Tejon Ranch Co. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts are in millions unless otherwise 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 segments.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $31.48 | $14.96 | $61.76 | $42.65 |
| Operating income (loss) | $10.99 | $(1.22) | $13.88 | $0.26 |
| Net income | $10.17 | $0.23 | $13.83 | $1.99 |
| Net income attributable to common stockholders | $10.18 | $0.22 | $13.82 | $1.99 |
| Diluted EPS | $0.38 | $0.01 | $0.52 | $0.08 |
- Revenue and earnings drivers: Q3 commercial/industrial real estate revenue included $19.63 million recognized from a 58-acre TRCC East land sale; $2.37 million of the $22 million contract price was deferred for a remaining performance obligation. The company also sold 12.3 acres in Q1 for $4.68 million. Management attributed most of the earnings improvement to these land sales and stronger joint venture results.
- Segment trends: Nine-month commercial/industrial operating income rose to $20.76 million from $4.23 million. Mineral resources operating income increased to $7.89 million from $7.03 million, despite lower water-sale volume. Farming recorded a nine-month operating loss of $6.62 million, versus a $2.37 million loss, primarily reflecting no 2022 pistachio yield, higher costs, and increased almond sales costs. Resort/residential operations generated no revenue and incurred $1.22 million of costs in the nine-month period.
- Margins and other income: Q3 operating margin was approximately 34.9% versus a loss in the prior-year quarter; nine-month operating margin was approximately 22.5% versus 0.6%. Results also included $4.87 million of equity earnings from unconsolidated joint ventures for the nine months, up from $2.82 million.
- Cash flow: Nine-month operating cash flow was $1.87 million, compared with cash used of $1.92 million in 2021. Investing activities used $5.38 million and financing activities used $2.37 million. Land-sale proceeds were $24.95 million; capital expenditures were $17.69 million. Cash, cash equivalents, and restricted cash ended at $31.51 million.
- Liquidity and debt: Cash and marketable securities totaled $61.55 million at September 30, up from $47.18 million at year-end 2021. Current assets were $75.67 million and current liabilities $13.23 million. Debt totaled $50.59 million; the company reported debt-to-total capitalization of approximately 9.6%. It had no balance drawn on its $40.61 million revolving credit facility and was in compliance with its financial covenants.
Material changes versus prior period
- Q3 revenue increased 110% and nine-month revenue increased 45%, with the principal driver being commercial land sales rather than a broad-based rise across segments.
- Nine-month net income attributable to common stockholders rose to $13.82 million from $1.99 million. Nine-month Adjusted EBITDA, a non-GAAP measure, was $30.51 million versus $15.11 million.
- Water sales volume declined to 9,600 acre-feet for the nine months from 13,199; water-sales revenue fell to $13.64 million from $14.99 million. Management said higher oil and cement royalties partly offset the decline.
- The company refinanced its term debt in June 2022, replacing the Wells Fargo loan with a Bank of America term note. The new loan is due in 2032 and is fixed at 4.62% through an interest-rate swap. It also terminated the prior swap and received $1.12 million.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific earnings or revenue guidance was provided. Management said quarterly results are not indicative of full-year results because farming, water sales, and real estate transactions are seasonal or timing-dependent. It expects continued investment in development and estimated up to $2.53 million of remaining-2022 spending for master-planned community planning, permitting, litigation/appeals, and development, in addition to other planned infrastructure and farming investments.
- Funding: Management believes existing cash, securities, operations, joint-venture distributions, and credit availability are adequate for near-term needs. Development of major projects may require additional debt, joint ventures, asset sales, or equity issuance; the company has a $200 million shelf registration and cautions that future financing may not be available on favorable terms.
- Centennial litigation: CEQA litigation remains unresolved. A settlement with Climate Resolve requires measures toward net-zero greenhouse-gas emissions and fire prevention, among other commitments. The court set a February 17, 2023 hearing on final judgment and remedies and a December 14, 2022 hearing on the company’s motion for reconsideration. Potential monetary exposure was not estimable in the filing, and appeals may follow.
- Water commitments: Contractual future water payments were reported at $277.66 million, including long-term purchase and State Water Project contracts. Management said it believes available water resources are adequate for the next crop year, while identifying California water availability and groundwater restrictions as longer-term concerns.
- Other exposures: The company had a $4.39 million standby letter of credit relating to East CFD bonds. It also guaranteed $144.16 million of unconsolidated joint-venture debt; management did not expect those guarantees to be called. Crop-insurance proceeds for the poor 2022 pistachio crop were expected in Q4, but the amount was not stated.
- Operating risks: Management cited cost inflation, potentially weaker almond prices, drought and water availability, commodity-price volatility, real estate market conditions, development financing, and entitlement litigation. Management stated there were no material changes to previously reported risk factors.
Investor verification priorities
- Confirm the economics, deferred revenue, and cash receipt timing for the $22 million TRCC East land sale, and the extent to which 2022 earnings depend on land-sale timing.
- Review subsequent disclosures on Centennial litigation, court remedies, appeals, and the financial cost of settlement commitments.
- Verify the amount and timing of 2022 pistachio crop-insurance recoveries and the effect of crop yields, input costs, and water availability on farming results.
- Assess the $277.66 million of future water-payment commitments against water assets, expected sales, and development needs.
- Monitor joint-venture debt, the company’s $144.16 million of guarantees, credit-facility covenant compliance, and funding required for planned development.