Tejon Ranch Co. — Q3 2014 Form 10-Q
Business context and period. Tejon Ranch is a California land-development and agribusiness company operating in commercial/industrial real estate, resort/residential development, mineral resources (including water sales), and farming. This filing covers the quarter and nine months ended September 30, 2014; figures below are in millions unless otherwise stated. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $13.85 | $15.13 | $36.71 | $32.36 |
| Operating income | $0.39 | $1.75 | $1.37 | $3.00 |
| Net income attributable to common stockholders | $1.75 | $2.29 | $3.74 | $4.99 |
| Basic / diluted EPS | $0.09 / $0.08 | $0.11 / $0.11 | $0.18 / $0.18 | $0.25 / $0.25 |
| Operating cash flow | Not separately provided | Not separately provided | $4.76 | $5.03 |
- Nine-month revenue rose 13%, primarily on $7.70 million of water sales; common-stockholder net income fell 25%. Q3 revenue declined 8% and common-stockholder net income declined 24%.
- Nine-month operating margin was approximately 3.7%, down from 9.3% in 2013; Q3 operating margin was approximately 2.8%, versus 11.5%.
- Nine-month net cash used in investing was $31.10 million, including $16.95 million of property and equipment expenditures, $9.63 million invested in unconsolidated ventures, and $10.00 million paid toward the TMV acquisition. Financing provided $19.35 million.
- At September 30, cash was $2.04 million and available-for-sale securities were $48.83 million, together $50.87 million, down $13.60 million from year-end. Current assets were $73.98 million and current liabilities $27.91 million.
- Total debt was $84.72 million, versus $4.69 million at December 31, 2013. It included a $20.20 million revolver, a $60.00 million note payable to DMB TMV LLC, and $4.52 million of other debt. Long-term debt-to-total-capitalization was reported at 16.5%, excluding the current portion of debt from long-term debt.
Material changes and management commentary
- Mineral resources revenue increased 84% year to date, primarily reflecting water sales of 6,250 acre-feet for $7.70 million, with related costs of $4.52 million. Oil royalty revenue decreased $0.85 million as production declined 11% and average oil prices fell about 3%.
- Farming revenue declined 13% year to date amid lower crop volumes: almond pounds sold fell 39% and pistachio pounds sold fell 16%. Management cited mild winter and early summer weather; higher prices partly offset lower volumes. The company said it had sufficient water for its crops despite drought conditions.
- Corporate expense rose 21% year to date, mainly due to higher stock compensation and pension expense. The 2013 comparison included reversals of compensation expense following executive departures.
- Equity earnings from unconsolidated ventures increased 13% year to date, partly due to improved TA/Petro results. The Outlets at Tejon opened August 7, 2014, and contributed to stronger Q3 outlet-center joint-venture earnings.
- On July 15, Tejon acquired its partner’s remaining interest in Tejon Mountain Village LLC for $70 million, making it wholly owned. The $60 million unpaid balance was subsequently paid on October 20, 2014, after a 30-day extension and a $1 million payment.
Liquidity, financing and outlook
- On October 13, 2014, the company entered a new Wells Fargo facility comprising a $70 million, ten-year term loan and a $30 million revolving line. The term loan financed the TMV purchase; its interest rate was fixed at 4.11% using a swap. The revolver matures September 30, 2019. The facility includes financial covenants, including minimum liquid assets of $20 million, and restricts certain borrowing, investment, distribution and asset-sale activities.
- Management said it expected adequate cash flows and funding sources for internal operations over the next 12 months, while noting future development will require substantial investment and financing is not assured on favorable terms. Planned remaining-2014 investments included about $3 million for TRCC-East infrastructure, up to $3.5 million for Grapevine entitlements, about $1 million for TMV pre-development, and up to $1 million for water assets and infrastructure.
- Management anticipated increased retail activity continuing into 2015. It expected lower oil prices to affect Q4 2014 royalties, estimating a possible reduction of up to $150,000. Crop prices, yields, real-estate sales and leasing are uncertain; results are seasonal and difficult to predict.
- Contractual obligations totaled $399.84 million, including estimated water payments of $286.25 million over the stated obligation horizon. Water-related commitments include annual minimum payments of approximately $7.77 million based on 2014 payments and a Nickel Family contract to purchase 6,693 acre-feet annually through 2044.
Risks, contingencies and unusual items
- Water rights and supply remain important uncertainties. The Antelope Valley groundwater adjudication continued, with settlement discussions ongoing; management said the eventual outcome and effect on the Centennial project and other land were difficult to assess.
- Water-bank litigation resulted in a requirement for a supplemental environmental review, but the court allowed the Kern Water Bank to continue operating under an interim operating plan. The company could not estimate potential financial effects or rule out future operating curtailments.
- In July, the company received a notice of intent to sue challenging federal approvals and an incidental-take permit for the Tehachapi Uplands habitat plan; no lawsuit had been filed as of the filing. A separate TMV-related land-title case was dismissed, but an appeal was scheduled for argument in November 2014; management considered an adverse outcome remote.
- Environmental cleanup and monitoring obligations relate to land leased to National Cement and former operators. The company stated it believed tenant indemnities covered the matters and that any company-funded work was unlikely to be material.
- A $5.43 million standby letter of credit supports East Community Facilities District bonds; management said it would be drawn only if the company failed to pay property taxes. Further bond debt of approximately $80.25 million was authorized for the East district.
- The filing reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the new term loan and revolver comply with covenants and how the TMV financing affects interest expense, liquidity and leverage.
- Water-sale economics and future water availability, contract costs, and the outcomes of the groundwater and water-bank proceedings.
- Actual crop yields, selling prices and receivable settlements, especially for almonds and pistachios, and the effect of weather and drought.
- Oil production and prices, including whether the anticipated royalty decline materializes.
- Progress, costs and approvals for TRCC, Grapevine, Centennial and TMV, and the performance of the newly opened outlet center.
- Developments in the habitat-plan notice, TMV appeal and environmental matters, including any changes to potential financial exposure.