A year into an aggressive stock buyback program aimed at boosting its share price, Valencia-based mega-developer Newhall Land & Farming Co. has hit a series of stumbling blocks that have slowed down the repurchase plan and further sunk its stock.

Trouble began in late August when the planned sale of the Newhall Land-owned Valencia Town Center regional mall collapsed after Edwards Theatres, which runs two cinemas in the mall, filed for bankruptcy protection. Money from the mall sale was to be used for the stock buyback program.

A week later, Newhall Land officials announced they would pull out of a planned Palmdale development, City Ranch, they had partnered on with homebuilder Kaufman & Broad Home Corp. last year.

Newhall Land's stock late last week was trading at around $24 a share, down from its 52-week high of $28.88 reached Aug. 14.

Two analysts polled by Zacks Investment Research rate the stock a "moderate buy." That is a change from August, when analysts split, one rating the company a "strong buy," and one a "moderate buy."

"The company is going through some changes," said analyst Katherine Flores of Sutro & Co. "Over the last year, they've focused on building out Valencia and their buyback program."

The rising debt and pullout of Palmdale led Sutro & Co. to downgrade Newhall Land from "buy" to "accumulate," Flores said. She believes the company will eventually find a buyer for the mall and other assets to pay down its debt, but is concerned that in the short term the failed sale could hurt the company's bottom line.

Newhall Land has had a solid performance record through much of the 1990s, with a five-year revenue growth rate of 19 percent. But as it begins to run out of land to develop, earnings have slowed.

For the second quarter ended June 30, the company reported net income of $6.3 million (22 cents per share), roughly half the net income of $12.7 million (40 cents) for the like period a year ago. Revenues were $55.3 million vs. $63.9 million.

Flores said the company should have put more thought into its decision to enter the Palmdale market, where home values have languished even as they have exploded in other parts of L.A. County.

"It's disappointing because they just entered it a year ago," she said. "Anytime someone pulls out of a project after a year, it's disappointing."

Thomas Lee, CEO of Newhall Land, said his company initiated talks to withdraw from the project, and Kaufman & Broad has indicated the same. The company is still negotiating with Kaufman & Broad to get out of the partnership. Lee said the mall setback is unrelated to the pullout.

Holding pattern for stock

The company has embarked on an effort to sell off some of its top properties in Valencia, including the Town Center Mall and commercial properties nearby that house Princess Cruises and other companies. Money from the sales would be used to fund the stock buyback program, apparently because company officials continue to believe that the stock is undervalued.

Newhall Land's stock has remained stuck in the $20 to $30 range while other real estate stocks have rebounded over the last year, thanks to a revived Southern California market. Flores said Newhall Land's stock has struggled partly because the company doesn't have a large number of shares in circulation, deterring larger investors. And because the company is a limited partnership rather than a corporation, it falls under different tax rules, further deterring investors.

The aggressive repurchase program calls for Newhall Land to buy back 6.3 million units by the end of 2000. So far, the company has bought 4.65 million units at a cost of $123.5 million. The buyback combined with setbacks in the sale of its real estate offerings have increased the company's debt, which has gone from $222 million at the end of 1999 to $291 million at the end of the second quarter.

The company has financed the stock buyback by borrowing money and selling off various parcels.

Lee said the mall setback will delay the repurchase program. It's too early to say how much of a delay it will cause, he said, but the buyback likely won't be complete until sometime in 2001. The company is in talks with other potential mall buyers.

"We're committed to completing the unit repurchase and getting it done as soon as we can," Lee said.

Liquidation in the works?

Some analysts believe the company is making itself a leaner outfit in anticipation of an outright sale of the entire operation.

By selling off assets, Newhall Land could make itself more attractive to potential buyers, said Brent Hendrickson, analyst with B. Riley & Co. The company and its assets, which include land for the proposed Newhall Ranch and commercial and residential holdings throughout the Santa Clarita Valley, are too great for one developer to acquire at present.

"It makes it easier to sell if they sell off the company (assets individually)," Hendrickson said. "I think they're looking at long-term shareholder value."

Company officials have declined to say whether such a strategy is being pursued. "That's very speculative," Lee said. "We're not going to comment on that."

The Palmdale market is still years away from the point where it will generate big profits for developers, and Hendrickson said for a company that already has a large number of valuable properties in the Valencia area, the time frame doesn't make sense.

"They have a huge project on their hands just in the Valencia area," Hendrickson said. "They've got a lot on their plate now.

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