8. OTHER LIABILITIES
For the captions presented in the table above, please refer to the respective Notes to Unaudited Consolidated Financial Statements for further detail.
9. STOCK COMPENSATION - RESTRICTED STOCK AND PERFORMANCE SHARE GRANTS
The following is a summary of the Company's Performance Condition Grants as of the sixthree months ended June 30, 2020:March 31, 2021:
The following is a summary of the Company’s stock grant activity, both time and performance share grants, assuming target achievement for outstanding performance grants for the sixthree months ended June 30, 2020:March 31, 2021:
|
| | | | | | |
| June 30, 2020March 31, 2021 | | |
Stock Grants Outstanding Beginning of Period at Target Achievement | 409,373840,307 |
| | |
New Stock Grants/Additional Shares due to Achievement in Excess of Target | 777,97050,379 |
| | |
Vested Grants | (224,441(110,517) | ) | | |
Expired/Forfeited Grants | —(23,956) |
| | |
Stock Grants Outstanding End of Period at Target Achievement | 962,902756,213 |
| | |
The following is a summary of the assumptions used to determine the price for the Company's market-based Performance Condition Grants for the sixthree months ended June 30, 2020:March 31, 2021:
|
| | | |
($ in thousands except for share prices) | | | |
Grant date | December 12, 2019 | | March 11, 2020 |
Vesting end | December 31, 2022 | | December 31, 2022 |
Share price at target achievement | $18.80 | | $16.36 |
| | | |
Expected volatility | 17.28% | | 18.21% |
Risk-free interest rate | 1.69% | | 0.58% |
| | | |
Simulated Monte Carlo share price | $11.95 | | $5.87 |
Shares granted | 6,327 | | 81,716 |
Total fair value of award | $76 | | $480 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands except for share prices) | | | | | | | | |
Grant date | | 12/12/2019 | | 03/11/2020 | | 12/11/2020 | | 03/18/2021 |
Vesting end | | 12/31/2022 | | 12/31/2022 | | 12/31/2023 | | 03/18/2024 |
Share price at target achievement | | $18.80 | | $16.36 | | $17.07 | | $20.02 |
| | | | | | | | |
Expected volatility | | 17.28% | | 18.21% | | 29.25% | | 30.30% |
Risk-free interest rate | | 1.69% | | 0.58% | | 0.19% | | 0.33% |
| | | | | | | | |
Simulated Monte Carlo share price | | $11.95 | | $5.87 | | $15.59 | | $18.82 |
Shares granted | | 6,327 | | 81,716 | | 3,628 | | 10,905 |
Total fair value of award | | $76 | | $480 | | $57 | | $205 |
The unamortized cost associated with unvested stock grants and the weighted average period over which it is expected to be recognized as of June 30, 2020March 31, 2021 were $10,801,000$6,667,000 and 2520 months, respectively. The fair value of restricted stock with time-based vesting features is based upon the Company’s share price on the date of grant and is expensed over the service period. The fair value of performance grants that cliff vest based on the achievement of performance conditions is based on the share price of the Company’s stock on the day of grant once the Company determines that it is probable that the award will vest. This fair value is expensed over the service period applicable to these grants. For performance grants that contain a range of shares from zero to a maximum, the Company determined, based on historic and projected results, the probability of (1) achieving the performance objective and (2) the level of achievement. Based on this information, the Company determines the fair value of the award and measures the expense over the service period related to these grants. Because the ultimate vesting of all performance grants is tied to the achievement of a performance condition, the Company estimates whether the performance condition will be met and over what period of time. Ultimately, the Company will adjust stock compensation costs according to the actual outcome of the performance condition.
Under the Non-Employee Director Stock Incentive Plan, or NDSI Plan, each non-employee director receives a portion of his or her annual compensation in stock. The stock is granted at the end of each quarter based on the quarter-end stock price.
