Business context and reporting period
Tejon Ranch Co. filed this Form 10-K for the fiscal year ended December 31, 2015. The California-based company operates across commercial/industrial and resort/residential real estate, mineral resources and water, farming, and ranch operations. Its principal asset is approximately 270,000 acres of largely undeveloped land.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue and other income | $52.1 million | $52.3 million |
| Operating income (loss) | ($3.2 million) | $1.9 million |
| Net income attributable to common stockholders | $3.0 million | $5.7 million |
| Diluted earnings per share | $0.14 | $0.27 |
| Cash provided by operating activities | $17.0 million | $13.2 million |
| Capital expenditures | $28.0 million | $24.8 million |
Operating margin was approximately negative 6.1%, versus positive 3.7% in 2014; net income attributable to common stockholders was approximately 5.7% of revenue, versus 10.8%. Adjusted EBITDA, a non-GAAP measure, was $12.4 million, down from $16.2 million.
At year-end, total assets were $431.9 million and equity was $331.3 million. Debt, including the current portion and before deferred financing costs, was $74.2 million, compared with $81.3 million a year earlier. Cash and marketable securities totaled $34.7 million, down $13.0 million year over year; the $30 million revolving facility was undrawn. Management reported compliance with debt covenants and stated it expected adequate resources to fund operations for the next 12 months.
For the fourth quarter, revenue and other income was $15.9 million and net income attributable to common stockholders was $1.7 million, compared with $14.9 million and $1.9 million, respectively, in the 2014 fourth quarter.
Material changes versus 2014
- Common-stockholder earnings fell to $3.0 million from $5.7 million, while operating results before joint-venture earnings shifted to a $2.3 million loss from $3.2 million of income.
- Mineral-resource revenue declined $1.1 million as oil prices fell; the average oil price was about $45 per barrel versus $90 in 2014. Water sales partly offset the decline, reaching $10.2 million.
- Farming revenue rose modestly, but farming segment profit fell to $4.9 million from $7.2 million. Pistachio yields were severely affected by a mild winter; crop insurance generated $2.7 million.
- Corporate expenses increased $2.2 million, primarily from payroll and benefits, including employee severance and a non-cash pension settlement charge.
- Equity earnings from unconsolidated joint ventures increased to $6.3 million from $5.3 million, supported largely by improved TA/Petro results.
- Operating cash flow increased, but cash and investments declined as the company funded development and paid down its revolving credit balance. The company reclassified ranch-related activities into a separate segment; prior periods were recast.
Outlook, risks, contingencies, and unusual items
Management plans continued investment in entitlements, infrastructure, water resources, and commercial development. For 2016, it estimated up to approximately $10.5 million for TRCC infrastructure, $1.2 million for farming, $16 million for residential-project planning and development, $3.9 million for water infrastructure and assets, and $2.5 million for equipment and information technology. These are estimates, not earnings guidance, and timing is subject to approvals and market conditions.
Management expected lower oil royalty revenue in 2016 if oil prices remained weak. It said current water sources were expected to meet 2016 farming needs despite a preliminary State Water Project allocation of 30% of entitlement, while noting ongoing drought and longer-term water-supply uncertainty. Crop prices and yields, especially for almonds and pistachios, remain sensitive to weather, world supply, and foreign-exchange movements.
Major development projects remain long-dated and approval-dependent. Mountain Village is entitled but mapping was expected to continue through late 2017; Centennial and Grapevine were in entitlement and environmental-review processes, with filing of key documents anticipated in 2016. The company cautioned that development can take 25 years or more and require substantial capital. Key risks include regulatory delays or denials, environmental challenges, construction costs, real-estate cycles, commodity prices, water availability, and access to financing.
Legal matters include appeals relating to the Antelope Valley groundwater judgment and pending appeals and a required revised environmental review concerning the Kern Water Bank. The company said the potential monetary impact of adverse outcomes in relevant water litigation could not be estimated. A petition to the U.S. Supreme Court remained pending in a separate Mountain Village land-title case; management considered an adverse result remote. Environmental cleanup obligations at the National Cement site are subject to tenant indemnities, and the company reported no environmental liability accrual at year-end.
Other notable items include the $70 million term loan used to acquire full ownership of Mountain Village in 2014, now fixed at 4.11% through an interest-rate swap, and the 2015 pension settlement charge. The company paid no cash dividends in 2015 or 2014. Its 2013 warrants faced NYSE MKT delisting proceedings in February 2016 due to very low market value.
Important facts for investors to verify
- Review the full audited financial statements and notes, particularly segment results, cash and investment balances, debt maturities, and covenant definitions.
- Track oil prices and production, 2016 crop yields and settlements, water costs and availability, and any changes to water-sale volumes.
- Confirm actual 2016 capital spending and progress on TRCC, Mountain Village, Centennial, and Grapevine approvals, infrastructure, and funding.
- Monitor groundwater and Kern Water Bank litigation, the revised environmental review, and any resulting effect on water access or development plans.
- Assess whether joint-venture earnings and distributions remain sustainable and how much the company depends on them relative to its consolidated operating results.