Tejon Ranch Co. — Q3 2011 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2011. Tejon Ranch is a diversified real estate development and agribusiness company with commercial/industrial real estate, resort/residential development, and farming segments. Its principal asset is approximately 270,000 acres in California. Results are seasonal and affected by the timing of crop harvests and real estate activity.
Financial performance
Amounts below are in millions, except per-share data. Margins are calculated from reported figures.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $14.765 | $16.279 | $43.283 | $24.630 |
| Operating income | $3.035 | $12.029 | $14.702 | $7.153 |
| Net income attributable to common stockholders | $2.558 | $7.850 | $10.656 | $5.368 |
| Basic and diluted EPS | $0.13 | $0.40 | $0.54 | $0.30 |
| Operating margin | 20.6% | 73.9% | 34.0% | 29.0% |
| Net margin attributable to common stockholders | 17.3% | 48.2% | 24.6% | 21.8% |
- Nine-month revenue rose 76%. The principal drivers were $15.75 million from the first-quarter sale of five conservation easements covering approximately 62,000 acres and higher oil royalties. Commercial/industrial revenue increased $3.655 million, mainly from oil royalties, which management said rose with higher oil prices. Farming revenue declined $0.690 million, primarily because pistachio production was 23% below the prior-year record crop.
- Q3 revenue fell 9%. A $3.281 million decrease in farming revenue, primarily lower pistachio revenue, outweighed a $1.907 million increase in commercial/industrial revenue. Management cited higher oil prices and production for the quarterly royalty increase.
- Profit comparisons reflect an unusual prior-year expense reversal. Management attributed much of the higher 2011 expenses, especially corporate and compensation costs, to stock-based compensation expense compared with reversals of expense in 2010. The Q3 2010 corporate expense line was a $2.036 million credit, versus $2.655 million of expense in Q3 2011. Accordingly, the large year-over-year decline in quarterly operating income is not solely a revenue trend.
- Equity-method earnings from unconsolidated joint ventures were $0.583 million for nine months, versus $0.660 million. Nine-month income tax expense was $5.710 million, with an approximately 35% effective tax rate, versus $3.233 million and approximately 38% in 2010. Management attributed the lower rate primarily to depletion allowances associated with oil production and prices.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $16.143 million at September 30, 2011; available-for-sale marketable securities were $67.527 million. Together, these liquid assets totaled $83.670 million, up 27% from year-end 2010.
- Nine-month operating cash flow was $5.743 million, versus cash used of $0.155 million in 2010. Investing activities used $16.029 million, including net purchases of marketable securities, $9.509 million in property and equipment expenditures, joint-venture contributions, and a $0.485 million investment in a pistachio processor. Easement-sale proceeds were $15.750 million. Financing provided $4.402 million, primarily from stock-option exercises.
- Total debt was approximately $0.298 million, less than 1% of book capitalization. The $30 million revolving credit facility had no borrowings; it matures in October 2013. Management reported $83.670 million in liquid assets and compliance with the facility’s $25 million minimum-liquid-assets and $175 million tangible-net-worth requirements.
- Total assets were $311.696 million and total equity was $295.272 million at September 30. Current liabilities were $9.129 million against current assets of $101.269 million.
Outlook, risks, and contingencies
- Management estimated approximately $5 million of investment requirements for the remainder of 2011, including joint-venture contributions, TRCC-East infrastructure, and recurring capital needs. It expected to fund operations and near-term capital requirements from available resources, while noting that future development may require additional debt, joint ventures, asset sales, or equity issuance. No full-year earnings or revenue guidance was provided.
- Management expected continued investment in commercial and residential development, but said timing and scale depend on market demand, financing, and governmental approvals. It noted depressed industrial lease rates despite declining Inland Empire vacancy, and that Tejon’s distance from the Port of Los Angeles may be a competitive disadvantage.
- Farming is exposed to crop yields, weather, commodity prices, and global supply and demand. Management cited the pistachio crop’s alternating production cycle, potential future increases in statewide almond and pistachio supply, and possible effects of a stronger U.S. dollar on exports. At September 30, $6.988 million of receivables was exposed to changing crop prices, primarily pistachios and wine grapes.
- Approximately 5,488 acres are subject to water contracts with estimated minimum annual payments of $2 million before potential credits, whether or not water is available or used. The company also holds $6.773 million in standby letters of credit tied to community-facilities-district bonds; management said they would be drawn only if it failed to pay property taxes. Approximately $107 million of additional East CFD bond debt was authorized for possible future issuance.
- TMV entitlement litigation remained pending: an appeal of the favorable 2010 CEQA ruling was awaiting a hearing, anticipated in early 2012, and a separate land-title suit had been refiled after dismissal of the original claims. The company was not accruing a loss for these matters. The company and Tejon Industrial Corp. were dismissed from a California state lawsuit concerning TA/Petro facilities; other water-bank litigation remained unresolved and potential losses were not estimable.
- Environmental cleanup and monitoring obligations relate to land leased to National Cement and former tenant Lafarge. The company believes tenant indemnities cover the matters and that any likely company-funded expenditure would not be material, but this depends on the tenants’ performance and resources. The Antelope Valley groundwater adjudication found the basin to be in overdraft; the effect on company lands and the Centennial project remained uncertain.
- Management stated that no material changes had occurred to the risk factors in its most recent Form 10-K. Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- How much of nine-month earnings growth depended on the $15.75 million easement sale and higher oil royalties, and how comparable stock-compensation expense is across periods.
- Final almond and grape harvest results, crop receivable prices, and pistachio production and pricing.
- Progress on TMV and Centennial entitlements, pending litigation, and the related future funding needs.
- Future development spending, market demand and leasing conditions at Tejon Ranch Commerce Center, and access to financing beyond existing liquidity and the revolving facility.
- Water availability and contractual payments, future CFD bond issuance and special-tax exposure, and the status of environmental remediation by tenants.