Nitor Capital Management LLC, a significant stockholder of Tejon
Ranch Company (NYSE: TRC) (“Tejon Ranch” or the “Company”) which
beneficially owns approximately 1.75% of Tejon Ranch’s outstanding
shares, today issued the following letter to the Company's
stockholders.
Fellow Stockholders,
Nitor Capital Management LLC (together with its
affiliates, “Nitor Capital Management” or “we”) is a significant
stockholder of Tejon Ranch Company (“Tejon Ranch” or the “Company”)
with beneficial ownership of approximately 1.75% of Tejon Ranch’s
outstanding shares. We initially invested in Tejon Ranch in 2021
because we believed, as we do now, that the Company owns
irreplaceable, one-of-a-kind assets, has exceptional growth
potential and its shares are deeply undervalued.
As a long-term stockholder of Tejon Ranch, we
have spent a considerable amount of time learning the history of
the Company and reviewing the Company’s financial statements,
executive compensation practices and capital allocation decisions.
We have attempted to engage constructively with the Company’s
management and board of directors (the “Board”) to better
understand their overall strategy and offer potential solutions to
the issues plaguing the Company, including by providing
recommendations on how we believe the Company could dramatically
improve its reporting of certain metrics to facilitate the market’s
understanding of the business and more appropriately value the
Company. Unfortunately, the Company’s management and Board have
been unwilling to meaningfully engage with us and Tejon Ranch’s
share price has continued to languish.
During its early days, Tejon Ranch was a land
company with nearly all of its value tied to its ownership of
270,000 acres of raw undeveloped ranch/farmland (equivalent to the
size of Los Angeles). Over the past 25 years, Tejon Ranch has
evolved into a highly valuable, cash flow generating, commercial
and industrial real estate company with what we estimate to be $800
million worth of assets that are either fully approved for
development or income producing.1 Notably, what was once 1,450
acres of raw undeveloped land has now transformed into a
world-class commerce center, Tejon Ranch Commerce Center, that
still has remarkable potential for further development. Despite
this impressive growth, shares of Tejon Ranch are astoundingly
worth less today than they were 5, 10, 20 and even 30+ years
ago.
Our diligence over the past several years has
led us to the following conclusion: the Company’s failure to
deliver value to stockholders is simply unjustifiable. We believe
much of the Company’s inability to provide stockholders with a
return on their investment is the result of severely misaligned
compensation incentives for senior management, speculative
deployment of capital and failure to effectively communicate the
value of the Company’s assets to the market.
Accepting the status quo at the Company is no
longer tenable – stockholders have suffered long enough, and it is
time for management and the Board to take immediate action to
deliver value to stockholders. Due to the Company’s failure to
present a clear and credible plan as to how stockholders will
receive a return on their investment or how the Company plans to
close the gap between its net asset value (NAV) and its share
price, we intend to WITHHOLD our votes for Compensation
Committee Chair Steven A. Betts, Chairman of the Board Norman J.
Metcalfe, Real Estate Committee Chair Geoffrey L. Stack and
Nominating Committee Chair Michael H. Winer, and
vote AGAINST approval of executive officer
compensation at the Company’s upcoming 2024 Annual Meeting
of Stockholders (the “Annual Meeting”) scheduled to be held on May
14, 2024.
A Persistent Failure to Deliver
Stockholder Value Over Any Relevant Time Period
When looking at the past 1-, 3-, 5-, 10- and
20-year periods, the numbers are clear: your investment is likely
worth less today than the day you invested, even though there has
been considerable appreciation in the value of the Company’s
assets.
|
1-Year TSR |
3-Year TSR |
5-Year TSR |
10-Year TSR |
20-Year TSR |
Tejon Ranch |
-16.92% |
-5.67% |
-15.37% |
-50.71% |
-56.17% |
Source: Bloomberg. Calculated as of market close
on April 15, 2024.
Given the immense destruction of stockholder
value that has persisted during their lengthy tenures, we question
how the Board can justify the continued service of the directors we
intend to withhold support from at the Annual Meeting: 81-year-old
Mr. Metcalfe and 80-year-old Mr. Stack have each served on the
Board since 1998, Mr. Winer has served on the Board since 2001 and
Mr. Betts has served on the Board since 2014. Even worse,
these directors comprise the leadership of the Board
(consisting of the Chairman of the Board and Chairs of each
committee other than audit), which we believe makes them even more
responsible for the Company’s abysmal performance.
