Tejon Ranch Co. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual filing, not a quarterly report; the filing also reports unaudited fourth-quarter results. Tejon Ranch is a diversified California land, real estate development, farming and natural-resources company, with approximately 270,000 acres and five operating segments.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue from operations, including investment and other income | $36.3 million | $47.2 million |
| Segment revenues | $35.7 million | $45.6 million |
| Equity earnings from unconsolidated joint ventures | $4.2 million | $7.1 million |
| Operating loss before joint-venture earnings | $6.9 million loss | $6.2 million loss |
| Net income (loss) attributable to common stockholders | $1.6 million loss; $(0.07) per diluted share | $0.6 million income; $0.03 per diluted share |
| Cash from operating activities | $9.8 million | $5.6 million |
| Cash and marketable securities at year-end | $91.0 million | $27.9 million |
| Total debt | $70.0 million | $81.6 million |
| Total assets / total equity | $518.2 million / $426.8 million | $439.7 million / $334.5 million |
Revenue from operations declined about 23% year over year. The company reported no consolidated operating profit: operating loss before joint-venture earnings was $6.9 million. The filing does not provide a single consolidated operating-margin figure; the operating result was negative. Adjusted EBITDA, a non-GAAP measure, was $12.1 million versus $14.7 million. The company generated $9.8 million of operating cash, spent $21.7 million on real estate and equipment, and used $68.2 million in investing activities, including purchases of marketable securities.
Year-end cash and securities rose sharply following an October rights offering that raised $89.9 million net from 5.0 million shares sold at $18 each. The company repaid $17.0 million of revolving-credit borrowings; the revolver balance was zero at year-end, with $30.0 million available. Debt-to-total-capitalization was 14.0%, down from 19.6%. The $66.0 million term loan has a fixed 4.11% rate through an interest-rate swap and matures in 2024; the revolving facility matures in September 2019. The company reported compliance with its credit covenants. No cash dividends were paid, and management said it had no current intention to pay them.
Material changes versus FY 2016
- Mineral Resources revenue fell $8.2 million, primarily because water sales dropped to $1.3 million from $9.6 million as unusually wet conditions reduced market demand. Water sales volume declined to 939 acre-feet from 7,285.
- Farming revenue decreased $2.2 million. Pistachio revenue fell $1.7 million amid an alternate down-bearing crop year and lower yields; almond revenue declined $1.0 million. Lower farm costs, particularly water costs, helped segment profit rise to $0.2 million from a small loss.
- Joint-venture earnings declined $2.9 million to $4.2 million, reflecting lower TA/Petro and outlet-center earnings and losses at a Majestic industrial-property venture.
- Corporate expenses decreased $2.4 million to $10.1 million, mainly due to staff reductions and lower legal and IT professional-services costs. Commercial/industrial segment revenue was broadly flat, while its segment profit increased to $2.9 million.
- Operating cash flow increased $4.2 million. Cash and securities rose primarily due to the equity offering, while total debt decreased by $11.6 million.
Outlook, risks and contingencies
- Management expects to continue funding entitlements, permitting, infrastructure and development. Estimated 2018 investments include about $8.1 million for TRCC infrastructure, up to $18.5 million for the residential projects, $6.2 million for water-related investment, and $3.6 million for orchards and farm equipment. The timing and amounts are subject to project approvals and other conditions.
- Management expects mineral-resource royalties to improve in 2018 if oil prices remain higher, and anticipates improved water-sale opportunities if dry conditions return. Both outlooks are uncertain and depend on commodity prices, production, rainfall and demand.
- Management said existing water resources should meet 2018 farming needs despite a preliminary State Water Project allocation of 20%. Longer-term risks include drought, water cost and availability, groundwater regulation, and restrictions or litigation affecting water rights.
- Centennial remained in the entitlement process, with county review of its environmental report ongoing. Grapevine approvals were being challenged in litigation; the company and Kern County were defending the approvals. Mountain Village had received tentative tract-map approval for its first phases, but construction had not begun. Residential developments may take 25 years or longer, and timing depends on approvals, market conditions and financing.
- Material business risks include California land-use and environmental approvals, project litigation, real-estate cycles and financing availability, crop yields and prices, oil and gas prices, water supply, construction costs, and dependence on joint-venture partners. The company cited $366.9 million of contractual obligations, including estimated water payments of $262.0 million, principally over the long term.
- The company guaranteed $99.0 million of unconsolidated joint-venture debt; it said it did not expect the guarantees to be called. A $4.9 million standby letter of credit relates to TRCC infrastructure bonds. Legal matters also include appeals concerning Antelope Valley groundwater rights and Kern Water Bank proceedings. Management stated that other proceedings were not expected to have a material adverse effect; some litigation outcomes and related monetary exposure cannot presently be estimated.
- U.S. tax reform reduced the federal corporate rate and led to a $54,000 estimated deferred-tax revaluation expense. The company reported a $1.1 million income-tax benefit for 2017 and said its tax accounting for the law remained incomplete.
Auditors issued unqualified opinions on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether operating performance and joint-venture earnings recover, and how much of reported operating cash flow is supported by recurring operations versus joint-venture distributions.
- Progress, costs, litigation outcomes and financing plans for Grapevine, Centennial and Mountain Village, including the assumptions behind long-dated development estimates.
- Actual 2018 water availability, water-sale volumes and costs, and the implications of drought and groundwater rules for farming and development.
- Crop yields, final crop settlements and customer concentration: one buyer accounted for 74% of pistachio revenue and the largest almond buyer for 50% of almond revenue.
- Joint-venture debt, guarantee exposure and covenant headroom, alongside planned capital spending and liquidity after the rights offering.
- The eventual effects of tax reform and adoption of new revenue-recognition and lease-accounting standards, and any material developments in pending environmental or water litigation.