Tejon Ranch Co. (TRC) is a diversified real estate development and agribusiness company committed to responsibly using its land and resources to meet the housing, employment, and lifestyle needs of Californians and to create value for its shareholders. The company's prime asset is approximately 270,000 acres of contiguous, largely undeveloped land located between Los Angeles and Bakersfield, California.
Business Overview
Tejon Ranch Co. operates in five reporting segments: commercial/industrial real estate development, resort/residential real estate development, mineral resources, farming, and ranch operations. The commercial/industrial real estate development segment is anchored by the Tejon Ranch Commerce Center (TRCC), a 20 million square foot commercial and industrial development along Interstate 5. TRCC has already seen over 8 million square feet of development, including distribution centers for major companies like IKEA, Caterpillar, and Nestlé.
The resort/residential real estate development segment is focused on large-scale master planned communities, including Mountain Village at Tejon Ranch (MV), Centennial, and Grapevine. MV is entitled for 3,450 homes, 160,000 square feet of commercial development, and 750 hotel keys, while Centennial is planned for 19,333 homes and 10.1 million square feet of commercial space. The mineral resources segment generates revenue from oil, gas, rock, and aggregate leases, as well as water sales. The farming segment produces revenue from the sale of almonds, pistachios, and wine grapes, while the ranch operations segment includes game management and grazing leases.
Financials
For the full year 2023, Tejon Ranch Co. reported annual revenue of $44,739,000, net income of $3,265,000, annual operating cash flow of $13,655,000, and annual free cash flow of -$13,707,000. In the first quarter of 2024, the company generated revenue of $7,406,000 and a net loss of $914,000.
The decrease in net income from the prior year period was primarily driven by a 64% decline in mineral resources segment revenue, which fell from $6,912,000 in Q1 2023 to $2,489,000 in Q1 2024. This was due to a 73% drop in water sales revenue, which fell from $5,099,000 to $1,363,000, as heavy rainfall in California limited water sales opportunities. Expenses in the resort/residential segment also increased by $1,173,000 due to higher professional service fees.
Partially offsetting these declines was a $942,000 income tax benefit recorded in Q1 2024, compared to a $1,013,000 tax provision in the prior year period. The company's effective tax rate was 51% in Q1 2024, higher than the statutory rate, primarily due to permanent differences related to Section 162(m) compensation deduction limitations.
Liquidity
As of March 31, 2023, Tejon Ranch Co. had $60,671,000 in cash, cash equivalents, and marketable securities, as well as $108,615,000 available on its revolving line of credit. The company's debt-to-total-capitalization ratio was 9.0% at the end of the quarter.
In November 2023, Tejon Ranch Co. entered into a new $160 million revolving credit facility with AgWest Farm Credit, which replaced the company's previous credit facility. The new facility has a maturity date of January 1, 2029 and bears interest at one-month term SOFR plus a margin of 2.25%.
The company expects to continue investing significantly in its real estate development projects, including the first phase of its Terra Vista at Tejon multi-family community within TRCC, as well as infrastructure improvements and entitlement activities for its master planned communities. For the remainder of 2024, Tejon Ranch Co. estimates capital investments of approximately $40 million for the Terra Vista project, $15 million for TRCC infrastructure, and $8 million for land planning, litigation, and development activities at MV, Centennial, and Grapevine.
Segmental Performance
Commercial/Industrial Real Estate Development
The commercial/industrial real estate development segment generated revenue of $2,945,000 in Q1 2024, an increase of 10% from the prior year period. This was primarily due to higher landscaping revenues and increased management and development fees from the company's joint ventures. Expenses in this segment rose 14% to $1,927,000, driven by higher payroll, stock compensation, and insurance costs.Resort/Residential Real Estate Development
As Tejon Ranch Co. continues to pursue entitlement and development of its master planned communities, this segment incurred $1,561,000 in expenses in Q1 2024, up from $388,000 in the prior year period. The increase was mainly attributable to higher professional service fees and planning costs.Mineral Resources
Mineral resources segment revenue declined 64% to $2,489,000 in Q1 2024, due to the 73% drop in water sales revenue mentioned earlier. Expenses in this segment decreased 48% to $2,116,000, primarily due to lower water cost of sales.Farming
The farming segment generated revenue of $865,000 in Q1 2024, a 27% decrease from the prior year period. This was driven by declines in other farming revenue, including water sales, as well as lower hay sales. Farming expenses increased 3% to $2,067,000.Ranch Operations
Ranch operations revenue fell 26% to $1,107,000 in Q1 2024, mainly due to lower filming location revenue. Expenses in this segment decreased 8% to $1,227,000.Outlook
Tejon Ranch Co. continues to execute on its long-term strategy of entitling and developing large-scale mixed-use communities to serve the growing populations of Southern and Central California. The company remains focused on advancing its resort/residential projects, while also driving value creation through its commercial/industrial development at TRCC.
Risks and Challenges
However, the company faces several risks, including regulatory and legal challenges, such as the ongoing litigation surrounding the Centennial project. Additionally, the company's farming and mineral resources operations are subject to commodity price fluctuations and weather-related impacts. Tejon Ranch Co. also relies on access to water resources, which could be constrained by drought conditions or regulatory changes.
Conclusion
Despite these risks, the company's substantial land holdings, diversified business model, and strong liquidity position provide a solid foundation for long-term value creation. As Tejon Ranch Co. continues to navigate the development process and capitalize on opportunities in its various business segments, it remains well-positioned to deliver growth and returns for shareholders over the coming years.