Tejon Ranch Co. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts below are U.S. dollars. The company is a diversified land-development and agribusiness company operating in commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $6.849 million | $7.000 million | $19.802 million | $23.633 million |
| Operating loss | $3.107 million | $1.402 million | $2.924 million | $0.282 million |
| Net income (loss) attributable to common stockholders | $(0.688) million | $0.406 million | $0.521 million | $2.023 million |
| Diluted earnings (loss) per share | $(0.03) | $0.02 | $0.03 | $0.10 |
| Adjusted EBITDA | $1.360 million | $2.536 million | $5.374 million | $6.895 million |
For the six-month period, revenue fell 16%, primarily from lower farming revenue and, to a lesser extent, reduced water sales and oil royalties. Common-stockholder earnings declined despite higher joint-venture earnings, as farming and oil royalty results weakened. In Q2, revenue declined 2%; higher commercial and mineral-resource revenue was outweighed by lower farming and ranch revenue and higher expenses. The filing reports no consolidated gross margin figure.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was a use of $3.697 million, versus $1.633 million provided in 2015. Investing activities used $7.931 million, including $13.266 million in property and equipment expenditures; financing activities provided $10.560 million, largely from revolving-credit borrowings.
- Cash and cash equivalents were $0.862 million at June 30, 2016, down from $1.930 million at year-end. Cash, cash equivalents, and marketable securities totaled $33.523 million, down 4% from year-end.
- Current assets were $52.316 million and current liabilities $22.189 million. The company reported $19 million available on its $30 million revolving credit line after $11 million was drawn.
- Total debt was $85.089 million: an $11 million revolver, a $70 million term note, and a $4.089 million promissory note. The term note’s interest rate is fixed at 4.11% through a swap; the promissory note rate is 4.25%. The company said it was in compliance with all credit covenants at June 30.
- Book equity was $331.738 million. The company reported long-term debt-to-total capitalization of approximately 18.2% (its stated measure excludes the revolving balance from long-term debt).
Business changes and management commentary
- Six-month commercial/industrial revenue increased 5% to $4.313 million, supported by leasing activity at Tejon Ranch Commerce Center. Commercial/industrial and joint-venture earnings together increased to $4.217 million from $3.610 million.
- Mineral-resource revenue declined 7% to $11.927 million. Oil production fell to 151,163 barrels from 246,277, and average oil price fell to $35 per barrel from $51. Water sales volume decreased to 7,285 acre-feet from 7,922.
- Farming revenue fell 61% to $1.723 million, chiefly because almond carryover inventory was lower and pistachio production and carryover were weak. Ranch operations revenue declined 20% to $1.839 million, including lower hunting and grazing revenue.
- Joint-venture earnings rose 17% to $3.297 million, primarily due to improved TA/Petro operations and outlet-center results. Resort/residential development generated no revenue and incurred $0.929 million in expenses during the first half.
- Management expects oil prices and royalties to remain under pressure during 2016 and reported lower almond and pistachio prices. It noted that farming results are seasonal, with the largest share of farming revenue historically recognized in the third and fourth quarters. No specific full-year earnings or revenue guidance was provided.
- Estimated remaining-2016 capital investment includes about $2.9 million for TRCC-East infrastructure, $2.7 million for Grapevine planning and entitlement, $0.72 million for Mountain Village tract maps, $3.9 million for Centennial entitlement work, up to $1.4 million for water assets and infrastructure, and about $0.65 million for farming assets.
- On August 6, 2016, after quarter-end, the company entered a 50/50 joint venture with Majestic Realty to acquire and manage a fully leased 651,909-square-foot industrial building at TRCC. The stated purchase price is $38 per square foot; further capital needs depend on acquisition financing. The company also described a non-binding intent to pursue a separate 480,000-square-foot industrial building with Majestic.
Risks, commitments, and unusual items
- Contractual obligations totaled $393.628 million, including an estimated $271.881 million of future water payments, of which $8.240 million was due within one year. The water commitments largely reflect long-term supply contracts.
- The company guarantees $61.859 million of unconsolidated joint-venture debt. Its $5.426 million standby letter of credit supports East Community Facilities District bonds and is expected by management not to be drawn, but could be triggered if the company fails to pay property taxes.
- Legal and regulatory matters include appeals concerning the Antelope Valley groundwater adjudication and litigation over State Water Project contract amendments and the Kern Water Bank. The company said possible impacts of the latter proceedings could not be estimated. A potential Endangered Species Act lawsuit concerning the Tehachapi Uplands habitat plan had not been filed as of the report.
- The interest-rate swap liability increased to $6.212 million from $2.905 million at year-end; the effective hedge’s fair-value changes were recorded in other comprehensive income. The company recorded a $1.993 million six-month other comprehensive loss, mainly reflecting the swap’s fair-value movement.
- Management stated it believed available cash, securities, operating cash flows, and credit-line availability were adequate for the next 12 months, while noting that future financing availability and terms are not assured. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether planned development, leasing, and entitlement activity converts into revenue and cash flow, given ongoing operating losses and substantial development spending.
- The sustainability and timing of water-sale proceeds, associated water costs, and long-dated water-purchase obligations.
- Oil-price and production trends, crop yields and inventory carryover, and the effects of commodity prices and drought on farming and ranch operations.
- Liquidity and covenant headroom as seasonal inventory costs build, including the $20 million minimum liquid-assets covenant and the company’s reliance on its revolver.
- Progress and financing terms for the Majestic joint ventures, and any material outcome from the groundwater, Kern Water Bank, or habitat-related proceedings.