Tejon Ranch Co. — Q2 2017 Form 10-Q
Business context and reporting period. Tejon Ranch is a diversified land development and agribusiness company operating in commercial/industrial real estate, resort/residential development, mineral resources, farming and ranch operations. This unaudited filing covers the three and six months ended June 30, 2017; balance-sheet comparisons are to December 31, 2016. Results are seasonal and affected by the timing of land activity and crop sales.
Financial performance and liquidity
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Revenue | $6.365m | $12.067m | Q2 $6.849m; six months $19.802m |
| Operating loss | $1.779m | $5.535m | Q2 loss $3.107m; six months loss $2.924m |
| Net income (loss) attributable to common stockholders | $0.026m | $(1.876)m | Q2 loss $0.688m; six months income $0.521m |
| EPS, basic and diluted | $0.00 | $(0.09) | Q2 $(0.03); six months $0.03 |
| Adjusted EBITDA (non-GAAP) | $3.424m | $3.768m | Q2 $2.492m; six months $7.501m |
All amounts above are in U.S. dollars; financial statement figures are reported in thousands. Q2 2017 net income was approximately break-even, while the six-month period shifted to a loss from prior-year income. Six-month revenue fell 39%, primarily because mineral-resource revenue declined $8.407m as wet conditions reduced water sales. Equity earnings from unconsolidated joint ventures were $1.788m for the six months, down 46%.
- Segment trends: Six-month commercial/industrial revenue rose 8% to $4.674m, aided by recognition of deferred revenue from a prior land sale. Mineral-resource revenue fell 70% to $3.520m. Farming revenue rose 12% to $1.932m, but the segment recorded a $0.649m operating loss. Ranch operations revenue rose 6% to $1.941m and recorded a $1.013m operating loss. Resort/residential development generated no revenue and incurred $1.130m of expense.
- Cash flow: For the six months, operating activities used $1.642m, investing activities used $8.955m, and financing activities provided $9.861m. Capital expenditures were $10.943m; the company also invested $4.468m in water assets. Cash and equivalents ended at $0.522m, compared with $1.258m at year-end.
- Liquidity and debt: Cash plus marketable securities totaled $23.229m, down 17% from year-end. Total debt was $91.968m, including $20m outstanding on the $30m revolving line; $10m remained available. Total book capitalization was $426.982m and reported debt-to-total-capitalization was 21.5%. The company reported compliance with its financial covenants, including a $20m minimum liquid-assets requirement.
- Other balance-sheet items: Total assets were $449.978m and total equity $335.014m at June 30. Net investment in water assets increased to $47.556m from $43.764m at year-end. Marketable securities were $22.707m.
Changes, outlook and risks
- Water sales were the primary year-over-year earnings driver: six-month mineral-resource revenue was $8.407m lower, largely because above-normal rain and snow reduced demand and opportunities for interim water transactions. The wet year also enabled additional water banking.
- Management reduced staffing in response to weaker oil and crop prices and fewer water-sale opportunities, estimating $2.565m of personnel-cost savings over the next 18 months. It expected savings to begin in the second half of 2017 and 2018.
- Management said it expected sufficient operating cash flow and credit availability for the next 12 months, while noting substantial future development investment may require common-stock issuance, additional debt or joint ventures. Estimated remaining-2017 investment included approximately $2.981m for TRCC-East infrastructure, $3.319m for Grapevine, $5.188m for Mountain Village, $3.917m for Centennial and up to $0.600m for water assets and infrastructure.
- Near-term operating outlook is uncertain: management could not yet estimate 2017 crop yields, noted almond trees were affected by wet weather, and cited commodity-price and water-availability uncertainty. Farming revenue is typically weighted toward the third and fourth quarters; land sales and leasing are difficult to predict.
- Long-dated water purchase commitments are significant: estimated water payments total $265.192m over the periods shown in the filing, including $8.884m due within one year. The Nickel contract requires annual purchases through 2044. Total contractual obligations were $394.312m.
- Contingencies include appeals in the Antelope Valley groundwater adjudication; pending challenges concerning the Kern Water Bank and its revised environmental review; and a CEQA lawsuit challenging Grapevine project approvals. Grapevine received county entitlement approval in December 2016, but the lawsuit seeks to invalidate approvals or require revised environmental documentation. The filing says potential monetary exposure for certain water litigation cannot be estimated.
- Unconsolidated joint ventures had $104.649m of debt; Tejon guaranteed $89.372m related to Rockefeller and Majestic ventures. A $4.921m standby letter of credit supports East CFD bonds and is expected by the company not to be drawn. The company also froze future benefit accruals in its defined benefit and supplemental executive retirement plans in April 2017, producing a $1.626m combined improvement to other comprehensive income.
Key facts for investors to verify
- Whether reduced water-sale revenue persists if water availability and market conditions change, and how that affects earnings and cash needs.
- Progress, costs, approvals and litigation outcomes for Grapevine, Centennial and Mountain Village, and leasing and development activity at TRCC.
- Crop yields, sales prices and working-capital needs as the 2017 harvest season progresses.
- Liquidity relative to the credit facility’s $20m covenant threshold, revolving-line usage, and the timing and funding of planned capital investment.
- Long-term water-contract obligations and the company’s $89.372m of guarantees for unconsolidated joint-venture debt.