TRC: New Approval Validates the Company’s Real Estate Opportunity

NYSE:TRC

Positive Takeaways of Approval For Development of Multi-family Residential Complex

Real estate-development company Tejon Ranch Company (NYSE:TRC) targets maximizing shareholder value through the monetization of its land-based assets. We view last week’s approval for TRC to develop multi-family apartments within the Tejon Ranch Commerce Center (TRCC) as a positive that is not fully reflected in the share price. The Kern County Board of Supervisors approved two conditional use permits that will enable TRC to develop multi-family apartment uses within the TRCC.

The TRCC is a 20 million square foot development that is on both sides of Interstate 5. TRC has already developed almost six million square feet of industrial, commercial and retail space in the TRCC, and holds the leases for a number of distribution facilities for companies such as IKEA, Caterpillar Inc., Dollar General and others. The TRCC has 14 million square feet of available space and “a proven ability to deliver” speedy turnaround on construction.

Conditional use permits allow development provided that certain conditions are met. Zoning authorities use conditional use permits when development would be beneficial for the community but they want to place certain restrictions on the development, including potentially prohibiting the operation of certain types of businesses. In California, conditional use permits are subject to the California Environmental Quality Act (CEQA). With Kern County apparently determining that the planned development project would not have a significant adverse effect on the local environment, the project is likely to advance without significant pushback from potential opponents, including from environmental groups.

For instance, when one environment group recently sued the company in an attempt to block development, last month the U.S. District Court, Central District of California granted summary judgment in TRC’s favor in a lawsuit that challenged the 2013 approval of a Multi-Species Habitat Conservation Plan covering the upland regions of Tejon Ranch. In granting summary judgment, the court rejected every argument and cited Tejon Ranch development, as a potential solution to California’s housing crisis.

Kern County Housing Shortage

Kern County is experiencing a severe shortage of housing, including of apartment units. Construction of new units has lagged compared to many other areas within the state and the slow pace of development exacerbates the housing shortage problem. Moreover, a majority of California land is zoned for single-family or commercial use, while private home owners often oppose nearby construction of apartments. In 2019, a report from the California Housing Partnership estimated that Kern County needed an additional 26,200+ affordable rental units to meet its housing shortage.

In the greater Los Angeles metropolitan region overall, just as in the state generally, there is a shortage of housing. By historical measures, new and used house inventory is virtually non-existent. Reflecting the imbalance between supply (inventory) and demand, housing prices continue to increase. TRC is the only major area close to Los Angeles where infrastructure is possible and one of the few real estate development companies with scale.

The state’s housing shortage is highlighted in recent proposed legislation in front of the California regulators. Senate Bill-50 notes that the “lack of housing, including emergency shelters, is a critical problem that threatens the economic, environmental, and social quality of life in California.” TRC is the only nearby land area with sufficient land and scale to help address the state’s housing shortage in any meaningful way, as noted.

The recently granted Kern County approvals authorize TRC to develop up to a maximum of 495 multi-family residences in thirteen apartment buildings just north of the Outlets at Tejon. The development is also approved to Include about 6,500 square feet of amenity space to serve the community and 8,000 square feet of revenue-generating retail space on the ground floor of some of the residential buildings.

Proximity Makes TRCC Attractive & Convenient

Proximity to nearby cities makes the TRCC an attractive location for the construction of apartment units. TRC’s principal asset is its extensive land holding located approximately 60 miles north of Los Angeles and 25 miles south of Bakersfield, California. Reflecting proximity to these major cities and to nearby highways – Interstate 5, for instance – it takes about 75 minutes to travel from the TRCC to Los Angeles’ Union Station. It is roughly an hour by car from Santa Clarita.

Moreover, the anticipated continued development of the California High-Speed Rail is also expected to facilitate commuting from TRCC to nearby cities. The California High-Speed Rail Authority has nearly 120 miles under construction, with more construction extensions anticipated. The Authority plans “a state-wide rail modernization” program that will help traverse one of the country’s largest states, mitigating automobile congestion and pollution. The Authority recently completed five high-speed rail structures throughout Madera, Fresno, and Kern counties.

Potential Funding Sources

As with the company’s other planned projects, potential capital funding sources for development of these units include possible joint ventures with financial partners, debt financing and/or the sale of rights, among other sources. Moreover, TRC’s agribusiness and commerce business units are operational and generate recurring revenue. At the end of 3Q 2020, TRC had cash and securities aggregating about $50.4 million, with an additional $35.0 million available on its line of credit.

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