Tejon Ranch Co. — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2023, compared with Q1 2022. Tejon Ranch is a diversified California land development and agribusiness company with five segments: commercial/industrial real estate, resort/residential real estate, mineral resources, farming, and ranch operations. Results are seasonal and quarterly performance is not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Total revenue | $12.3 million | $21.0 million |
| Operating income | $0.5 million | $5.2 million |
| Net income attributable to common stockholders | $1.8 million; $0.07 per diluted share | $4.3 million; $0.16 per diluted share |
| Operating cash flow | $3.4 million | $8.0 million |
| Cash, cash equivalents and marketable securities | $75.7 million at March 31, 2023 | $72.6 million at December 31, 2022 |
| Debt | $49.7 million; no revolving-line borrowings | $49.9 million at December 31, 2022 |
| Equity | $477.1 million | $477.6 million at December 31, 2022 |
- Revenue declined about 42%; operating margin was approximately 4%, versus 25% in Q1 2022. Net income attributable to common stockholders was approximately 14% of revenue, versus 20%.
- Investing activities provided $0.9 million, including $10.6 million of joint-venture distributions and $1.3 million of water-sale proceeds, offset by $5.0 million of real estate and equipment expenditures and $4.4 million invested in water assets. Financing activities used $3.0 million, including debt repayments and taxes on vested stock grants.
- Current assets were $87.3 million and current liabilities $13.1 million at March 31. The company reported $40.6 million available under its revolving credit facility. Management said liquidity and expected cash flows should fund internal operations over the next 12 months.
- The $48.1 million term loan is effectively fixed at 4.62% through an interest-rate swap; the other $1.6 million note bears 4.25%. The company reported compliance with its credit-facility covenants.
- Adjusted EBITDA, a non-GAAP measure, was $6.4 million, down from $11.3 million. Commercial/industrial net operating income, also non-GAAP, was $2.0 million versus $1.7 million.
Material changes and segment drivers
- Commercial/industrial real estate: Revenue fell $4.7 million, principally because there was no Q1 2023 land sale, compared with a $4.7 million sale in Q1 2022. Segment operating income declined $3.6 million to $1.0 million.
- Mineral resources: Revenue decreased $5.1 million and operating income fell $2.0 million. Water sales were $5.1 million versus $10.2 million; unusually heavy winter rainfall and a 100% State Water Project allocation, compared with 5% in 2022, reduced sales opportunities.
- Farming: Revenue rose 81% to $1.2 million, but the segment remained loss-making, with an operating loss of $0.8 million. Most crop revenue is typically recognized in the third and fourth quarters.
- Ranch operations: Operating results improved to $0.2 million income from a $0.3 million loss, mainly due to temporary filming activity and higher filming revenue.
- Joint ventures: Equity earnings rose $0.3 million to $1.5 million. Higher travel-plaza earnings and industrial leasing gains contributed. The company also reports a $14.0 million loss at TRC-MRC 5 LLC, of which its recorded equity loss was $7,000; the filing does not clearly explain this difference in the supplied text.
Outlook, risks and contingencies
- The company expects no meaningful water sales for the remainder of 2023. It also notes uncertainty from water availability, commodity prices, crop yields, inflation, weather, development timing and market conditions; it provides no specific consolidated earnings or revenue guidance.
- For the remainder of 2023, estimated investment includes approximately $19.4 million for TRCC-East infrastructure and up to $6.3 million for planning, litigation/appeals, permitting and development at Mountain Village, Centennial and Grapevine. Management expects to use cash, securities maturities, operations and joint-venture distributions, while retaining debt, joint ventures, asset sales and stock issuance as potential funding sources.
- Centennial litigation: On March 22, 2023, a court entered judgment rescinding the project approvals. Tejon is considering options to reinstate approvals, including additional environmental analysis. The monetary value of any adverse outcome cannot currently be estimated. The ruling creates material uncertainty for a major residential development project.
- Water contracts carry substantial long-term commitments: estimated contractual payments total $269.1 million, including $13.5 million expected in 2023. The company also has a $4.4 million standby letter of credit related to East CFD bonds; it says a draw is unlikely. Unconsolidated joint ventures had $183.7 million of debt, with $27.5 million subject to guarantees as described by the company.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reports no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether and how Centennial’s rescinded approvals can be reinstated, the expected timing and cost of further proceedings, and the implications for project value.
- Whether management’s expectation of little or no further 2023 water sales is borne out, and the effect of water availability and long-term water-contract costs.
- Funding for the stated development investment plans, including actual revolving-line availability, covenant headroom and the maturity of the facility. The filing gives inconsistent revolving-line maturity dates: June 30, 2027 in the debt note and June 2032 in MD&A.
- The extent and conditions of guarantees on joint-venture debt, and the financial effects of the TRC-MRC 5 LLC loss reported in the joint-venture table.
- Whether seasonal crop revenue, development activity and any future land sales materially change results after this weak first quarter.