The following table summarizes stock compensation costs for the Company's 1998 Stock Incentive Plan, or the Employee Plan, and NDSI Plan for the following periods:
|
| | | | | | | |
($ in thousands) | Six Months Ended June 30, |
Employee Plan: | 2020 | | 2019 |
Expensed | $ | 2,179 |
| | $ | 1,311 |
|
Capitalized | 649 |
| | 633 |
|
| 2,828 |
| | 1,944 |
|
NDSI Plan - Expensed | 220 |
| | 281 |
|
Total Stock Compensation Costs | $ | 3,048 |
| | $ | 2,225 |
|
| | | | | | | | | | | |
($ in thousands) | Three Months Ended March 31, |
Employee Plan: | 2021 | | 2020 |
Expensed | $ | 1,146 | | | $ | 1,111 | |
Capitalized1 | (10) | | | 366 | |
| 1,136 | | | 1,477 | |
NDSI Plan - Expensed | 130 | | | 114 | |
Total Stock Compensation Costs | $ | 1,266 | | | $ | 1,591 | |
| | | |
1For the quarter ended March 31, 2021, the Company had stock compensation forfeitures that were capitalized during a prior period, in excess of amounts capitalized during the current period, resulting in the net reversal presented above. |
10. INTEREST RATE SWAP
In October 2014, the Company entered into an interest rate swap agreement to reduce its exposure to fluctuations in the floating interest rate tied to LIBOR under the term note with Wells Fargo, or the Term Note, as discussed in Note 7 (Linewithin the Capital Structure and Financial Condition section of CreditManagement's Discussion and Long-Term Debt).Analysis of Financial Condition and Results of Operations. On June 21, 2019, the Company amended the interest rate swap agreement to continue to hedge a portion of its exposure to interest rate risk from the Term Note, and, subsequently, the Amended Term Note. The original hedging relationship was de-designated, and the amended interest rate swap was re-designated simultaneously. The amended interest rate swap qualified as an effective cash flow hedge at the initial assessment based upon a regression analysis and is recorded at fair value.
During the quarter ended June 30, 2020,March 31, 2021, the interest rate swap agreement was deemed highly effective. Changes in fair value, including accrued interest and adjustments for non-performance risk, that qualify as cash flow hedges are classified in accumulated other comprehensive income, or AOCI. Amounts classified in AOCI are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings.
As of June 30, 2020,March 31, 2021, the fair value of the interest rate swap agreement was less than its cost basis and as such is recorded within Other Liabilities on the Consolidated Balance Sheets. The Company had the following outstanding interest rate swap agreement designated as an interest rate cash flow hedge as of June 30, 2020March 31, 2021 and December 31, 20192020 ($ in thousands):
|
| | | | | | | | | | |
June 30, 2020 |
Effective Date | | Maturity Date | | Fair Value Hierarchy | | Weighted Average Interest Pay Rate | | Fair Value | | Notional Amount |
July 5, 2019 | | June 5, 2029 | | Level 2 | | 4.16% | | $(7,041) | | $56,842 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2021 |
Effective Date | | Maturity Date | | Fair Value Hierarchy | | Weighted Average Interest Pay Rate | | Fair Value | | Notional Amount |
July 5, 2019 | | June 5, 2029 | | Level 2 | | 4.16% | | $(3,726) | | $53,881 |
|
| | | | | | | | | | |
December 31, 2019 |
Effective Date | | Maturity Date | | Fair Value Hierarchy | | Weighted Average Interest Pay Rate | | Fair Value | | Notional Amount |
July 5, 2019 | | June 5, 2029 | | Level 2 | | 4.16% | | $(2,716) | | $58,768 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 |
Effective Date | | Maturity Date | | Fair Value Hierarchy | | Weighted Average Interest Pay Rate | | Fair Value | | Notional Amount |
July 5, 2019 | | June 5, 2029 | | Level 2 | | 4.16% | | $(5,929) | | $54,887 |
11. INCOME TAXES
The Company’s provision for income taxes during the interim reporting periods has historically been calculated by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for theeach respective reporting period. TheHowever, the Company utilized a discrete effective tax rate method, as allowed by ASC 740-270 “Income Taxes—Interim Reporting,” to calculate taxes for thethis interim reporting period (the three and six months ended June 30, 2020.March 31, 2021). The Company made this choice because it determined that because there is a high degree of uncertainty in estimating annual pretax earnings, the historical method would not provide a reliable estimate for tax expense for the three and six months ended June 30, 2020.March 31, 2021 due to a high degree of uncertainty in estimating annual pretax earnings.
For the sixthree months ended June 30, 2020,March 31, 2021, the Company's income tax expense was $708,000$21,000 compared to $313,000$512,000 for the sixthree months ended June 30, 2019.March 31, 2020. Effective tax rates were 234%-2% and 27%-298% for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. As of June 30, 2020,March 31, 2021, the Company had income tax receivables of $676,000.$1,148,000. The Company classifies interest and penalties incurred on tax payments as income tax expense.
