Tejon Ranch Co. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. Tejon Ranch is a diversified land-development and agribusiness company with commercial/industrial real estate, resort/residential development, mineral resources, farming and ranch operations. Its principal asset is approximately 270,000 acres in California.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $13.079 | $11.946 | $32.881 | $35.579 |
| Operating loss | $(1.909) | $(3.541) | $(4.833) | $(3.823) |
| Equity earnings from unconsolidated joint ventures | $2.353 | $2.055 | $5.650 | $4.861 |
| Net income (loss) attributable to common stockholders | $0.324 | $(0.788) | $0.845 | $1.235 |
| Diluted earnings (loss) per share | $0.02 | $(0.04) | $0.04 | $0.06 |
- Revenue and earnings: Q3 revenue rose 9%, largely on higher pistachio sales, and the company returned to quarterly profitability. Nine-month revenue fell 8%; common-stockholder net income declined 32%. Nine-month operating loss widened, while increased joint-venture earnings partly offset weaker operating results.
- Cash flow: Nine-month operating cash flow was $1.413 million, versus $1.541 million in 2015. Investing used $10.414 million, including $19.760 million of property and equipment expenditures; financing provided $10.496 million. Cash and cash equivalents ended at $3.425 million.
- Liquidity: Cash, cash equivalents and marketable securities totaled $31.042 million, down 11% from year-end 2015. Current assets were $51.132 million and current liabilities $24.452 million. The company reported $19 million of unused capacity on its $30 million revolving credit line.
- Debt: Total debt was $85.025 million, including $11 million drawn on the revolver; the revolver had no balance at December 31, 2015. The $70 million term note has a fixed 4.11% rate through an interest-rate swap; a separate note carried a 4.25% fixed rate. The company reported compliance with all credit covenants. Long-term debt-to-total capitalization was approximately 18.1%.
- Margins: The filing does not present consolidated gross-margin figures. Segment results show farming income of $1.538 million in Q3 versus a $0.047 million loss a year earlier; nine-month farming income was $0.405 million versus $0.760 million. Mineral resources income fell to $5.892 million for nine months from $7.151 million.
Material changes versus the prior comparable periods
- Commercial/industrial real estate revenue increased 6% in the first nine months, supported by leasing activity. Q3 also included a one-time $60,000 tenant early-termination fee.
- Nine-month mineral resources revenue declined 8% as oil royalties fell with lower prices and production, and water-sales revenue decreased. Oil production was 230,131 barrels versus 357,507; the average price was $35 per barrel versus $49. Water sales were 7,285 acre-feet versus 7,922.
- Nine-month farming revenue decreased 11%, chiefly due to smaller almond and pistachio carryover sales and lower commodity prices. However, 2016 pistachio yields recovered sharply from the poor 2015 crop, driving Q3 farming revenue up 15% year over year.
- Ranch operations revenue decreased 18% for nine months, including lower game-management revenue and drought-related reductions in grazing-lease revenue.
- Joint-venture earnings increased 16% for nine months, primarily from TA/Petro, which benefited from higher fuel sales volumes and improved fuel margins; the Outlets at Tejon also improved.
- Other comprehensive income included a $2.729 million nine-month loss on the interest-rate swap, contributing to accumulated other comprehensive loss of $8.557 million at September 30, 2016.
Outlook, risks and contingencies
- Management expects adequate operating cash flow and credit availability for the next 12 months, but notes that cash needs depend on farming cycles, commodity prices and the timing of property development, sales and leases. No formal earnings or revenue guidance was provided.
- Management anticipated continued low oil prices and slowing production through 2016, and said lower almond and pistachio prices could persist into 2017 amid rising supply. Farming results are seasonal, and quarterly results are not indicative of full-year performance.
- Planned remaining-2016 investment included approximately $2.2 million for TRCC-East infrastructure, additional project entitlement and planning expenditures, and up to $1 million for water assets and infrastructure. The company said future development may require additional debt, equity issuance or joint ventures.
- Development progress: two Majestic Realty joint ventures were formed in 2016—one to acquire a fully leased 651,909-square-foot warehouse and another to plan a roughly 480,000-square-foot industrial building. After quarter-end, on October 27, the Kern County Planning Commission recommended approval of the Grapevine community plan; the Board of Supervisors was expected to act in December 2016. Approval was not yet final in the filing.
- Commitments include estimated water payments of $267.580 million over the periods shown in the filing’s contractual-obligations table, including obligations extending to 2044. The table reports total contractual obligations of $391.706 million; these are scheduled contractual amounts, not all current balance-sheet debt.
- Contingencies include a $5.426 million standby letter of credit supporting East CFD bonds, which management said it did not expect to be drawn; guarantees on $82.689 million of unconsolidated joint-venture debt; and ongoing water-related litigation. Appeals were filed in the Antelope Valley groundwater adjudication, while the Kern Water Bank matter remained subject to court and appellate proceedings. The company said potential monetary exposure from the latter could not be estimated.
- The company also disclosed a potential challenge to federal habitat-plan approvals for Mountain Village, though no lawsuit had been filed as of the report; environmental obligations concerning the National Cement site; and other ordinary-course proceedings that management did not expect to have a material adverse effect.
Most important facts for investors to verify
- Whether the pistachio crop recovery and lower commodity prices translate into sustainable farming revenue and cash flow.
- Whether oil production and prices continue to decline, and how future water-sale volumes and margins develop.
- Progress and final approvals for Grapevine, Mountain Village and other developments, including the timing and funding of planned capital investment.
- Available liquidity and covenant headroom as seasonal inventory needs and development spending continue; the credit facility requires at least $20 million of liquid assets.
- Exposure from the $267.580 million estimated water-payment commitment, joint-venture debt guarantees, CFD letter of credit, and pending groundwater and water-bank litigation.