Tejon Ranch Co. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results cover four segments: commercial/industrial real estate, resort/residential development, mineral resources, and farming. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $7.00 | $8.32 | $23.63 | $22.86 |
| Operating income (loss) | $(1.40) | $(0.03) | $(0.28) | $0.98 |
| Net income attributable to common stockholders | $0.41 | $0.87 | $2.02 | $1.99 |
| Diluted earnings per share | $0.02 | $0.04 | $0.10 | $0.10 |
| Cash from operating activities | Not separately presented | Not separately presented | $1.63 | $2.13 |
Second-quarter revenue fell 16%, and the operating loss widened substantially, while six-month revenue rose 3% and common-stockholder net income was nearly unchanged. Six-month results included $2.81 million of equity earnings from unconsolidated joint ventures, up from $1.59 million. The filing does not present a single consolidated gross-margin measure.
- Segment changes, six months: Commercial/industrial revenue increased 16% to $6.39 million, with improved leasing and power-plant percentage rent. Mineral resources revenue increased 4% to $12.85 million, chiefly from water sales. Farming revenue declined 8% to $4.39 million. Resort/residential generated no revenue, versus $0.18 million.
- Key offsets: Water sales were $10.17 million, up $2.46 million, from sales of 7,922 acre-feet. Oil royalties fell $1.83 million as the average oil price declined 52% to about $48 per barrel. Higher water-sales costs, farming costs, and corporate expenses weighed on operating results.
- Quarterly drivers: Q2 farming revenue fell 55%, partly because the prior-year quarter included a $1.30 million pistachio price adjustment and a $0.14 million tree-removal reimbursement. Lower oil royalties also hurt Q2 mineral revenue. Higher joint-venture earnings partly offset these declines.
Balance sheet, cash flow, and liquidity
- At June 30, cash was $0.11 million and marketable securities were $39.29 million, for combined cash and securities of $39.40 million, down $8.38 million from year-end 2014. Current assets were $60.44 million and current liabilities $14.90 million.
- Total debt was $78.30 million: $74.34 million of notes payable and $3.96 million drawn on a $30 million revolving credit line. Long-term debt-to-total-capitalization was approximately 18.4%. The $70 million term loan is fixed at 4.11% through an interest-rate swap; the company reported compliance with all loan covenants.
- Six-month operating cash flow was $1.63 million. Investing activities used $3.62 million, including $12.11 million of property and equipment expenditures, partly offset by $4.97 million of East Community Facilities District reimbursements. Financing activities used $3.55 million, primarily reflecting net credit-line repayments.
- The credit facility requires at least $20 million of liquid assets. Management said cash and securities, together with $26.04 million of available credit, were adequate for near-term needs, while acknowledging substantial future development funding needs.
Outlook, risks, and notable items
- No formal revenue or earnings guidance was provided. Management expects continued commercial leasing and development activity, with planned 2015 investment including approximately $5 million for TRCC infrastructure, up to $3 million for Grapevine entitlement work, $1.5 million for Tejon Mountain Village pre-development, up to $2.5 million for Centennial entitlement work, and up to $1 million for water assets and infrastructure.
- Management anticipated lower 2015 almond and pistachio production because of light bloom and drought-related conditions, although high expected crop prices might partly offset lower yields. The company expected lower oil prices to continue affecting results. Farming and real-estate activity are seasonal, making interim results an unreliable guide to full-year performance.
- Water-sale activity was significant but not necessarily recurring at the same level: the company sold its 2015 Nickel water allocation and carry-forward inventory after determining it had excess supply. Long-term water purchase obligations were estimated at $274.57 million, including $8.04 million due within one year.
- On August 6, 2015, after quarter-end, the company agreed to offer its power-plant tenant the option to purchase up to 2,000 acre-feet in 2016 and up to 3,500 acre-feet annually from 2017 through July 2030, subject to an extension option. The tenant is not required to buy water but must pay an annual option fee.
- Material proceedings include the Antelope Valley groundwater adjudication, where a settlement submitted by parties representing more than 99% of current water use awaited court approval; and Kern Water Bank litigation requiring a revised environmental review, with appeals pending. A petition for rehearing was filed in the TMV land-title case after the Ninth Circuit affirmed judgment for the company. The company also disclosed a challenge to the Antelope Valley Area Plan and continuing environmental cleanup and monitoring obligations at the National Cement site.
- Other exposures include a $5.43 million standby letter of credit supporting East CFD bonds, long-term water contracts, and commodity-price risk in crop receivables. Management said it believed the letter of credit would not be drawn and that financing and environmental outcomes remained uncertain.
Most important facts for investors to verify
- Whether recurring leasing and joint-venture earnings can offset operating losses, corporate-cost growth, and weaker oil royalties.
- The sustainability and margins of water sales, alongside the company’s substantial long-term water purchase commitments and water-supply needs.
- Actual 2015 crop yields and prices, and the continuing effects of drought and lower oil prices.
- Progress and funding requirements for TRCC, Centennial, Grapevine, and TMV, including entitlement and infrastructure milestones.
- Developments in groundwater and Kern Water Bank proceedings, and any resulting effects on water availability, project entitlements, or contingent obligations.