now at the $140 million level, and expands rapidly from year to year. Like the movie theater industry, in which earnings are not about the movie tickets, but the soda and popcorn, a travel plaza is not about the gasoline, but the amenities and restaurants that go along with it. The travel plaza profits can probably be attributed to the amenities. This one venture might account, depending how calculated, for roughly a quarter to one-third of the company’s earnings (there’s your GAAP earnings, there’s your FFO, there’s your free cash flow, plus you got your pre or post-equity compensation free cash flow, plus…).
In asset-light fashion, Tejon Ranch does not engage in direct development, but contributes land to develops, typically for a 50% ownership position. To the degree that the company is known to investors, it is probably for the mixed-use master planned communities it has been trying to develop for the past couple of decades. If ever fully approved and entitled, these would encompass 35,000 homes on over 40,000 acres of gross land area. That would be a very significant higher-better-use change in land value. In its way, the continued growth of the industrial and retail developments enhances the potential demand for the planned housing, since several thousand people already work in the Tejon Ranch projects.
Other sources of value development that come with Tejon Ranch’s land position are revenue producing farmland and water rights. The latter have been a decided scarcity-based inflation beneficiary in the southwest for generations. The company earns a not-insubstantial amount of income from leasing land for an electric power plant and cell phone towers. It also receives royalties on cement and aggregates.
There is at least one ESG Compliance list that restricts purchase of Tejon Ranch; we know this, because one client was precluded from owning the shares. There are many such ESG restriction lists, all of which reach different—and often contradicting—conclusions for different reasons. In this case, Tejon Ranch was restricted because, among its 5,359 acres of farmland, which include almonds, pistachios, alfalfa and vegetables, 1,036 acres are devoted to wine grape production. That presumably placed the company in the Alcohol and Tobacco sector.
The shares are no higher today than they were in 1985. They have been as much as 3x higher, but not an awful lot lower. The price volatility simply reflects the periodic positive publicity that develops around the three master planned communities, followed by disappointment as the proposals work their way through repeated regulatory review, litigation and negotiation phases. One could say that this process, which requires much ongoing entitlement and litigation expense, is much closer to actualization than it ever has been, but it remains in equipoise. That is the way of land development.
With or without those final approvals, though, the company would appear to be at the beginning of an earnings inflection point. Leasing activity at its industrial and commerce center has been sufficiently robust and reached a certain critical mass as to be reflected in pricing: per square foot land prices have increased at a 20% annual rate in the past five years, and industrial rents at a 23% rate.
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Horizon Kinetics - Tejon Ranch: Just About Large As L.A, Shares No Higher Today Than In 1985