What makes the Company’s performance even more
vexing and inexcusable is that despite the quality of the Company’s
assets, the strength of the balance sheet and the growing cash
flows, the Board and management team have exhibited no urgency in
providing any return to stockholders, the true owners of the
Company (who have not even received a single dividend during this
century). We are concerned that the incumbent directors are
prioritizing their own interests and those of management over
stockholders. In our view, change is clearly
needed.
We Believe the Board Has Enriched
Management While Stockholders Suffer
A board of directors has a fundamental
obligation to implement appropriate compensation frameworks and
incentives for management that align with a company's strategic
goals and promote long-term value creation. Unfortunately, at Tejon
Ranch, the Board has overseen a compensation structure where
incentives do not align with creating stockholder value. Simply
put, management has been enriched while stockholders have endured
non-existent returns.
Under the current compensation program, because
executives receive compensation based on target prices that reset
every three years, executives are able to meet their targets
without contributing to the long-term value of the Company. This is
unacceptable in our view. Executives should be compensated based on
continual long-term price appreciation, and the compensation tied
to share price appreciation should no longer have “resets” (which
is akin to an investment manager receiving a performance fee
without a “high watermark”).
Presently, cash bonuses are tied to meeting
Adjusted EBITDA budgets, which are set by the Company.
Additionally, bonuses are paid when the Board approves development
projects, when construction begins and once again when the projects
are completed.2 Problematically, these bonuses are given
irrespective of the eventual economics or performance of the
projects, so it appears as if management receives bonuses for
merely doing their job.
Furthermore, the current compensation program
includes stock compensation that incentivizes management to
“[c]omplete a capital raise of at least $150 million in proceeds
(not more than 50% from debt sources) to fund the construction of
Phase 1 of Mountain Village with Board of Directors approval...”3
Accordingly, it seems that management is being incentivized to
complete an equity raise equivalent to approximately 37% of the
Company’s current market capitalization, regardless of whether
doing so is in the best interest of the Company or its
stockholders.
These misaligned incentives have resulted in
undeserved windfalls for Company executives. For example, during
the past 10 years, while stockholder returns have been in the red,
Chief Executive Officer Gregory S. Bielli has received more than
$30 million in total compensation (with nearly $25 million of that
being compensation on top of Mr. Bielli’s salary).4 Further, in
2023, the Board decided to give Mr. Bielli a discretionary bonus of
$600,000. We question how any well-functioning Board could reward
executives for overseeing such terminal underperformance. As Chair
of the Compensation Committee, we believe that Mr. Betts must be
held accountable for these questionable compensation practices,
along with Messrs. Metcalfe and Stack, who collectively represent a
majority of the Compensation Committee.
With the upcoming retirement of Mr. Bielli at
year-end, Tejon Ranch is at a critical juncture. We believe it is
vital to the Company’s performance that the next Chief Executive
Officer be committed to unlocking stockholder value and has
financial incentives that are built around performance goals that
truly lead to stockholder returns (both near-term and
long-term).
We urge the Board to work diligently to
reconfigure the compensation structure to ensure that management is
properly incentivized to make decisions that benefit stockholders
and drive meaningful growth. The current compensation scheme
clearly is not working for stockholders.
Capital Allocation Missteps Have Harmed
the Company and Investors
In addition to leading to abysmal returns for
stockholders, we believe the current compensation structure has
incentivized management to pursue master planned community (“MPC”)
developments at great cost and significant dilution to
stockholders.
While we can appreciate that aggressively
pursuing all three MPC opportunities may have been a sound business
strategy at a certain point in the Company’s history, the success
of the Company and stockholder returns are no longer fully
dependent on the eventual development of the MPCs. At this point,
we believe it makes sense to aggressively pursue only the Grapevine
MPC, which is already fully approved and adjacent to the Tejon
Ranch Commerce Center, which we are confident will add substantial
future value for stockholders.
Since 2013, the majority of Tejon Ranch’s net
capital spend has gone toward MPC capital expenditure, where nearly
$200 million of capital has been deployed.5 To date, there has been
zero return generated on a net capital investment that is
equivalent to half of the current market capitalization of the
Company. The Company’s decision in 2014 to reacquire its 50%
interest in Mountain Village for $70 million precipitated an equity
raise in 2017 equivalent to 20% of the Company. Notably, Mountain
Village has been approved and marketable now for several years, yet
no partner or viable path to a profitable monetization has been
presented to the market.
