Tejon Ranch Co. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. Tejon Ranch is a diversified land development and agribusiness company operating in commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations. Its principal asset is approximately 270,000 acres of land in California. Results are seasonal and depend on water availability, crop cycles, and the timing of real estate activity.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $13.469 million | $5.702 million; up 136% |
| Operating income (loss) | $1.545 million | $(3.562) million |
| Operating margin | Approximately 11.5% | Negative |
| Net income (loss) attributable to common stockholders | $1.457 million; $0.06 per diluted share | $(1.902) million; $(0.09) per diluted share |
| Adjusted EBITDA (non-GAAP) | $5.139 million | $0.344 million |
| Operating cash flow | $6.969 million | $(0.570) million |
| Cash and marketable securities | $90.588 million | Down $0.387 million from year-end 2017 |
| Total debt | $68.973 million | $69.959 million at year-end 2017; no revolving-line borrowings |
At March 31, 2018, total assets were $520.609 million, total liabilities $91.402 million, and equity $429.207 million. The company reported a 13.8% debt-to-total-capitalization ratio and compliance with its debt covenants. Its $65.162 million term loan is fixed at 4.11% through an interest-rate swap; the revolving credit facility provides $30 million of availability and matures in September 2019. Q1 investing cash outflow was $5.450 million and financing cash outflow was $2.147 million.
Material changes versus Q1 2017
- Mineral resources revenue increased $7.130 million, mainly from water sales: 7,442 acre-feet sold for $7.992 million, versus 939 acre-feet in Q1 2017. Management attributed the opportunity to moderate drought conditions. Associated mineral-resource expenses also rose, by $2.907 million.
- Commercial/industrial revenue was nearly unchanged at $2.154 million. Segment operating income increased to $1.002 million from $0.674 million, helped by lower expenses.
- Farming revenue rose to $1.195 million from $0.431 million, primarily due to almond sales and timing of inventory sales; farming nevertheless recorded a $0.643 million operating loss.
- Ranch operations revenue fell 9% to $0.989 million. Equity earnings from unconsolidated joint ventures decreased 27% to $0.167 million, including weaker TA/Petro results, partly offset by improvement at TRC-MRC 2.
- Income tax expense was $0.526 million, versus a $1.332 million tax benefit in Q1 2017.
Outlook, commentary, risks, and unusual items
- No specific full-year revenue or earnings guidance was provided. Management said quarterly results are not indicative of full-year performance; farming revenue is typically concentrated in the third and fourth quarters, while real estate activity varies with market conditions and project timing.
- Management expects adequate cash, securities, operating cash flow, and credit availability for the next 12 months. It also expects substantial capital needs as development advances and may use additional debt, joint ventures, asset sales, or equity financing.
- Estimated remaining-2018 investment includes approximately $7.772 million for TRCC-East infrastructure, $6.026 million for Grapevine, $5.514 million for Mountain Village, and $3.834 million for Centennial. These are estimates, not earnings guidance.
- Water sales are uncertain and depend in part on the final State Water Project allocation. The company has a contract to sell 7,000 acre-feet over two years. Contractual water payments are substantial: approximately $8.889 million in 2018 and $255.873 million in estimated payments over the periods shown in the filing.
- Weather, crop yields and commodity prices pose farming risks; management said it was too early to assess potential effects of February cold weather on crop yields. It also cited uncertainty around foreign trade discussions and crop demand.
- Material legal and regulatory matters include appeals and litigation concerning the Antelope Valley groundwater adjudication, the Kern Water Bank, and the Grapevine project approvals. The filing says potential monetary exposure for some pending claims cannot be estimated.
- The company guarantees $100.021 million of unconsolidated joint-venture debt and has a $4.921 million standby letter of credit related to East CFD bonds. Management does not expect these obligations to be called or drawn, but outcomes are uncertain.
- The company adopted ASC 606 revenue guidance in Q1 2018 using the full retrospective method and reported no significant overall differences in recognition or timing. It also adopted guidance for gains and losses on transfers of nonfinancial assets; there were no such customer transfers during the quarter.
Important facts for investors to verify
- Whether elevated water-sale revenue and operating cash flow are repeatable, given drought conditions and water-allocation uncertainty.
- Crop yields, almond and pistachio pricing, and the extent to which Q1 farming revenue reflects timing rather than underlying growth.
- Progress, required investment, and litigation outcomes for Grapevine, Centennial, Mountain Village, and TRCC-East.
- Liquidity and covenant headroom as long-term water commitments and development spending continue; the revolving facility matures in September 2019.
- Potential exposure from joint-venture debt guarantees, CFD assessments, and pending groundwater, water-bank, and development litigation.