Tejon Ranch Co. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Tejon Ranch is a California land-based real estate and agribusiness company operating across commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations. Its principal asset is approximately 270,000 acres of land.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Operating revenues | $49.5 million | $45.6 million |
| Equity earnings from unconsolidated joint ventures | $16.6 million | $3.8 million |
| Operating income (loss) | $(1.4) million | $0.4 million |
| Net income attributable to common stockholders | $10.6 million; $0.40 diluted EPS | $4.3 million; $0.16 diluted EPS |
| Cash provided by operating activities | $16.0 million | $14.4 million |
| Capital expenditures | $25.2 million | $22.6 million |
| Cash and marketable securities | $66.2 million | $79.7 million |
| Total assets | $539.4 million | $529.0 million |
| Long-term debt, including current maturities | $61.9 million | $65.9 million |
Operating margin on reported operating revenues was approximately negative 2.9%; net income was substantially supported by equity-method joint venture earnings rather than operating income. The company reported a 27.3% effective tax rate. No cash dividends were paid in 2019 or 2018.
Fourth-quarter 2019 revenue, including investment income, was $20.5 million and net income attributable to common stockholders was $9.7 million, or $0.37 per diluted share. The quarter included a significant gain recognized through the Five West Parcel joint venture’s property sale.
Material changes versus prior year
- Common-stockholder net income rose to $10.6 million from $4.3 million, driven mainly by joint venture earnings, which increased $12.7 million to $16.6 million.
- Five West Parcel sold a building and land for $29.1 million and recorded a $17.5 million gain at the venture level. Tejon’s reported equity earnings from that venture were $9.1 million.
- Commercial/industrial revenue increased 87% to $16.8 million, including $6.6 million recognized on land and building contributions to joint ventures. Related segment expenses also rose, and the segment earned $3.8 million.
- Mineral resources revenue declined 32% to $9.8 million, mainly because water sales fell to $4.0 million from $9.1 million after a wet winter reduced sales opportunities.
- Farming revenue increased 4% to $19.3 million and segment profit rose to $4.1 million from $2.5 million, reflecting stronger almond yields and lower water holding costs. Results included a $3.7 million net upward adjustment for prior crop estimates, principally pistachios.
- The company abandoned 313 acres of vineyards and recorded a $1.6 million asset write-off. Ranch operations continued to report a segment loss, $1.7 million in 2019.
Liquidity, debt, and capital commitments
- Year-end cash was $27.1 million and marketable securities were $39.1 million. The $35 million revolving credit facility was undrawn at year-end; the company reported compliance with its credit covenants.
- The principal term loan balance was $58.8 million, with interest fixed at 4.16% through a swap and maturity extended to June 2029. A separate $3.1 million note bears 4.25% interest and matures in 2028.
- Operating cash flow was $16.0 million. Investing activities provided $0.8 million net, including security maturities, while financing activities used $5.7 million, largely for debt repayment and taxes on vested stock grants.
- Management estimated 2020 capital spending of approximately $6.0 million for TRCC infrastructure, $3.5 million for farming, up to $10.5 million for residential-project planning and permitting, and $3.2 million for water-related investments.
- Contractual obligations totaled $363.8 million, including $269.1 million of estimated future water payments. Tejon also guaranteed $116.0 million of debt of Rockefeller and Majestic joint ventures; management said it did not expect those guarantees to be called.
Outlook, commentary, and principal risks
Management expects continued investment in TRCC infrastructure and in litigation defense, permits, mapping, and predevelopment for Mountain Village, Centennial, and Grapevine. It expects earnings to fluctuate with commodity prices and yields, land sales and leasing, and joint venture results. Management stated that existing cash, operating cash flow, and available credit should fund operations over the next twelve months, but that further development of major projects will require additional capital, potentially from joint ventures, debt, asset sales, or equity issuance.
- Mountain Village, Centennial, and Grapevine are entitled, but substantial development has not begun. Residential projects may take 25 years or longer from construction commencement, and timing and costs remain uncertain.
- Centennial approvals face litigation. Grapevine was reapproved in December 2019 after a court-ordered supplemental environmental review, but new litigation and proceedings remain pending.
- Water availability is a material long-term exposure. The preliminary 2020 State Water Project allocation was 15% of entitlement; management believed other groundwater, surface-water, and district resources should meet near-term farming needs. Reduced allocations or prolonged drought could increase costs or harm crops and development plans.
- Crop prices and yields are exposed to global supply, weather, water costs, currency movements, and trade disruption. The filing stated that the impact of the coronavirus outbreak on almond and pistachio trade was not yet known.
- Mineral royalties depend on production and volatile oil, gas, and construction-material prices. Management did not expect increased oil production in 2020 if prices remained at then-current levels.
- Other material risks include California’s economic and regulatory environment, entitlement delays and environmental challenges, competition, construction-cost inflation, dependence on strategic partners and tenants, and potential LIBOR transition effects.
The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- How much of 2019’s earnings increase was nonrecurring, particularly the Five West Parcel sale gain, and what recurring cash distributions can joint ventures sustain?
- Whether the 15% preliminary 2020 water allocation changed, and whether available supplemental water is sufficient and affordable for farming and development.
- Current status and potential effect of Centennial and Grapevine litigation, including any impact on approvals, project timing, or costs.
- Whether commercial/industrial leasing and land-sale activity can improve operating income, given the reported operating loss and reliance on joint venture earnings.
- Funding plans for the residential projects and TRCC, including progress against capital spending estimates, debt guarantees, and the substantial contractual water-payment obligations.
- Final settlement prices for crop receivables and the sustainability of reported crop revenue adjustments and yields.