Tejon Ranch Co. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Tejon Ranch is a diversified land, real estate development, farming and natural resources company. Amounts below are in millions unless otherwise noted. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $6.10 | $9.27 | $18.36 | $30.29 |
| Operating income (loss) | $(1.87) | $(2.32) | $(1.38) | $2.89 |
| Equity earnings from joint ventures | $1.94 | $1.66 | $3.46 | $2.88 |
| Net income (loss) attributable to common stockholders | $0.27 | $(0.67) | $2.04 | $3.64 |
| Diluted earnings (loss) per share | $0.01 | $(0.03) | $0.08 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $4.48 | $2.93 | $10.87 | $14.19 |
- Q2 revenue fell about 34%; the common-stockholder result improved to a small profit, helped by lower farming costs and higher investment income. Lower water sales reduced mineral-resource results.
- Six-month revenue fell about 39%, and operating results shifted from income to loss. Management attributed the decline chiefly to no land sale in 2023 and fewer water-sale opportunities; higher joint-venture earnings, investment income and improved farming losses partly offset this.
- Commercial/industrial segment operating income was $1.93 million for the half-year versus $5.25 million, primarily because there was no comparable land sale. Mineral-resource operating income declined to $3.52 million from $6.50 million, principally with water-sale revenue down to $5.10 million from $12.41 million. Farming’s operating loss narrowed to $1.28 million from $2.65 million. Joint-venture equity earnings rose 20% to $3.46 million.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1.17 million, versus $2.66 million. Investing activities used $9.48 million, including $10.19 million of real estate and equipment expenditures and $4.67 million invested in water assets; financing activities used $3.47 million.
- At June 30, cash and cash equivalents were $27.34 million and available-for-sale securities were $39.65 million, or $66.99 million combined. The revolving credit line had no borrowings and provided $40.61 million of availability. Management said it expected adequate resources for operations over the next 12 months.
- Total debt was $49.28 million; total equity was $479.08 million and the reported debt-to-total-capitalization ratio was approximately 9.3%. The $47.72 million term loan is hedged at a 4.62% rate and matures in 2032; a separate $1.56 million note bears 4.25% interest and matures in 2028. The company reported compliance with credit-facility covenants.
- Contractual obligations included $267.97 million of estimated future water payments, mostly due after five years. The company reported $93.87 million in total liabilities and $81.29 million in current assets.
Outlook, risks and notable items
- No full-year earnings or revenue guidance is provided. Management estimated up to $10.20 million of TRCC-East infrastructure investment and up to $4.54 million for master-planned community planning, permitting, litigation and development in the remainder of 2023; additional farming investment was also planned.
- Management expects continued investment in development and says future project funding may require joint ventures, debt, asset sales or additional common stock. It cited inflation in construction costs and tighter capital markets as potential constraints.
- Centennial’s project approvals were rescinded by a court judgment in March 2023. Tejon appealed in May and CBD/CNPS cross-appealed in June; the rescission order was on hold during the appeal. The potential monetary effect of an adverse outcome could not be estimated.
- Water availability and allocation affect both sales and farming. The State Water Project allocation was 100% in 2023 versus 5% in 2022, limiting third-party water sales. The company said it had sufficient water for the next crop year, while noting longer-term uncertainty from drought and groundwater regulation.
- Other risks include seasonal crop sales, commodity and crop-price variability, weather, entitlement and permitting outcomes, and the timing of real estate sales and leases. Tejon also disclosed a $4.39 million standby letter of credit associated with East CFD bonds and guarantees on certain joint-venture debt; it did not expect these guarantees to be called. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and legal outcomes in the Centennial appeal, and their implications for project approvals, costs and development timing.
- Whether commercial land sales, TRCC leasing and the fully pre-leased TRC-MRC 5 building, expected to be completed in Q1 2024, translate into future cash flow and earnings.
- Water-sale volumes, water-contract costs and obligations, and water availability for farming and planned development.
- Cash use and financing needs against the planned capital program, including access to credit, joint-venture distributions and potential equity issuance.
- Joint-venture performance, debt and guarantees, alongside the company’s reported non-GAAP Adjusted EBITDA and its reconciliation to GAAP results.