Tejon Ranch Co. — Q3 2017 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2017. Tejon Ranch is a diversified real estate development and agribusiness company with commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations. Results are seasonal and depend on the timing of crop sales, property activity, and water transactions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $11.9 million | $13.1 million | $24.0 million | $32.9 million |
| Operating loss | $1.6 million | $1.9 million | $7.1 million | $4.8 million |
| Net income (loss) attributable to common stockholders | $(22,000) | $324,000 | $(1.9) million | $845,000 |
| EPS, diluted | Approximately $0.00 loss | $0.02 | $(0.09) | $0.04 |
| Operating cash flow | Not separately reported | Not separately reported | $7.9 million | $1.4 million |
| Capital expenditures | Not separately reported | Not separately reported | $15.6 million | $19.8 million |
- Revenue mix and changes: Nine-month revenue fell 27%. Mineral-resource revenue declined $8.4 million, mainly because wetter conditions sharply reduced water-sale opportunities; farming revenue fell $1.6 million, primarily on lower pistachio production and revenue. Commercial/industrial revenue rose 9% to $7.1 million, and ranch operations revenue rose 25% to $2.8 million.
- Profit drivers: Equity earnings from unconsolidated joint ventures declined 38% to $3.5 million for the nine months. Management cited higher TA/Petro operating costs and lower fuel margins, outlet-center leasing-related charges, and non-cash accounting losses at the Majestic TRC-MRC 2 venture. Farming reported a nine-month operating loss of $1.1 million versus $405,000 of income a year earlier.
- Cash flow: Operating cash flow improved to $7.9 million, substantially supported by $7.2 million of operating distributions from the TA/Petro joint venture. Investing activities used $12.4 million; financing activities provided $5.9 million.
- Balance sheet and liquidity: At September 30, cash was $2.7 million and available-for-sale marketable securities were $21.5 million. Current assets were $39.5 million and current liabilities were $30.1 million. Total debt was $88.0 million, including $17.0 million drawn on the $30 million revolver; shareholders’ equity including noncontrolling interests was $336.1 million. The company reported $13 million of remaining revolver availability and compliance with its debt covenants.
- Debt and commitments: The $66.9 million term note is effectively fixed at 4.11% through an interest-rate swap; the revolver rate was 2.74% at quarter-end. The credit facility matures in September 2019, while the term note’s final principal is due in October 2024. Disclosed contractual obligations totaled $388.1 million, including estimated water payments of $265.0 million, largely due after five years.
Outlook, commentary, and risks
- Management expected annual personnel-cost savings of approximately $2.6 million during 2018 from staffing reductions. It anticipated continued development and entitlement spending, including at TRCC, Centennial, Grapevine, and Mountain Village, and estimated additional 2017 capital investment in the remainder of the year. No earnings or revenue guidance was provided.
- Management said it expected adequate operating cash flow and revolver availability for the next 12 months, but noted that substantial future development investment may require equity, project debt, joint-venture capital, or other financing. On October 27, 2017, after quarter-end, the company completed a rights offering that raised $90 million through the sale of 5 million shares at $18 per share; these proceeds are not included in September 30 cash balances.
- Crop results remain exposed to alternating pistachio yields, weather, global crop size, and commodity prices. Management reported lower 2017 pistachio yields after a record 2016 crop and said crop-insurance proceeds were still pending. Wet weather supported water supplies but curtailed interim water-sale opportunities.
- Development depends on entitlements, financing, leasing demand, and infrastructure investment. The Grapevine approvals face a CEQA challenge seeking to invalidate project approvals. Appeals remain in the Antelope Valley groundwater matter; management said its allocation under the approved physical solution is consistent with its Centennial water plan. In a separate Kern Water Bank matter, a court ruling on October 2, 2017 denied a petition and discharged a writ, though related appeals remain pending. The company said potential monetary exposure from unresolved claims could not be estimated.
- The company guarantees $96.3 million of debt of unconsolidated joint ventures. A $4.9 million standby letter of credit supports East CFD bonds and could be drawn if the company fails to pay property taxes. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the post-quarter $90 million rights-offering proceeds adequately fund planned development and reduce reliance on borrowing.
- Whether pistachio crop insurance pays a material amount, and how crop yields, pricing, and water availability affect subsequent results.
- Whether joint-venture earnings recover, particularly given TA/Petro cost and margin pressures and non-cash losses at TRC-MRC 2.
- Progress and outcomes in the Grapevine CEQA case, groundwater appeals, and remaining Kern Water Bank litigation.
- Compliance with liquidity and debt covenants as development spending continues; the filing requires at least $20 million in liquid assets under the credit agreement.