The following letter represents solely the author's personal opinions and interpretations. While the author has made reasonable efforts to ensure the accuracy of the information presented, readers should conduct their own due diligence. Statements regarding management's performance, investment strategies, and the potential impact of alternative actions are subjective and based on the author's analysis of publicly available information. For example, the author's opinion that capital allocation has been inefficient is based on the company's financial reports indicating minimal returns on land development investments over the past 15 years. These opinions should not be considered investment advice.
Harvey Capital Letter to Tejon Ranch Co. Shareholders
4/30/2025
Dear Tejon Ranch Co. Shareholders,
I am writing to express my sincere appreciation for Bulldog Investors' recent involvement in Tejon Ranch Co. I am very prayerful and hopeful that other frustrated shareholders recognize the golden opportunity in front of them to elect directors that are truly shareholder-oriented in nature.
Bulldog Investors' method of discovering mismanaged companies, recognizing their hidden value, and executing a plan to realize that value is remarkably successful. I'd encourage any shareholder to research them and their affiliated entities to get a better understanding of the value they can bring to Tejon Ranch Co.
I'm managing approximately $3 million, a meaningful portion of which is my own capital, making me a "little guy" shareholder just like many of you. This personal investment in the entities I manage underscores my belief in having skin in the game and demonstrates my commitment to wanting shared success between myself and my investors. This contrasts sharply with the current management and most long-standing directors, whose past decisions and significant compensation during a period of stagnant stock price suggest a different approach. I'd like to point out some of these questionable past actions I've noticed.
Capital allocation has been questionable
This has been pointed out by Bulldog Investors and others who have written open letters to Tejon's management in the prior year, but I want to give my take on this. In summary, current management has sunk hundreds of millions of dollars over the past 15 years into getting land entitled for future development. The stock price has shown little to no return on that investment, a result that is considerably below expectations.
What makes this even more remarkable is that while this was occurring, Tejon Ranch Commerce Center (TRCC) was being developed into a world-class mixed-use development with the ability to generate a lot of cash for the company. The availability of high-ROI income-generating development properties within TRCC presented significant opportunities for capital deployment, yet management opted to direct a material amount of resources towards these remote residential land developments, raising questions about their strategic focus and stewardship of shareholder capital.
The company "struck oil" with TRCC, which is very evident when you look at the net operating income (NOI) their owned properties are generating in that master development. Given the high-ROI nature of the TRCC asset, it appears that a more substantial allocation of available funds to it would be a prudent strategy. Simply put, if you strike oil, you need to keep drilling. Had management directed into TRCC just a fraction of the total funds that have gone to these senseless land entitlements over the years, the income the company produces on a recurring basis would likely be significantly higher and the share price would likely reflect that.
As a result of capital being directed elsewhere, the company has seemingly missed a valuable opportunity to expand its portfolio of NOI-producing real estate within TRCC. While the allocation of over $300 million to yet-to-yield future land developments seems suboptimal on its own, the more critical issue is the lost potential of investing those resources in TRCC, a prime opportunity for enhancing shareholder value.
Management's continued inability to create shareholder value
The incumbent management team released a letter on 4/3/25 that Bulldog responded to on 4/8/25. I'd encourage anyone to read those who have not. I believe Tejon's management is grasping at straws when they point out their "successes" in this letter as Bulldog concisely points out in their response.
I'd like to zoom in on a very telling statement in management's letter on 4/3/25; "We believe our deliberate development strategy and approach to land entitlement as well as the related industrial, commercial and residential development will drive long-term value creation for Tejon shareholders." (emphasis mine)
Whether this is a calculated attempt to obfuscate the disastrous results of their land entitlement investments or a display of genuine incompetence, the outcome is the same: management has lost the trust of its shareholders. It's time for a change.
A questionable incentive structure created by management
In the same letter their announcement of a new CEO to "usher in the next phase of the company's growth" is deeply problematic. Firstly, there has been no growth to usher in, as the stock price has remained stagnant for 30-40 years. Secondly, it is highly unlikely this new CEO will deliver any meaningful change, in my opinion. Why? Because the incentive structure is fundamentally flawed and fails to prioritize shareholder value in a material way.
This announcement is a transparent attempt to distract from decades of mismanagement and falsely promise a turnaround, when in reality, the same misaligned incentives remain. Let's examine the details, and I'll explain why this "next phase" is unlikely to materialize.
Per the new CEO's compensation package, in 2025 he will receive:
- A stock grant worth $200,000, with payouts determined by the company's share price CAGR by December 31, 2027. A 20% CAGR yields $400,000, a 10% CAGR yields $200,000, and a 5% CAGR yields $100,000. While this incentive is a move towards aligning with shareholder value, it's not ideal. Metrics like NOI growth would be more appropriate.
- Cash bonuses and stock grants totaling $1,068,750 tied to continued employment. This seems somewhat standard today, so I don't have much of a comment on this. Although it should be noted that this is not tied to increasing shareholder value in any way.
- $468,750 in stock grants tied to certain objectives. These objectives are completely useless in my opinion, and I'll summarize them below:
- Outreach and relationship building with elected officials. How is this quantifiable in any way? Also, shouldn't this be a basic function of the CEO of a real estate development company?
- "One-on-one" contact with the top ten shareholders. I'm unsure how this will lead to increased value, which is likely what the top ten shareholders care most about.
- Review and comment on the Strategic Plan to the Board. "Hey guys, the plan looks great!" This one is laughable. How can a CEO's comp be tied to something this elementary?
- Join two boards with economic development/policy-making impacts. Being that this is likely to push along the Centennial development, which is not where resources should be focused on in my opinion, this objective is of little relevance.
You'll notice that nothing here incentivizes continued development of TRCC or the surrounding area, and aside from the last one (which is irrelevant to increasing shareholder value) none of these are quantifiable. It's worth noting that other executives also have bonus structures that incentivize continued investment in these developments, which have yielded virtually nothing over the past 15 years in terms of an increase in share price. I'd encourage anyone wanting to learn more about this to read the recent proxy material released by the company.
These incentive structures are not only bad, but they show how management is doubling down on their master-planned community strategy that has not delivered any material value to shareholders as long as they've been implementing it. Whether driven by entrenched stubbornness or a profound lack of understanding, the current leadership is failing to deliver. To realize any return on our investment, a fundamental shift in direction is necessary.
Bulldog is more than capable of closing the value gap
Here is the last comment I'd like to highlight from the incumbent management team's letter on 4/3/25; "…none of Bulldog Investors' nominees have any identified expertise that matches Tejon's operating business units, including real estate development, operational experience or experience with the development of master-planned communities. We believe that Bulldog Investors wants to disrupt our value-creating strategy that we have been successfully executing on for years."
Let's simply compare the 5-year track records of Bulldog Investors' Special Opportunities Fund and Tejon Ranch Co. I took the closing prices on 4/9/20 and 4/9/25 for each company and added annual dividends paid per share during this time (spoiler alert: there are none from Tejon during this period). Here are the results which speak for themselves:
Special Opportunities Fund: 100.97% total return, 14.93% CAGR.
Tejon Ranch Co: 8.65% total return, 1.67% CAGR.
In conclusion, Bulldog's proven track record, spanning decades, demonstrates their ability to unlock Tejon's immense potential. I urge all shareholders to seize this golden opportunity for change and support Bulldog's election. They are the right stewards to realize the value present management has consistently failed to achieve. I firmly believe in Andy, Phil, and the entire Bulldog team, and I encourage you to join me in supporting their vision for Tejon's future.
In Christ,
Will Harvey III