Tejon Ranch Co. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Tejon Ranch is a diversified land development and agribusiness company with commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $8.946 | $5.070 | $19.608 | $18.539 |
| Operating loss | $(1.395) | $(2.349) | $(2.427) | $(0.804) |
| Net income (loss) attributable to common stockholders | $0.707 | $(0.997) | $0.826 | $0.460 |
| Diluted earnings (loss) per share | $0.03 | $(0.04) | $0.03 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $4.223 | $1.975 | $7.791 | $7.114 |
- For Q2, commercial/industrial real estate revenue rose to $6.595 million, including $4.313 million from a land contribution to a new Majestic joint venture. The contribution had fair value of about $5.9 million; the Company recognized $1.533 million of profit and deferred $1.532 million.
- First-half net income improved, primarily on a $2.028 million increase in equity-method joint-venture earnings—especially TA/Petro—and $1.400 million higher commercial profit. These gains were partly offset by lower water sales.
- First-half mineral resources revenue declined $3.839 million to $6.792 million, principally because water sales fell $4.012 million amid greater State Water Project allocations and fewer sales opportunities. Equity in joint-venture earnings increased to $2.847 million from $0.819 million.
- Other comprehensive loss was $1.825 million for the first half, largely reflecting a $2.693 million unrealized loss on the interest-rate swap before tax effects.
- At June 30, total assets were $528.950 million, total liabilities $93.889 million, and total equity $435.061 million. Cash and cash equivalents were $3.505 million; available-for-sale securities were $56.501 million. Cash plus securities totaled $60.006 million, down from $79.657 million at year-end 2018.
- Total debt was $63.914 million, including $4.093 million of current maturities. Debt-to-total capitalization was 12.8%. The $30 million revolving credit line had no borrowings; the Company reported compliance with its financial covenants.
- First-half operating cash flow was a use of $1.278 million, versus $4.558 million provided in the prior year. Investing activities used $8.282 million and financing activities used $2.843 million. Capital expenditures were $12.581 million.
- The filing does not present a consolidated operating margin percentage; the Company reported an operating loss in both the quarter and first half.
Material changes and management outlook
- Q2 revenue increased 76% year over year, chiefly because of the land contribution; commercial/industrial operating income was $2.002 million versus $0.801 million. First-half revenue increased about 6%, but the operating loss widened to $2.427 million from $0.804 million.
- Management cautions that quarterly results are not indicative of full-year performance: farming sales are concentrated in the third and fourth quarters, while property sales and leasing depend on timing and market opportunities. No specific full-year earnings or revenue guidance is provided.
- Management expects limited water-sale opportunities during the remainder of 2019 after above-average precipitation raised the State Water Project allocation to 75%; oil production is not expected to increase if prices remain around current levels. The Company believes it has sufficient water resources for its 2019 needs.
- Management estimates remaining-2019 investment of about $4.622 million for TRCC infrastructure, $1.279 million for farming, and up to $9.706 million for planning, entitlement, litigation, permitting, and development at Mountain Village, Centennial, and Grapevine. It expects adequate resources for internal operations over the next 12 months, while noting that later development stages may require additional equity, joint-venture funding, or debt.
- The $60.639 million term loan is being extended/refinanced, with a proposed maturity extension to June 5, 2029 and a related swap rate of 4.16%; the filing describes this process as ongoing. The $30 million revolving line matures in September 2019, and renewal was in process.
Risks, contingencies, and unusual items
- Major development approvals face litigation and entitlement uncertainty. Centennial received Los Angeles County approval in April 2019 but was challenged in two lawsuits seeking to invalidate the approvals. Grapevine approvals were rescinded following a court ruling requiring supplemental environmental analysis; the Company was pursuing re-entitlement and anticipated possible County action in late 2019. Mountain Village is also subject to a federal lawsuit challenging wildlife-plan approvals; the Company said it believed the suit did not prevent development as of June 30, 2019.
- Water contracts represent substantial long-term commitments: estimated future water payments totaled $255.613 million, including $208.820 million due after five years. Minimum contract payments were $7.383 million in the first half; management did not expect further payments for the remainder of 2019.
- The Company guaranteed $118.895 million of joint-venture debt, out of $134.180 million in aggregate outstanding joint-venture debt. It reported that it did not expect the guarantees to be called, based on positive joint-venture cash flows. A $4.468 million standby letter of credit supports East CFD bonds and is contingent on failure to pay property taxes.
- Other disclosed proceedings include appeals concerning Antelope Valley groundwater rights and the Kern Water Bank, and environmental remediation at National Cement’s leased property. The Company stated that tenants are responsible for remediation under indemnities and that it did not expect a material cost from that matter.
- Risks include water availability and cost, weather and crop yields, crop-price and tariff changes, oil prices and production, development-market conditions, financing access, and the outcome and timing of litigation and government approvals. Management reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the term-loan extension and revolver renewal were completed, and on what final terms.
- Progress and rulings in Centennial, Grapevine, Mountain Village, groundwater, and Kern Water Bank proceedings—and their potential effect on development schedules and costs.
- Actual water-sale volumes, prices, and contract payments, given the $255.613 million of estimated future water obligations.
- Whether joint-venture earnings and commercial land transactions recur, and how much cash is generated from those activities.
- Funding sources and liquidity available for planned development spending, including the potential need for new debt, equity, or partners.