Tejon Ranch Co. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Tejon Ranch is a diversified land development and agribusiness company with commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations. Management cautions that quarterly results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $10.662 million | $13.469 million |
| Operating income (loss) | $(1.032) million | $1.545 million |
| Net income | $124,000 | $1.455 million |
| Net income attributable to common stockholders | $119,000 | $1.457 million |
| Adjusted EBITDA (non-GAAP) | $3.614 million | $5.139 million |
| Operating cash flow | $(1.211) million | $6.969 million |
| Investing cash flow | $(4.971) million | $(5.450) million |
Revenue fell about 21% year over year. Mineral resources revenue declined $2.999 million, principally because rainy winter conditions reduced water-sale opportunities. Water sales were 4,445 acre-feet versus 7,442 acre-feet; related revenue was $5.026 million versus $7.992 million. The decline was partly offset by commercial/industrial revenue growth of $672,000 and a $709,000 increase in equity earnings from unconsolidated joint ventures. Equity in joint-venture earnings was $876,000, including improved results from the TA/Petro venture.
Commercial/industrial revenue rose 31% to $2.826 million, largely due to higher Pastoria Energy Facility lease revenue. Mineral resources operating income fell to $2.300 million from $4.900 million. Farming revenue declined 32% to $815,000 and the segment recorded a $783,000 operating loss; ranch operations recorded a $461,000 operating loss. Resort/residential development generated no revenue and incurred $648,000 of expenses.
Financial position, liquidity and debt
- At March 31, cash and cash equivalents were $7.904 million and available-for-sale marketable securities were $60.270 million; together they totaled $68.174 million, down $11.483 million from year-end 2018.
- Total debt was $64.908 million, including $4.048 million of current maturities; total equity was $434.694 million. Management reported a 13.0% debt-to-total-capitalization ratio.
- The $61.561 million term loan is effectively fixed at 4.11% through an interest-rate swap and matures in October 2024. The separate $3.347 million note bears 4.25% and matures in 2028. The $30 million revolving credit line had no balance outstanding and matures in September 2019; management expected renewal on similar terms.
- The company reported compliance with its credit covenants, including a requirement to maintain at least $20 million of liquid assets, counting revolver availability. It stated that available liquidity and expected cash flows should fund operations for the next 12 months, while longer-term development may require additional financing.
- Investing cash use included $5.112 million of real estate and equipment expenditures and $3.502 million for long-term water assets. Capital spending planned for the rest of 2019 included approximately $10.089 million for TRCC infrastructure, up to $14.421 million for master-planned communities, and approximately $1.918 million for farming.
Outlook, risks and notable developments
- Management expects limited water-sale opportunities for the remainder of 2019, reflecting rainfall and a 70% State Water Project allocation. It did not expect increased oil production in 2019 if prices remained at then-current levels.
- Crop results are seasonal; most farming revenue is typically recognized in the third and fourth quarters. Management cited uncertainty around almond production, anticipated a lower pistachio crop following a record 2018 harvest, and highlighted water availability, crop prices, tariffs, exchange rates and weather as risks.
- TRCC industrial development continued. A 579,040-square-foot distribution facility being developed with Majestic was 67% leased before completion; completion and tenant occupancy were expected in Q4 2019.
- After the quarter, Los Angeles County gave final approval on April 30, 2019 to Centennial’s specific plan, covering 19,333 homes and more than 10.1 million square feet of commercial space. Grapevine’s prior approvals were rescinded following litigation; the company filed new entitlement applications and anticipated possible county action in late 2019. Mountain Village is entitled, but its development timing depends on economic and real estate conditions and financing.
- Material contingencies include a newly filed challenge to federal approvals for the Tehachapi Uplands habitat plan, appeals in Antelope Valley groundwater and Kern Water Bank matters, and Grapevine entitlement litigation. Management said it intends to defend the habitat-plan matter and believes it does not prevent Mountain Village development. The filing does not quantify a likely financial exposure for these proceedings.
- Contractual obligations included $253.040 million of estimated future water payments, principally under long-term water contracts. The company also had a $4.468 million standby letter of credit related to East CFD bonds and guarantees on $105.199 million of unconsolidated joint-venture debt; management did not expect the guarantees to be called.
- On April 1, 2019, the company contributed land valued at $5.8 million to TRC-MRC 3, recognizing $1.7 million of profit and deferring $1.7 million under equity-method accounting.
Most important facts for investors to verify
- Whether water-sale revenue and segment profitability recover, given rainfall, water allocations and the substantial long-term water-purchase commitments.
- Liquidity and financing execution: renewal of the revolver, continued covenant compliance, and funding for planned development investment.
- Progress and costs for Centennial, Grapevine and Mountain Village entitlements, including potential further litigation and the actual timing of development.
- Industrial facility completion and lease-up, and whether joint-venture earnings—particularly from TA/Petro—remain strong.
- Crop production, pricing and receivable estimates as the 2019 harvest season progresses; results may differ materially from Q1 trends because of seasonality.