Tejon Ranch Co. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with the three months ended March 31, 2014. Tejon Ranch is a diversified land-development and agribusiness company with commercial/industrial real estate, resort/residential real estate, mineral resources, and farming segments.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $16.633 million | $14.535 million; up 14% |
| Operating income | $1.120 million | $1.009 million; operating margin 6.7% vs. 6.9% |
| Equity earnings from unconsolidated joint ventures | $1.150 million | $0.438 million |
| Net income attributable to common stockholders | $1.617 million | $1.113 million |
| Basic and diluted EPS | $0.08 | $0.05 |
| Operating cash flow | $1.744 million | $4.783 million |
| Cash and cash equivalents | $1.672 million at March 31 | $5.638 million at December 31, 2014 |
| Available-for-sale marketable securities | $43.940 million at March 31 | $42.140 million at December 31, 2014 |
| Total debt, including revolver | $78.060 million at March 31 | $81.309 million at December 31, 2014 |
| Total assets / total equity | $433.489 million / $325.205 million | At March 31, 2015 |
Cash, cash equivalents, and marketable securities totaled $45.612 million. The company reported $26.340 million available on its credit lines and compliance with all credit-facility covenants. The $70 million term loan is hedged at a fixed 4.11%; the revolving line had $3.660 million outstanding. The filing reports a $1.395 million unrealized interest-rate-swap loss in other comprehensive income for the quarter.
Net cash decreased $3.966 million during the quarter: operating activities provided $1.744 million, investing activities used $1.943 million, and financing activities used $3.767 million. Capital expenditures were $6.117 million, partly offset by $4.971 million of infrastructure reimbursement proceeds and a $1.100 million joint-venture distribution.
Material changes versus Q1 2014
- Revenue growth reflected higher farming revenue, up $1.225 million, and higher mineral-resources revenue, up $0.546 million. Farming benefited from almond sales, including higher carryover inventory; almond pounds sold rose 75% and the average price rose 22%.
- Mineral-resources revenue included $8.993 million from water sales, versus $7.390 million in the comparable quarter. Tejon sold 7,054 acre-feet, including its 2015 Nickel water allotment and carryforward water. Higher water revenue was partly offset by a $0.970 million decline in oil royalties; the average oil price fell 59% to about $40 per barrel.
- Equity earnings increased chiefly because TA/Petro joint-venture earnings improved with higher fuel and non-fuel operating margins and customer traffic.
- Operating cash flow was lower, at $1.744 million versus $4.783 million. Management attributed the prior-year cash generation partly to water-sale proceeds and collection of farming receivables.
- Tejon acquired the remaining interest in Tejon Mountain Village in July 2014; accordingly, it no longer reported TMV management-fee revenue in Q1 2015. The filing also consolidates Centennial Founders, LLC.
Prior-period mineral-resource and farming amounts were reclassified to align with the current presentation, including water sales and related costs. Management states that the reclassifications did not affect prior-period operating results.
Outlook, commentary, and risks
- No specific earnings or revenue guidance was provided. Management cautioned that quarterly results are not indicative of the full year because farming revenue is seasonal and real-estate sales and leasing vary in timing.
- Management expects continued commercial activity at Tejon Ranch Commerce Center, including new retail tenants, a planned multi-tenant building, and a TA/Petro convenience store and gas station. It continues marketing the site for large logistics and distribution users.
- For the remainder of 2015, the company estimated capital investment of approximately $8 million for TRCC infrastructure; up to $5 million for Grapevine entitlements; approximately $2 million for Tejon Mountain Village pre-development; up to $3 million for Centennial entitlements; up to $2 million for water assets and infrastructure; and other farm and equipment investments. These are estimates, not commitments to spend all amounts.
- Management expected lower oil prices to continue to weigh on results in 2015. It cited California drought-related increases in water costs and said almond and pistachio blooms were light versus historical levels, potentially indicating reduced production. Crop production and revenue estimates were not yet available.
- Key uncertainties include commodity and crop prices, water availability and cost, weather, financing availability, development approvals and entitlements, real-estate market conditions, and the timing of development expenditures and leasing.
- Contingencies include the Antelope Valley groundwater adjudication, where a class settlement remained subject to court approval; water-bank litigation and a required revised environmental review; and potential challenges to the Tehachapi Uplands habitat plan. The company also disclosed ongoing groundwater and cement-kiln-dust monitoring obligations associated with National Cement’s leased property. Management said the potential financial impact of certain proceedings could not be estimated.
- The company has substantial contractual water-payment obligations: approximately $286.2 million in total estimated future payments, including $7.8 million due within one year. It also has a $5.426 million standby letter of credit related to East CFD bonds; management said it believed the letter would not be drawn.
Important facts for investors to verify
- Whether water-sale volumes and revenue can be sustained, and how long water remains available for interim sales before development and farming demand increases.
- The effect of lower oil prices, drought-related water costs, and crop yields and prices on full-year segment results.
- Progress, costs, and funding for TRCC, Grapevine, Centennial, and Tejon Mountain Village, including approvals and leasing activity.
- Cash generation and liquidity as planned development spending proceeds; the company’s stated liquidity includes marketable securities and access to credit, not cash alone.
- Developments in groundwater and water-bank proceedings, and any resulting effect on water rights, project approvals, or land values.
- Debt levels, credit-facility covenant compliance, and the significant long-term water-payment commitments.