Tejon Ranch Co. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Tejon Ranch is a diversified land and real estate development, agribusiness and natural-resources company, with five reporting segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $10.313 | $10.662 |
| Operating loss | $(1.763) | $(1.032) |
| Net income (loss) attributable to common stockholders | $(0.682); $(0.03) per share | $0.119; approximately $0.00 per share |
| Operating cash flow | $4.037 | $(1.211) |
| Cash and cash equivalents | $25.048 | $27.106 at Dec. 31, 2019 |
| Marketable securities | $34.228 | $39.084 at Dec. 31, 2019 |
| Total debt | $60.172 | $61.897 at Dec. 31, 2019 |
Cash, cash equivalents and marketable securities totaled $59.276 million, down $6.914 million from year-end. The company also had a $35 million revolving credit facility with no balance outstanding. It reported compliance with its credit covenants and a 12.0% debt-to-total-capitalization ratio. The principal term loan balance was $57.805 million, hedged at a fixed 4.16%; the revolving facility matures in October 2024 and the term loan in June 2029.
Investing activities used $2.802 million, including $4.948 million of real estate and equipment expenditures and $2.635 million for long-term water assets. Financing activities used $3.293 million, including debt repayments and taxes on vested stock grants. Comprehensive loss attributable to common stockholders was $3.512 million, including a $3.959 million pretax unrealized loss on the interest-rate swap.
Segment results included $2.320 million of commercial/industrial revenue (down 18%); $6.178 million of mineral-resource revenue (up 1%), including $5.121 million from water sales; $0.952 million of farming revenue (up 17%); and $0.863 million of ranch-operations revenue (down 3%). Resort/residential development generated no revenue and recorded $0.626 million of expense. Equity in unconsolidated joint-venture earnings rose to $1.355 million from $0.876 million.
Changes versus Q1 2019
- Total revenue declined 3%, while operating expenses increased 3%, widening the operating loss by $0.731 million.
- The company moved from $0.119 million of income attributable to common stockholders to a $0.682 million loss. Management cited higher operating expenses and a discrete stock-compensation-related tax item; reported income-tax expense was $0.512 million versus $0.095 million. The filing says the tax item did not affect current income-tax payable.
- Operating cash flow improved by $5.248 million, primarily due to collections of receivables, mainly related to farming.
- Commercial/industrial revenue fell largely because a prior-year Pastoria Energy Facility revenue true-up did not recur. Mineral-resource revenue was broadly flat: stronger cement demand offset lower oil royalties.
Outlook, risks and contingencies
- COVID-19: Management said effects were uncertain and could adversely affect leasing revenue, joint-venture income, traffic, oil royalties and customer demand. Tenants had requested rent relief, mainly deferrals; the company said it had not agreed to rent forgiveness or permanent abatements. The outlet center was closed in response to the pandemic. Management planned expense and cash-saving measures and said liquidity was adequate for the next 12 months assuming conditions did not materially worsen.
- Capital needs: Estimated remaining-2020 investment included up to $9.049 million for planning, litigation, mapping and development at the residential projects; approximately $6.173 million for TRCC infrastructure; and approximately $1.960 million for farming. Management said development may require additional financing, joint ventures or equity issuance; financing availability and terms are not assured.
- Long-term obligations: Contractual obligations totaled $354.143 million, including $262.399 million of estimated water payments, much of it due after five years. The company expected to pay $10.027 million under water contracts during 2020. Water availability and California groundwater regulation are ongoing risks.
- Commodity, agriculture and seasonality: Management expected a significant decline in oil royalties for the foreseeable future after oil prices fell sharply. Crop sales are seasonal, concentrated in the third and fourth quarters; crop prices, weather, labor availability, tariffs and water supply could affect results. The filing cautions that Q1 results are not indicative of full-year performance.
- Development litigation: Grapevine’s 2019 re-entitlement was challenged in a new CEQA action, and Centennial approvals were challenged in two consolidated actions. Outcomes and timing remain uncertain. The company also disclosed pending Antelope Valley groundwater and Kern Water Bank litigation; potential monetary effects of some claims could not be estimated.
- Other commitments: The company reported $118.559 million of guarantees on unconsolidated joint-venture debt and a $4.468 million standby letter of credit related to East CFD bonds. Management did not expect either to be called, but these remain contingent exposures. The filing also describes a pending California condor-related challenge to the Tehachapi Uplands habitat plan.
- Subsequent event: On April 17, 2020, the company contributed land and a building to its Petro Travel Plaza joint venture for $2.0 million; approximately $0.535 million of gain was expected to be recognized in Q2, with the remainder deferred.
Investor verification points
- Track rent collections, tenant deferral requests and the pandemic’s effects on TRCC, the outlet center and joint-venture earnings.
- Monitor oil royalty receipts, oil prices and production plans of the company’s largest oil royalty tenant.
- Verify progress and potential delays in Grapevine and Centennial litigation, Mountain Village permitting, and related development spending.
- Assess liquidity against planned capital investments, long-dated water-contract payments and potential external financing needs.
- Review the tax reconciliation and stock-compensation tax item, as well as the swap’s fair-value effects on comprehensive income and equity.
- Follow the groundwater and Kern Water Bank proceedings, joint-venture debt guarantees and CFD letter-of-credit exposure.