By M. Marin
NYSE:TRC
READ THE FULL TRC RESEARCH REPORT
Income-producing units, new credit facility – resources to move development plans ahead …
Tejon Ranch Company (NYSE:TRC) reported year-end 2023 results last week and provided an overview of recent milestones. While the company continues to move forward on its development plans, it also continues to generate revenue from the income-producing units in its operations. Moreover, TRC’s recent initiatives combined with our recent meeting with the company’s CFO support our view that the company is focused on developing its land assets to unleash value for shareholders. As the company moves forward on its development plans, TRC continues to generate revenue from the income-producing units in its operations, including activities at the Tejon Ranch Commerce Center (TRCC) and the minerals and agricultural businesses.
Believe recent activity & results underscore value of Tejon Ranch underlying land assets for a broad range of uses, including development, agriculture, water sales, mineral resources…
Recent activity and results underscore the value of Tejon Ranch’s underlying land assets for a broad range of activities, in our view. The farming segment produces revenues from the sale of wine grapes, almonds, and pistachios. Ranch operations consists of game management revenues and ancillary land uses, such as grazing leases and – given the location of TRC land – filming. The company’s mineral resources segment generates revenue from oil and gas royalty leases, rock and aggregate mining leases, a lease with National Cement of California Inc., and from water sales to the State Water Project.
…Laying the groundwork to support growth, with further steps expected in 2024…
TRC is laying the groundwork to support growth. For example, in 2023, the company closed on a new $160 million unsecured revolving credit facility with AgWest Farm Credit, reflecting TRC’s agricultural and ongoing ranching and farming operations. The credit facility will be available to fund future real estate construction projects and other operations. We believe the new facility enhances TRC’s financial flexibility to fund future growth with or without JV partners in order to maintain greater exposure to the upside and profits of its development projects.
In 1Q24, TRC began construction of Terra Vista at Tejon, which is a new multi-family apartment community located adjacent to the Outlets at Tejon at TRCC that will add another income producing asset. The Terra Vista residential complex will offer affordable housing for employees at TRCC and the nearby Hard Rock Hotel & Casino Tejon project and others. The company intends to continue to invest funds in 2024 for litigation defense, permits, and maps for its master plan mixed-use developments (see below) and for master project infrastructure and vertical development within its active commercial and industrial development, including ongoing construction of Terra Vista at Tejon. During the next several years, the company expects its income producing activities to generate revenue and cash flow to complement other sources of financing to advance its development projects.
Strong TRCC Leasing demand from multinationals existing industrial space fully leased
Reflecting its attractive location, FTZ-designation and other factors, the Tejon Ranch Commerce Center (TRCC) is seeing strong demand from multinational and national new and prospective industrial / commercial tenants, while the Outlets at Tejon is also adding new retail tenants and diversifying. As we have noted in previous reports, TRCC is located only about 60 miles north of Los Angeles and 25 miles south of Bakersfield, California, making it a strong option for logistics and distribution / warehouse needs, particularly as supply in the Los Angeles area is relatively scarce.
The strong lease activity TRCC continues to see on both existing area and space planned for development reflects this. For example, construction on a new distribution center for Nestlé USA recently began & new tenant RectorSeal is relocating from the LA area. TRC has finalized transactions on >2.5m sq ft of industrial space over the past 2-years at existing or under-development buildings, with significant pre-construction commitments for space. Leasing space even before construction has begun reflects the strength of market demand, scarcity of supply and the strategic location and building amenities at the TRCC, including access to a solid labor pool, according to management.
In addition to strong demand for warehouse space, demand for retail footage at TRCC also remains solid and the company continues to add new stores to the Outlets at Tejon. Relatively recent additions to the Outlets at Tejon include Under Armour, which is a well-known distributor of branded athletic performance apparel, footwear, and accessories, U.S. Polo Association and Lacoste. K-Pop Star, another recent TRC outlets tenant, focuses on Korean pop culture merchandise. Other stores there include a Nike Factory Store, Calvin Klein and a Banana Republic Factory Store.
Housing in strong demand, reflecting severe shortage of affordable housing; Mixed-use developments will add to housing supply…
Reflecting the severe housing shortage in California generally and Kern County, this is likely to be much needed affordable housing. In fact, California Assembly Bill (AB) 1449 aims to exempt certain affordable apartment developments from review by the California Environmental Quality Act (CEQA). Specifically, the bill is expected to “exempt from CEQA certain actions taken by a public agency related to affordable housing projects, as defined, if certain requirements are met” until January 1, 2033. To qualify for exemption, projects need to be located in densely populated urban areas and include a number of units for residents who earn less than 80% of the median income in the local market, among other requirements. In addition, California governor Gavin Newsom has established the Housing Accountability Unit to facilitate the state’s goal of adding affordable housing.
Reflecting the imbalance between supply (inventory) and demand, housing prices continue to increase. TRC is the only major area close to Los Angeles where infrastructure is possible and one of the few real estate development companies with scale.
MULTIPLE MIXED-USE DEVELOPMENT PROJECTS
In various stages of development, Mountain Village is most advanced
Tejon Ranch has three master planned mixed-use residential communities in various stages of development. Mountain Village at Tejon Ranch is the most advanced of the three. Located in Kern County, it encompasses 26,417 acres of entitlement area, including 5,082 acres for a mixed-use master planned community to include housing, lodging, retail, and commercial components. In keeping with the goal of sustainability, all Mountain Village (MV) homes that are required by code are planned to feature roof-top photovoltaic solar arrays and battery energy storage systems.
The MV development is planned to be an exclusive, low-density, resort-based community that will offer a broad range of recreational activities, as well as lodging and spa facilities. MV is entitled for 3,450 homes, 160,000 square feet of commercial development, 750 hotel keys, and 21,335 acres of open space. Kern County approved the first tentative tract map for the project, which includes 752 residential lots, in 2017 and the first final map, consisting of 401 residential lots and parcels for hospitality, amenities, and public uses, in December 2021. The commercial aspect of the project is a 160,000 square foot commercial center that the company calls Farm Village, which will serve as the commercial and community center and which will include fresh culinary offerings, artisan markets, boutique lodging, and an array of trails, gardens, and agriculture. TRC is currently exploring various financing prospects for the development of MV, the timing of which will depend on the economy and state of the residential real estate market. Financing could encompass debt and/or equity financing and potential JVs. Given the company’s recent move toward leveraging financing from financial institutions, capital markets and organ cash flow generation, we would expect the company to prioritize funding measures that enable TRC to retain a greater portion of the upside.
SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR.
DISCLOSURE: Zacks SCR has received compensation from the issuer directly, from an investment manager, or from an investor relations consulting firm, engaged by the issuer, for providing research coverage for a period of no less than one year. Research articles, as seen here, are part of the service Zacks SCR provides and Zacks SCR receives quarterly payments totaling a maximum fee of up to $40,000 annually for these services provided to or regarding the issuer. Full Disclaimer HERE.
