Business context and reporting period
Tejon Ranch Co. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company owns approximately 270,000 acres in California and operates in commercial/industrial real estate, resort/residential development, mineral resources, farming, and ranch operations. Results are seasonal, and management cautions that interim results are not indicative of full-year performance.
Financial performance
Amounts below are in millions, except per-share data.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $13.5 | $9.7 | $28.6 | $29.3 |
| Operating loss | $(0.8) | $(2.5) | $(5.4) | $(4.9) |
| Net income (loss) attributable to common stockholders | $0.4 | $0.05 | $(0.6) | $0.9 |
| Basic and diluted EPS | $0.02 | $0.00 | $(0.02) | $0.03 |
- Q3 revenue rose 40%, mainly as farming revenue increased; nine-month revenue declined 2%.
- For the nine months, cash from operations was $7.6 million, versus $0.6 million in 2019. Investing activities provided $6.8 million, versus $8.5 million used in 2019; financing activities used $5.4 million, versus $1.2 million provided.
- Capital expenditures were $15.4 million for the nine months. Cash and cash equivalents were $36.2 million at September 30, 2020; available-for-sale securities were $14.2 million.
- Total debt was $58.1 million, including $4.3 million current maturities. The $35 million revolving credit facility had no borrowings. Debt-to-total-capitalization was approximately 11.6%; the company reported compliance with its credit covenants.
- Comprehensive loss attributable to common stockholders was $3.5 million for the nine months, reflecting a $4.0 million pretax unrealized loss on the interest-rate swap, partly offset by other comprehensive items.
Material changes versus prior comparable periods
- Q3 farming operating results improved by $1.8 million year over year, to $0.4 million income, principally due to a $3.8 million insurance recovery for reduced pistachio yields. Higher almond costs and water and irrigation expenses partly offset the benefit. Nine-month farming remained loss-making at $1.2 million, though improved from a $2.1 million loss.
- Nine-month commercial/industrial revenue fell 41%, primarily because there was no comparable 2019 land sale; segment operating income fell $2.2 million. A separate April 2020 sale of land and a building to the Petro joint venture generated $2.0 million cash proceeds and a $1.3 million gain.
- Nine-month mineral resources revenue increased 11%, supported by water sales and cement and aggregate royalties, while oil and gas royalties declined 64% to $0.5 million due to weak oil prices and demand.
- Equity earnings from unconsolidated joint ventures declined 28% to $3.6 million for the nine months. Q3 earnings fell 50%, primarily due to weaker Petro travel-plaza results and outlet-center tenant disruptions, partly offset by TRC-MRC 3 rental income.
- Nine-month income tax expense rose to $1.1 million from $0.3 million. Management attributed the increase mainly to Section 162(m) deduction limitations and a stock-compensation-related deferred tax shortfall; it said the shortfall was not expected to affect current tax payable.
Outlook, commentary, and risks
- Management provided no specific earnings or revenue guidance. It expects to fund near-term operations and investment needs with cash, operating flows, security maturities, and joint-venture distributions, assuming COVID-19 impacts do not materially worsen. It said further development of major projects may require joint-venture funding, debt, asset sales, or equity issuance; financing availability and terms are not assured.
- Management planned remaining-2020 investment of approximately $1.9 million for TRCC infrastructure, $0.3 million for farming, and up to $3.0 million for planning, litigation, mapping, permitting, and development at Mountain Village, Centennial, and Grapevine.
- COVID-19 effects remain uncertain. Commercial tenants deferred $163,000 of rent, or 13% of billings, with the company expecting the deferred rent to be repaid by the end of 2021. The outlet-center joint venture reported rent abatements and ongoing deferral negotiations; management continued to assess collectability.
- Farming risks include lower almond pricing amid expected high industry production, pistachio yields down 45% from 2019 following inadequate winter chill, and water availability and cost. Management reported sufficient water resources for the remainder of 2020, but noted longer-term uncertainty.
- Oil royalties face continued weakness; management did not expect an increase over the next 12 months at prevailing prices. Major royalty tenant California Resources Corporation entered Chapter 11 in July and exited bankruptcy in October 2020; it was current on payments through September 30, 2020.
- Development and water-related litigation remains material: Grapevine re-entitlements are challenged, Centennial approvals are under challenge, and appeals continue in Antelope Valley groundwater and Kern Water Bank matters. Management said it believed the Tejon Mountain Village litigation did not impede development. Outcomes and potential losses in certain matters were not estimable.
- The company reported $261.9 million of estimated future water-contract payments. It also guaranteed $119.2 million of unconsolidated joint-venture debt; management did not expect these guarantees to be called. A $4.4 million standby letter of credit supports East CFD bonds and, according to management, was unlikely to be drawn.
Important facts for investors to verify
- Whether pistachio insurance proceeds and harvest timing drove a one-time improvement, and how crop yields, prices, and water costs affect subsequent periods.
- Tenant rent collections, deferred-rent repayments, outlet-center negotiations, and the continuing effects of COVID-19 on joint-venture earnings.
- Oil-price trends and California Resources Corporation’s post-bankruptcy payment and drilling activity.
- Developments in Grapevine, Centennial, groundwater, and Kern Water Bank litigation, including potential effects on project timing and value.
- Funding plans and liquidity as major development spending proceeds, including compliance with debt covenants, joint-venture guarantees, and long-term water obligations.