We are deeply troubled that the lack of return
on the Company’s capital investment has not caused the Company to
reevaluate its strategy of investing its own capital in projects
that lack clear, quantifiable demand and returns.
Tejon Ranch Has High-Caliber Assets and
Tremendous Growth Potential with Improved Capital Deployment and
Clearer Messaging
We firmly believe in the quality of the
Company’s assets, their potential for continued appreciation and
development, and that with the right leadership and strategy,
substantial value can be unlocked for stockholders.
Tejon Ranch owns a portfolio of highly valuable
and sought after income producing assets (as well as 11 million sq.
ft. of fully approved industrial development rights). These assets
are generating over $100 million of recurring annual revenues and
$30 million of annual cash flows.6 As a result, we believe Tejon
Ranch has reached a point where these assets are now worth $700
million, or $26 per share of value, not including the Company’s
270,000 surface acres.
When adding the book value of the Company’s
remaining 270,000 acres and the value of the Company’s water and
farmland, we believe the total value of Tejon Ranch’s assets, net
of all debt, presently exceeds $44 per share (or $1.2 billion), on
a conservative basis.7 This represents nearly three times the value
of the Company’s current stock price.
Further, the $600 million Hard Rock Resort &
Casino development that is currently under construction, which is
projected to create approximately 5,000 jobs,8 should have a
significant positive impact on the value of the Company’s land as
the project is just several miles from the Tejon Ranch Commerce
Center.
Given the Company’s exceptional assets, robust
balance sheet and growth potential, we simply cannot reconcile why
management and the Board have not taken immediate action to
remediate the large valuation disconnect.
The Company’s Leadership Must Face
Accountability
While we have attempted to engage constructively
with management and the Board in hopes of creating value for
stockholders, the Company’s unwillingness to meaningfully engage
with us has made clear that we cannot sit idly by as stockholder
value continues to deteriorate. In our view, the Company’s
leadership needs to immediately demonstrate a commitment to
delivering value to stockholders, whether by returning capital to
stockholders, taking steps to align executive compensation to
stockholder returns or working diligently to properly convey the
value of the Company's assets to the market.
It is our hope that the incumbent directors who
have overseen the Company’s abysmal stock performance over nearly
every relevant measurable period receive a wake-up call at the
upcoming Annual Meeting where stockholders will have an opportunity
to hold them accountable. We encourage our fellow stockholders to
join Nitor Capital Management in sending a clear message to the
Board that the status quo will no longer be tolerated by
WITHHOLDING support for the election of Compensation
Committee Chair Steven A. Betts, Chairman of the Board Norman J.
Metcalfe, Real Estate Committee Chair Geoffrey L. Stack and
Nominating Committee Chair Michael H. Winer, and voting AGAINST
approval of executive compensation.
Sincerely,
David J. Spier Nitor Capital Management LLC
About Nitor Capital Management
LLCNitor Capital Management LLC is an investment
management firm based in Englewood Cliffs, New Jersey that manages
capital on behalf of institutional and high-net worth investors.
The firm manages Nitor Capital LLC, an investment fund that makes
long-term, concentrated investments in companies that own unique,
high-caliber, businesses and assets.
THIS IS NOT A SOLICITATION OF AUTHORITY
TO VOTE YOUR PROXY. DO NOT SEND US YOUR PROXY CARD. NITOR CAPITAL
MANAGEMENT LLC IS NOT ASKING FOR YOUR PROXY CARD AND WILL NOT
ACCEPT PROXY CARDS IF SENT. NITOR CAPITAL MANAGEMENT LLC IS NOT
ABLE TO VOTE YOUR PROXY, NOR DOES THIS COMMUNICATION CONTEMPLATE
SUCH AN EVENT.
ContactDavid J. SpierNitor Capital
Management LLCdspier@nitorcapital.com
____________________________________________
1 Nitor Capital Management estimate based upon real estate
comparables, rents, Tejon Ranch’s land transactions and in-depth
knowledge of Tejon Ranch’s assets resulting from Nitor Capital
Management’s significant due diligence on the Company.2 Source:
Company filings.3 Source: Company filings.4 Source: Company
filings.5 Source: Company filings.6 Source: Company filings
(numbers do not reflect G&A expenses).7 Nitor Capital
Management estimate based upon real estate comparables, rents,
Tejon Ranch’s land transactions and in-depth knowledge of Tejon
Ranch’s assets resulting from Nitor Capital Management’s
significant due diligence on the Company.8 Source: Hard Rock
International press release dated December 15, 2023.
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