Tejon Ranch Co. — Q3 2018 Form 10-Q
Business context and period: For the quarter and nine months ended September 30, 2018. Tejon Ranch is a land development and agribusiness company operating in commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations. Its principal asset is approximately 270,000 acres of land. Results are seasonal and affected by crop cycles, water activity, and the timing of development and leasing.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $15.432m | $11.908m | $33.971m | $23.573m |
| Operating income (loss) | $2.715m | $(1.503)m | $1.911m | $(7.120)m |
| Net income (loss) attributable to common stockholders | $3.488m | $(0.022)m | $3.948m | $(2.100)m |
| Diluted earnings (loss) per share | $0.13 | — | $0.15 | $(0.10) |
- Revenue drivers: Nine-month mineral resources revenue was $11.986m, including $7.992m from water sales; farming revenue was $12.573m. Commercial/industrial revenue was $6.788m. Resort/residential development generated no revenue and incurred $1.319m of costs.
- Cash flow: For the nine months, operating activities provided $8.829m; investing activities used $14.515m; financing activities used $4.247m. Capital expenditures were $16.183m. Cash declined to $10.174m from $20.107m at year-end 2017.
- Liquidity: Cash plus available-for-sale marketable securities totaled $79.555m, down from $90.975m at December 31, 2017. Current assets were $99.965m and current liabilities $13.331m.
- Debt and capital: Total debt was $66.941m, including $4.081m current maturities; the $30m revolving credit line was undrawn, with $30m available. The company reported a 13.3% debt-to-total-capitalization ratio and compliance with its financial covenants. Its term loan bears a fixed 4.11% rate via swap and matures in 2024; the revolving facility matures in September 2019.
- Other metrics: Equity-method joint-venture earnings were $2.411m for the nine months, versus $3.512m a year earlier. Adjusted EBITDA, a non-GAAP measure, was $15.126m versus $7.368m.
Changes versus prior comparable periods
- Nine-month revenue increased 44% and common-stockholder earnings improved from a loss to a profit. Management attributed the revenue increase chiefly to water sales during moderate drought conditions and higher pistachio production.
- Water sales were 7,442 acre-feet in the first nine months, versus 939 acre-feet in the prior-year period. The company stated it did not expect further water-sale opportunities for the remainder of 2018.
- 2018 pistachio yields exceeded 4 million pounds, a company record. Management expects 2019 to be a lower-production, alternate-bearing year. Wine-grape revenue declined, partly due to fewer production acres.
- Joint-venture earnings fell 31% for the nine months, primarily reflecting lower TA/Petro earnings and reduced outlet-center results; improved results at TRC-MRC 2 partly offset the declines.
- Available cash and securities declined by $11.420m from year-end, principally as development investment continued. The 2018 nine-month tax rate was approximately 25%, compared with approximately 41% in 2017, following the reduction in the federal statutory rate under the Tax Cuts and Jobs Act.
Outlook, risks, contingencies, and unusual items
- No specific consolidated earnings or revenue guidance was provided. Management emphasized that quarterly results are not indicative of full-year performance. It expects near-term liquidity and cash flows to fund operations, but says further development may require additional debt, equity, asset sales, or joint-venture financing.
- Management estimated remaining-2018 capital investment of approximately $4.478m across TRCC-East, Grapevine, Mountain Village, and Centennial. The company continues to invest in infrastructure and entitlement work on its developments.
- Crop results and receivables are exposed to commodity prices, weather, crop yields, and trade tariffs. Management cited uncertainty around tariffs from China and India and possible effects on almond and pistachio demand and pricing. At September 30, $9.126m of receivables was exposed to changing crop prices.
- Future development depends on market conditions, financing, and obtaining or defending governmental approvals. Grapevine litigation resulted in a court finding that the project EIR was inadequate on project description and related impact analysis; a remedy hearing was set for December 7, 2018. Other pending matters include appeals concerning Antelope Valley groundwater rights and the Kern Water Bank; monetary exposure from the latter matters could not be estimated.
- Long-term contractual commitments totaled $359.223m, including estimated water payments of $258.953m, of which $9.032m was due within one year. This includes long-running water purchase and supply obligations.
- The company had guaranteed $103.732m of unconsolidated joint-venture debt. Management did not expect the guarantees to be called. A $4.468m standby letter of credit supports East Community Facilities District bonds and could be drawn if the company failed to pay property taxes on its land.
- After quarter-end, on November 1, 2018, the company formed a Majestic Realty joint venture to develop a 579,040-square-foot industrial building. Tejon contributed 33.0877 acres valued at $5.765m; Majestic is to contribute matching cash capital, with future capital needs shared equally.
Most important facts for investors to verify
- Whether water-sale income was unusual and nonrecurring, given management’s expectation of no further 2018 water sales and the increased water-related costs.
- Final crop prices and collections on the $9.126m of price-exposed receivables, along with the expected lower pistachio crop in 2019 and tariff developments.
- Liquidity, covenant compliance, and the refinancing or renewal plan for the revolving facility maturing in September 2019, particularly as development spending continues.
- The final Grapevine litigation remedy and the status and potential consequences of water-rights and Kern Water Bank appeals.
- Joint-venture performance and debt guarantees, including the outlet center’s leasing and operating results and the new Majestic project’s funding and execution.
- Progress on entitlements, leasing, and development spending for Mountain Village, Centennial, Grapevine, and TRCC, and the substantial water-payment commitments extending over many years.