TEJON RANCH CO annual report, FY2018

Tejon Ranch Co. — FY2018 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Tejon Ranch is a California-focused real estate and agribusiness company with approximately 270,000 acres and five reporting segments: commercial/industrial real estate, resort/residential real estate, mineral resources, farming, and ranch operations. Its strategy centers on entitling and developing land while maintaining operating revenue from leasing, water, mineral royalties, farming, and joint ventures.

Financial performance and liquidity

Revenue: Segment revenues were $45.6 million, up 29% from $35.3 million in 2017. Including investment income and other loss, revenue and other income were $46.9 million, versus $35.4 million. Equity earnings from unconsolidated joint ventures were $3.8 million, reported separately.
Profit: Net income attributable to common stockholders was $4.3 million, or $0.16 per diluted share, compared with a $1.8 million loss, or $(0.08) per share, in 2017. Operating income was $0.4 million after a $7.5 million operating loss in 2017. The company recorded $3.8 million of equity earnings from joint ventures.
Quarterly context: Fourth-quarter revenue, including investment and other income, was $12.0 million; net income attributable to common stockholders was $0.3 million, or $0.01 per diluted share. The filing provides unaudited quarterly results.
Segment drivers: Mineral resources revenue increased to $14.4 million from $6.0 million, principally as water sales rose to $9.1 million from $1.3 million. Farming revenue rose to $18.6 million from $16.4 million, led by record pistachio yields. Commercial/industrial revenue was essentially flat at $9.0 million. Resort/residential remains pre-revenue and incurred $1.5 million of expenses.
Cash flow: Operating activities provided $14.4 million, compared with $9.8 million in 2017. Investing activities used $13.2 million, including $22.6 million of real estate and farm capital expenditures; financing activities used $5.3 million, primarily for debt repayment. Cash and cash equivalents were $15.9 million at year-end.
Liquidity and debt: Cash plus marketable securities totaled $79.7 million. Debt was $65.9 million, down from $70.0 million; the revolving credit line had no borrowings and provided $30 million of availability as of the filing date. Debt-to-total-capitalization was 13.1%. The company reported compliance with its credit covenants at year-end.
Balance sheet: Total assets were $529.0 million and equity was $434.7 million. The filing reports no cash dividends paid in 2018 or 2017 and no current intention to pay dividends.

Material changes versus 2017

Improved earnings primarily reflected higher water sales and improved farming results. Water revenue rose by $7.9 million; associated mineral-resource expenses also increased, including $3.3 million of additional water costs.
Pistachio revenue increased by $3.4 million, while almond revenue declined by $0.6 million and grape revenue declined by $0.4 million. Improved pistachio output more than offset weaker almond and grape results.
Equity earnings from joint ventures declined by $0.4 million to $3.8 million. Lower earnings at the outlet center and TA/Petro, and a loss at TRC-MRC 1, were partly offset by improved results at TRC-MRC 2.
Cash and marketable securities decreased by $11.3 million from year-end 2017. The 2017 comparison included $89.7 million of net proceeds from a rights offering; no comparable offering occurred in 2018.

Outlook, risks, contingencies, and unusual items

Management expects continued spending on infrastructure, farming assets, and entitlement and permitting work. Estimated 2019 investment includes approximately $10.7 million at TRCC, up to $17.3 million for master-planned communities, $3.2 million for farming, and $3.2 million for water-related items. Timing and final costs remain uncertain.
Management stated that available cash, operating cash flow, and credit-line availability should fund the next 12 months. Longer-term development will require additional funding, potentially through joint ventures, debt, asset sales, or equity issuance; financing availability and terms are not assured.
Centennial advanced after Los Angeles County’s December 2018 vote to approve its specific plan and development agreement, subject to final approval steps. Grapevine approvals were ordered rescinded after a court found environmental analysis inadequate; the company planned supplemental analysis and re-entitlement applications in 2019. Both projects remain exposed to litigation, regulatory delays, and higher development costs.
Water availability is a key operating and development risk. The preliminary 2019 State Water Project allocation was 35% of entitlement; management said other sources were expected to meet 2019 farming needs. The company also disclosed $260.1 million of estimated future water contract payments, including long-term purchase obligations.
Additional risks include crop prices, yields, tariffs and exchange rates; oil and gas prices and declining production; real estate demand, interest rates and construction costs; environmental rules; and California land-use approvals. The filing states that crop prices and yields for 2019 were not yet predictable.
The company guaranteed $106.0 million of debt of unconsolidated joint ventures; management did not expect guarantees to be called, citing positive joint-venture cash flows. A $4.5 million standby letter of credit supports East CFD bonds and could be drawn if the company fails to pay property taxes. The company also paid $2.6 million in CFD special taxes in 2018.
No environmental liabilities were recorded at year-end. The cement-site lessees are responsible for ongoing remediation under indemnities. The filing says pending matters are not expected to have a material adverse effect, but the financial impact of certain water-related litigation cannot be estimated.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. Adoption of lease accounting on January 1, 2019 resulted in a $52,000 operating lease asset and liability, with no stated income-statement or opening-equity impact.

Important facts for investors to verify

Whether 2018’s earnings improvement is repeatable without unusually high water sales, and how subsequent water availability affects sales and farming.
Final Centennial approvals and the schedule, cost, and legal outcome of Grapevine’s supplemental environmental review and re-entitlement.
Actual 2019 project spending, funding sources, and renewal terms for the $30 million revolving credit facility, which matures in September 2019.
Joint-venture debt exposure and guarantees, especially the $106.0 million guaranteed amount, alongside venture-level earnings and distributions.
Crop receivable exposure: $6.8 million was subject to price changes at year-end, mainly pistachios and almonds; confirm final settlement prices and collections.
Long-term water purchase commitments, including the $260.1 million disclosed obligation, and the assumptions behind expected water supply and development demand.