Tejon Ranch Co. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; 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. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $16.638 | $4.775 | $27.692 | $15.088 |
| Operating income (loss) | $2.525 | $(2.783) | $1.471 | $(4.546) |
| Net income (loss) attributable to common stockholders | $2.822 | $(0.333) | $1.767 | $(1.015) |
| Basic and diluted EPS | $0.11 | $(0.01) | $0.07 | $(0.04) |
| Operating cash flow | Not separately presented for quarter | $(1.095) | $0.051 | |
| Adjusted EBITDA (non-GAAP) | $7.657 | $3.719 | $10.656 | $7.266 |
Q2 operating margin was approximately 15.2%, versus a loss margin of 58.3% in Q2 2020; six-month operating margin was approximately 5.3%, versus a loss margin of 30.1%. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP results or cash flow.
- Revenue drivers: Q2 commercial/industrial revenue rose to $8.126 million from $2.114 million, principally due to $5.679 million of land-sale revenue from a land contribution to a new Majestic joint venture. Mineral resources revenue rose to $7.404 million from $1.776 million, primarily reflecting drought-related water sales. Six-month water sales were $11.862 million, up from $5.471 million; 10,596 acre-feet were sold versus 4,625.
- Other segments: Six-month farming revenue declined 24% to $0.886 million, and farming reported a $1.795 million operating loss. Ranch operations had a $0.457 million operating loss, improved from $1.045 million, with higher filming revenue and lower expenses. Resort/residential development generated no revenue and incurred $0.992 million of six-month costs.
- Joint ventures: Equity earnings were $1.365 million in Q2, up from $1.181 million, but fell 49% for the six-month period to $1.306 million. The six-month decline primarily reflected higher fuel costs at Petro despite a 25% increase in fuel sales volume.
- Liquidity and debt: At June 30, cash and cash equivalents were $40.478 million and available-for-sale securities were $9.161 million, for combined cash and securities of $49.639 million. Current assets were $63.210 million and current liabilities $12.314 million. Debt notes payable totaled $54.945 million, including $4.381 million current maturities; the revolving credit line was undrawn, with $35 million available. The company reported a 10.9% debt-to-total-capitalization ratio and compliance with credit covenants.
- Balance sheet: Total assets were $539.370 million and total equity $449.758 million at June 30, 2021. Cash and securities together decreased $8.452 million from year-end 2020.
Changes versus prior period and unusual items
- First-half earnings turned positive from a loss in 2020, largely due to the 2021 land contribution and higher water sales. Q2’s improvement also reflected stronger mineral-resource results and reopening-related recovery.
- The land contribution to TRC-MRC 4 had a fair value of $8.464 million and land cost of $2.895 million. Tejon reported $5.679 million of segment revenue and recognized $2.785 million of profit, with an equal amount deferred under the accounting applied to the joint-venture transaction.
- The comparison period included a $1.333 million gain on a 2020 building and land sale to the Petro joint venture; there was no comparable 2021 gain.
- Other comprehensive income for the first half was $1.276 million, including a favorable change in the interest-rate swap’s fair value; Q2 other comprehensive loss was $0.304 million.
- After quarter-end, 190,000 square feet at the TRC-MRC 3 industrial building was vacated in July 2021; the building had been fully leased through June 30.
Outlook, commentary and risks
- No specific full-year earnings or revenue guidance is provided. Management cautions that results are seasonal and quarterly results are not indicative of the full year; farming revenue is typically concentrated in the third and fourth quarters.
- Management expects adequate cash, operating cash flow and available credit to fund operations over the next 12 months, assuming COVID-19 impacts do not materially worsen. It anticipates further capital needs for major developments and may use joint ventures, debt, asset sales or equity issuance.
- Estimated remaining-2021 investment includes approximately $3.208 million for TRCC infrastructure, $0.853 million for farming, and up to $5.516 million for planning, litigation, mapping, permitting and development at Mountain Village, Centennial and Grapevine.
- Management cited drought and water availability, crop yields and prices, labor availability, development timing, financing access, COVID-19 variants and entitlement litigation as uncertainties. The company said its water resources were sufficient for its needs into the remainder of 2021, while noting risks from California’s low 5% State Water Project allocation.
- Litigation remains material to development plans. Centennial litigation produced a partial ruling requiring additional greenhouse-gas and wildfire-risk analysis; final judgments had not been entered as of the report. Appeals also remained pending in the Tehachapi condor and Kern Water Bank matters. Grapevine’s 2021 favorable judgment was final after no appeal was filed. A Conservancy-related payment dispute was ongoing, with payments deposited into escrow.
- Contractual water-payment obligations totaled $265.908 million, largely due after five years. The company also guaranteed $117.918 million of unconsolidated joint-venture debt; management did not expect the guarantees to be called. A $4.393 million standby letter of credit supports East CFD bonds and could be drawn if the company failed to pay property taxes.
Important facts for investors to verify
- Whether drought-driven water sales and favorable pricing persist, and the effect of water-sale costs and future water availability.
- The leasing status and financial impact of the 190,000-square-foot July vacancy at TRC-MRC 3.
- Progress and potential costs of Centennial, Mountain Village and Grapevine litigation, permitting and development, including future funding requirements.
- Actual operating cash generation against planned capital spending and substantial long-term water-payment commitments.
- Joint-venture results, particularly fuel-cost pressure at Petro, and exposure under debt guarantees.
- Crop yields, commodity prices and labor costs, given seasonality and the reported warm winter and drought conditions.