Tejon Ranch Co. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions unless noted. Tejon is a diversified land, real estate development and agribusiness company with five reporting segments: commercial/industrial real estate, resort/residential real estate, mineral resources, farming and ranch operations.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $4.775 | $8.946 | $15.088 | $19.608 |
| Operating loss | $(2.783) | $(1.395) | $(4.546) | $(2.427) |
| Net income (loss) attributable to common stockholders | $(0.333) | $0.707 | $(1.015) | $0.826 |
| Basic and diluted EPS | $(0.01) | $0.03 | $(0.04) | $0.03 |
- Revenue and segment trends: Q2 revenue fell 47% year over year, primarily because there were no commercial/industrial land-sale revenues or related construction management fees, compared with 2019. First-half revenue declined 23%. Mineral resources revenue rose 17% for the first half, led by water sales; farming revenue declined 32%. Commercial/industrial operating income for the first half declined 75% to $0.756 million.
- Other income and joint ventures: Q2 and first-half results included a $1.333 million gain on the April sale of land and a building to the Petro joint venture. Equity earnings from unconsolidated joint ventures were $1.181 million in Q2 and $2.536 million for the first half, down 40% and 11%, respectively, year over year.
- Cash flow: First-half operating cash flow was $0.051 million, compared with cash use of $1.278 million in 2019. Investing activities used $0.852 million and financing activities used $4.330 million. Cash decreased $5.131 million to $21.975 million.
- Liquidity and debt: Cash plus available-for-sale securities totaled $49.298 million at June 30, down from $66.190 million at year-end 2019. Debt was $59.151 million; the $35 million revolving credit line was undrawn. Book debt-to-total capitalization was 11.8%. The principal term loan carries a fixed 4.16% rate through a swap and matures in 2029. The company reported compliance with its credit covenants.
- Balance sheet: Total assets were $535.170 million, including $305.558 million of real estate development assets; total equity was $442.977 million. Current assets were $64.441 million and current liabilities $12.403 million.
- Margins: The filing does not present a consolidated gross-margin measure. Operating results remained loss-making, with the first-half operating loss widening from 2019.
Material changes, outlook and risks
- COVID-19 effects: Retail and outlet-center tenant traffic and collections were affected; certain company tenants received rent deferrals. Tejon deferred $62,000, or 14% of the relevant Q2 contractual rent billings, with most due in 2021. The outlet-center joint venture agreed to defer $83,000 for four tenants and was still negotiating with 29 others on $870,000 of contractual billings. The pandemic also reduced restaurant-related joint-venture earnings, oil demand and ranch activities.
- Management outlook: The company gave no specific earnings guidance. It said results are seasonal and timing-dependent, and that COVID-19 makes the outlook uncertain. Management expected adequate cash, operating cash flow and revolver availability for the next 12 months, assuming the pandemic’s impact did not materially worsen. It expects to seek additional funding over time for major developments through potential joint ventures, debt or equity issuance.
- Planned investment: For the remainder of 2020, management estimated approximately $3.492 million for TRCC infrastructure, $0.557 million for farming investments and up to $5.201 million for planning, litigation, mapping, permitting and development activities at Mountain Village, Centennial and Grapevine.
- Commodity and operating risks: Oil royalties were pressured by low prices and oversupply. Tejon reported that its largest oil royalty tenant, California Resources Corporation, filed for Chapter 11 on July 15, 2020; at filing, Tejon had no delinquent receivables from CRC. Almond pricing faced pressure from expected record industry production, while crop sales are seasonal. Water availability and allocation remain long-term risks.
- Development litigation: Grapevine’s 2019 re-entitlement faced a new CEQA challenge, with a hearing scheduled for January 2021. Centennial approvals were challenged in two consolidated lawsuits, with a hearing scheduled for September 2020. The company also disclosed ongoing water-rights and environmental litigation; outcomes and potential monetary effects were not clear or estimable in the filing.
- Long-term commitments and contingencies: Estimated contractual water payments totaled $260.601 million, largely beyond five years. The company also guaranteed $122.244 million of unconsolidated joint-venture debt and had a $4.468 million standby letter of credit related to East CFD bonds. Management did not expect the guarantees or letter of credit to be called.
- Unusual tax item: First-half income tax expense was $0.708 million despite a pretax loss, producing a 234% effective tax rate. The company attributed this mainly to tax-law limitations and a stock-compensation-related deferred tax shortfall, which it said was not expected to affect current taxes payable.
Important facts for investors to verify
- Whether deferred tenant rents and outstanding outlet-center negotiations are collected, and how the pandemic affects tenant occupancy, rent and joint-venture earnings.
- CRC’s bankruptcy process, ongoing royalty payments and any resulting changes in oil production or receivable collectibility.
- Progress and court outcomes in the Grapevine and Centennial challenges and other water-related litigation.
- Actual crop yields, commodity prices and water allocations compared with management’s expectations.
- Funding needs and sources for development plans, covenant compliance and exposure under joint-venture guarantees and long-term water contracts.