TEJON RANCH CO Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Farming Operations: Showed strong year-over-year improvement, with revenues up over 50% and GAAP bottom line improving by $2 million. Adjusted EBITDA has been positive in 11 out of the last 12 years.
• Tejon Ranch Commerce Center (TRCC): Industrial portfolio 100% leased, commercial 95% leased, outlets at Tejon 90% occupied. Joint ventures drive organic growth, weighted average rent levels climbing, and a 40% cost advantage to Inland Empire West. The new Hard Rock Tejon Casino will boost traffic. Terra Vista at Tejon multifamily community is over halfway leased.
• Cost Discipline: Completed a workforce reduction saving over $2 million per year, lowering headcount by 20% to improve operating margins.

Segment Performance

• Real Estate, Commercial and Industrial: Revenues increased 4% to $3.1 million, with operating income rising 7% to $976,000. Equity in earnings from unconsolidated joint ventures totaled $2.6 million, with the TA/Petro partnership generating $1.9 million.
• Mineral Resources: Produced operating income of $1.1 million on revenues of $3.2 million, stable year-over-year. Water sales contributed $322,000 to the segment's operating profit.
• Farming: Revenues improved by over 50% compared to the prior year, with GAAP operating losses reduced by 40% due to improved production and better water management.
• Ranch Operations: Total revenues were $1.3 million with positive operating income, supported by stable grazing and gain management activities.
• Corporate: General and administrative costs declined to $2.9 million. Consolidated operating income improved 37% year-over-year to $3.4 million, with adjusted EBITDA year-to-date at $13.9 million, up 7.3% from the prior year.

Guidance

• Management is focused on executing master planned communities to generate long-term shareholder value. This includes building out the 11 million square feet of TRCC, identifying new revenue sources, and developing master planned communities like Grapevine, Mountain Village, and Centennial. Expect future growth from ongoing cash flow of existing assets, development of TRCC, and master planned communities.

Risks

• Uncertainties related to the success of master planned communities, including challenges in re-entitling and developing Centennial.
• Market conditions affecting real estate performance.
• Traffic impacts on the TA/Petro joint venture sales due to reduced car and truck traffic.

Question and Answer

Q: After all these years of failure, don't you think you should just sell as much land as you can and buy back stock so as to realize the maximum amounts for shareholders?

A: Matt Walker emphasized that creating long-term shareholder value is the goal for master planned communities. Everything is on the table for monetizing land holdings, but currently, pursuing implementation plans for Grapevine, seeking joint venture partners for Mountain Village, and re-entitling Centennial makes sense.

Q: What is the company's policy regarding the disclosure of more detailed cost information on items such as the TRCC cost to complete and the estimated costs of the first phases of planned community development?

A: Matt Walker stated that the company provides information for all material cash requirements, including capital expenditures, as required by the SEC. It also discloses material cash requirements from known contractual obligations and estimates of TRCC's horizontal infrastructure cost to complete in the Annual Report.

Q: The $2 million expense reduction is welcomed and appreciated. However, based on management's stated value of TRCC, the book value of our MPC assets and the estimated value of our cash flowing land leases and royalties, Tejon arguably has a net asset value that is north of $40 per share. Following the expense reduction and the implementation of your plan, what will our annual per share cash earnings power be?

A: Matt Walker responded that future earnings potential comes from the build-out of TRCC, new revenue sources, ongoing cash flow from existing assets, and development of master planned communities, which have the potential for significant earnings growth over time.

Q: How much additional capital and how much time will it take before Mountain Village or Centennial are generating profits, returns for shareholders?

A: For Mountain Village, a capital raising effort to find a joint venture partner is underway, with construction documents expected in 18-24 months and construction starting after that. For Centennial, re-entitling through Los Angeles County is expected to take until near the end of next year, followed by mapping and construction, with timelines dependent on entitlement progress.

Q: Mountain Village and Centennial have a combined book value of more than $290 million, but produce no income and consume capital. Are they worth book value or more? If so, why not sell them to unlock more than 60% of market cap, leaving Grapevine and TRCC, already valued by management above our market cap. No other lever matches this shareholder value. Why not put them up for sale?

A: Matt Walker agreed that Mountain Village and Centennial are worth more than book value and that the company is always evaluating options to maximize asset value. Future cash flow potential from these communities is expected, and details will be discussed in greater depth at the Investor Engagement Event next week.

Q: The release says Terra Vista will increase to 228 units. Are you committed to that?

A: Yes, Terra Vista has completed construction on the first phase with 228 units, and more than half are leased. The second phase is entitled for additional units.

Q: The share price is at a 52-year low. There has never been a return of capital to owners of the company. We have assets with a lot of value and $50 million per year in cash flow. When do the owners get paid?

A: Matt Walker expressed frustration with the lack of share price appreciation but intends to implement a plan to create share price movement. This plan will leverage the balance sheet and third-party capital to grow cash flow-producing assets, with the goal of eventually allowing dividends or share repurchases.

Q: Given the 49.84% that voted in favor of the PFS Trust proposal to allow shareholders to call a special meeting, will this be approved by the Board of Directors as was recommended by ISS?

A: Matt Walker stated that governance topics, including the special meeting, will be discussed in greater depth at the Investor Engagement Event next week, and shareholders will receive an update then.

Q: Can you please give more color on this part of the press release? Equity and earnings of unconsolidated joint ventures decreased by $1.3 million compared with the prior year period, mainly attributed to the reduction in equity and earnings recorded for the TA/Petro joint venture.

A: Matt Walker explained that earnings from the TA/Petro joint venture (where Tejon is a 60% partner) are driven by fuel sales, convenience store sales, and related commercial real estate. Reduced traffic on Interstate 5 led to lower earnings from this joint venture.

Q: Please describe the economics of the joint venture relationships in the Grapevine location and discuss what management intentions are for taking greater TRC control of the development and reducing or eliminating the joint venture split of economics.

A: Tejon has joint ventures with Majestic Realty, Rockefeller, and TA/Petro. Going forward, management intends to develop more real estate on its own balance sheet for the remaining TRCC space, evaluating each opportunity based on return hurdles and capital allocation decisions.

Q: Given the apparent success of the apartment development near Grapevine and the potential demand from Hard Rock Casino employees, is management contemplating either additional apartments or townhouses?

A: Yes, management has plans to build more residential at TRCC, including additional multifamily housing and single-family homes in the Grapevine master planned community. The second phase of Terra Vista is entitled for additional units, and there is demand from Hard Rock Casino employees.

Q: If a buyer would put in a formal written bid to buy Mountain Village at the current book value, would the company sell it?

A: Matt Walker stated that all options are on the table, and if a reputable party makes a substantive offer, the Board would consider it, noting that the property is believed to be worth more than book value.

Q: The company cut $2 million from overhead. Was $1 million of that, the consulting cost being paid to the previous CEO?

A: Matt Walker clarified that the $2 million in savings came entirely from staffing cost reductions from existing staff, not from consulting fees to the previous CEO.