Tejon Ranch Co. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing also reports fourth-quarter results. Tejon Ranch is a diversified California land, real estate development, farming, mineral resources, and ranch operations company, with approximately 270,000 acres and seven joint ventures.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Segment revenue | $37.830 million | $49.523 million |
| Total revenues, including investment and other income, excluding equity earnings of joint ventures | $40.155 million | $48.938 million |
| Equity earnings of unconsolidated joint ventures | $4.504 million | $16.575 million |
| Net income (loss) attributable to common stockholders | $(0.740) million | $10.580 million |
| Diluted earnings (loss) per share | $(0.03) | $0.40 |
| Cash from operating activities | $15.481 million | $16.045 million |
| Cash and cash equivalents | $55.320 million | $27.106 million |
| Marketable securities | $2.771 million | $39.084 million |
| Long-term debt, including current maturities | $57.078 million | $61.897 million |
The company reported an operating loss of $6.747 million, compared with a $1.431 million loss in 2019. Income before equity earnings of joint ventures was a loss of $4.422 million; after $4.504 million of equity earnings and $0.829 million of income tax expense, net loss was $0.747 million. The effective tax rate was unusually high at approximately 1,011%, largely due to stock-compensation and other permanent tax differences; the company said the stock-compensation tax shortfall was not expected to affect current tax payable.
Investing activities provided $19.778 million, principally reflecting marketable-security maturities; financing activities used $7.045 million, mainly for debt repayments and taxes on vested stock grants. Capital expenditures were $22.259 million. At year-end, total assets were $536.349 million, total liabilities $91.018 million, and equity $445.331 million. The debt-to-total-capitalization ratio was 11.3%. The $35 million revolving credit line was undrawn, and the company reported compliance with its financial covenants.
Fourth quarter: Revenue was $9.279 million, segment profit $0.908 million, net loss $0.121 million, and loss attributable to common stockholders $0.123 million. Diluted loss per share rounded to zero.
Changes versus the prior year
- Segment revenue fell about 24%. Commercial/industrial revenue declined $7.256 million, largely because 2019 included land and building contributions to joint ventures that did not recur.
- Equity earnings from joint ventures fell $12.071 million. The largest comparison was the 2019 gain from the sale of Five West Parcel’s property; the travel-plaza joint venture also experienced lower fuel volumes and restaurant activity during the pandemic.
- Farming revenue declined $5.465 million and the segment moved from $4.080 million of operating profit to a $1.237 million loss. Lower almond prices, reduced pistachio yields and lower grape production were partially offset by $3.789 million of pistachio crop-insurance proceeds.
- Mineral resources operating profit rose to $4.322 million from $3.973 million, supported by higher water-sale revenue and cement royalties; oil and gas royalties declined.
- Cash and cash equivalents increased, while marketable securities declined substantially as securities matured to fund investment. Long-term debt declined by approximately $4.8 million.
Outlook, risks and notable items
- Management said cash, operating cash flow and available credit should fund near-term needs. It expects continued spending on commercial infrastructure, farms, water assets, and entitlements and predevelopment for Mountain Village, Centennial and Grapevine. As major developments advance, additional funding may be needed through joint ventures, debt, asset sales or equity issuance; financing availability and terms are not assured.
- In January 2021, Kern County approved permits allowing up to 495 apartments at Tejon Ranch Commerce Center. Development planning was expected to advance during 2021. Mountain Village remained dependent on final mapping and financing; Centennial faced pending litigation; Grapevine received a favorable court ruling in January 2021, subject to potential appeal.
- Water availability is a material operating and development risk. The preliminary 2021 State Water Project allocation was 10% of contract amounts; management expected other water sources to meet near-term farming needs. Contractual future water payments were $276.146 million, including $10.194 million expected in 2021.
- COVID-19 affected commercial tenants and the travel-plaza joint venture. The outlet center provided rent relief, and the company reported $174,000 of deferred rent on its consolidated commercial leases, expected to be repaid by the end of 2021. Pandemic duration and future effects remained uncertain.
- Other material exposures include commodity-price and crop-yield variability, California development approvals and environmental litigation, drought and groundwater regulation, construction-cost inflation, and reliance on joint ventures. The company guaranteed $118.484 million of unconsolidated joint-venture debt; management did not expect the guarantees to be called. A $4.468 million standby letter of credit supports East CFD bonds.
- The company recognized a $1.331 million gain on a 2020 property sale to its travel-plaza joint venture. No impairment loss was recorded on real estate development. The Grapevine and Centennial approvals, and the TUMSHCP permit, remained subject to potential legal developments; a conservation-related lawsuit was also pending.
- No cash dividends were paid in 2020 or 2019, and the company said it had no current intention to pay them.
The financial statements received an unqualified audit opinion. The auditor identified assessment of impairment indicators for real estate development as a critical audit matter because of the significant judgments involved in project cash flows, approvals, litigation and market assumptions.
Investor verification priorities
- Reconcile reported segment revenue, total revenue and other income, and equity earnings from joint ventures; assess how much earnings depend on nonrecurring property-sale gains and joint-venture distributions.
- Review the collection and repayment status of deferred tenant rent, and the ongoing effects of COVID-19 on travel-plaza and outlet operations.
- Track 2021 water allocations, water costs, farming requirements and the long-term water-purchase commitments.
- Monitor litigation, appeals and final approvals for Centennial, Grapevine and Mountain Village, as well as timing and financing for new development.
- Assess joint-venture debt, the company’s guarantees and credit-facility covenant headroom alongside planned capital spending and potential external financing needs.