Believe it or not there is a real estate company in California that, based on recent developments, is a great bargain for patient investors.

IN PICTURES: 7 Tips On Buying A Home In A Down Market

Down On The Ranch
Tejon Ranch Company
(NYSE:TRC) owns 270,000 acres of land just north of Los Angeles. Back in May of 2008, Tejon won support from environmental groups to develop its raw land. This victory was the catalyst the company needed to pave the way for value creation over the next few years.

Tejon agreed that it would put 240,000 of its acres into a land trust that would preserve the land for environmental benefits. In return, Tejon received guarantees from several major environmental groups that they would not oppose development of the remaining 30,000 or so acres. This agreement is a big deal if you know anything about the land entitlement process. It takes years and is not is cheap to get land entitled for development. This deal saves Tejon valuable time and money.

Focus On The Land...
This is the time when you should be buying land because with housing in a funk, land is being given away. Buy it now when nobody wants it and sell it high when the housing market turns.

Since 30,000 acres are cleared for development, they provide the greatest source of value from an investment standpoint. Tejon has a market cap of $460 million. The market cap implies a value of roughly $15,300 per acre of developable land. While there may not be an exact formula for valuing land, very few will disagree that developable entitled land is worth much more than $15,000 an acre. In fact, before the housing bust raw land in nearby parts of California was fetching $200,000 an acre. (For further reading, see Can Real Estate Stabilize Your Portfolio?)

...And The Balance Sheet
In other words if Tejon's 30,000 acres are valued at $50,000 each, the company is worth $1.5 billion versus $460 million today. And this figure also assumes the other 240,000 acres are worth nothing. More importantly, Tejon is debt-free, an unbelievable advantage for land companies. The only other such company that comes to mind that is debt-free with attractive land assets is St. Joe (NYSE:JOE) in Florida.

Not having debt is crucial for a land company, because until the land is developed, it's not generating revenues, so there is no way to service the debt. Take a look at other companies like Forest City Enterprises (NYSE:FCE.A), Boston Properties (NYSE:BXP) and Prologis (NYSE:PLD). All have attractive land holdings that are easily worth more than the market values of the company, but all three are sitting on so much debt that I wouldn't want to touch them in this restricted credit environment.

The Bottom Line
Tejon is a debt-free, land-rich company. With the milestone agreement with the environmental groups, the company now has a value creating catalyst. (For more, see Add Some Real Estate To Your Portfolio)

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center