AlthoughFor the Company had a net loss for the sixthree months ended June 30,March 31, 2021 and the year ended in 2020, the Company recognized income tax expense primarily as a result of permanent differences related to Section 162(m) limitations and discrete tax expense associated with stock compensation. The Section 162(m) compensation deduction limitations occurred as a result of changes in tax law arising from the 2017 Tax Cuts Jobs Act, which did not impact the Company until this year.Act. The discrete item was triggered when stock grants were issued to participants at a price less than the original grant price, causing a deferred tax shortfall. The shortfall recognized during the quarter represents the reversal of excess deferred tax assets recognized in prior periods. The recognition of the shortfall is not anticipated to have an impact on the Company's current income tax payable.
12. COMMITMENTS AND CONTINGENCIES
Water Contracts
The Company has secured water contracts that are encumbered by the Company's land, is subject tothese water contracts withrequire minimum annual payments, for which $10,027,000$10,194,000 is expected to be paid in 2020.total for 2021. As of June 30, 2020,March 31, 2021, the Company has paid $8,464,000$7,029,000 for its water contracts. These estimated water contract payments consist of SWP contracts with WRMWSD, TCWD, Tulare Lake Basin, Dudley-Ridge, and the Nickel water contract. The SWP contracts run through 2035 and the Nickel water contract runs through 2044, with an option to extend an additional 35 years. Contractual obligations for future water payments were $260,601,000$269,117,000 as of June 30, 2020.
March 31, 2021.
Conservancy Payments
The Company is obligated to make payments of approximately $800,000 per year through 2021 to the Tejon Ranch Conservancy, as prescribed in the 2008 Conservation Agreement entered into with five major environmental organizations in 2008.organizations. Advances to
the Tejon Ranch Conservancy are dependent on the occurrence of certain events and their timing and are therefore subject to
change in amount and period. TheseAll amounts paid will beare capitalized inas real estate development costs for the Centennial, Grapevine and Mountain Village, or MV, projects.
Contracts
The Company exited a consulting contract during the second quarter of 2014 related to the Grapevine Development, or Grapevine project, and is obligated to pay an earned incentive fee at the time of its successful receipt of litigated project entitlements and at a value measurement date five-years after litigated entitlements have been achieved for Grapevine. The final amount of the incentive feesfee will not be finalized until the future payment dates. The Company believes as of June 30, 2020 thatMarch 31, 2021, the net savings resulting from exiting the contract overduring this future time period will more than offset the incentive payment costs.
Community Facilities Districts
The Tejon Ranch Public Facilities Financing Authority, or TRPFFA, is a joint powers authority formed by Kern County and TCWD to finance public infrastructure within the Company’s Kern County developments. For the development of the Tejon Ranch Commerce Center, or TRCC, TRPFFA has created 2 Community Facilities Districts, or CFDs: the West CFD and the East CFD. The West CFD has placed liens on 420 acres of the Company’s land to secure payment of special taxes related to $28,620,000 of bond debt sold by TRPFFA for TRCC-West. The East CFD has placed liens on 1,931 acres of the Company’s land to secure payments of special taxes related to $55,000,000$75,965,000 of bond debt sold by TRPFFA for TRCC-East. At TRCC-West, the West CFD has 0 additional bond debt approved for issuance. At TRCC-East, the East CFD has approximately $65,000,000$44,035,000 of additional bond debt authorized by TRPFFA that can be sold in the future.
In connection with the sale of the bonds, there is a standby letter of credit for $4,468,000$4,393,000 related to the issuance of East CFD bonds. The standby letter of credit is in place to provide additional credit enhancement and cover approximately two years' worth of interest on the outstanding bonds. This letter of credit will not be drawn upon unless the Company, as the largest landowner in the CFD, fails to make its property tax payments. The Company believes that the letter of credit will never be drawn upon. The letter of credit is for two years and will be renewed in two-year intervals as necessary. The annual cost related to the letter of credit is approximately $68,000.
The Company is obligated, as a landowner in each CFD, to pay its share of the special taxes assessed each year. The secured lands include both the TRCC-West and TRCC-East developments. Proceeds from the sale of West CFD bonds went to reimburse the Company for public infrastructure costs related to the TRCC-West development. At June 30, 2020,As of March 31, 2021, there were 0 additional improvement funds remaining from the West CFD bonds. There are no$15,783,000 of additional improvement funds remaining within the East CFD bonds for reimbursement of public infrastructure costs during future years. During 2020,fiscal 2021, the Company expects to pay approximately $2,598,000$2,473,000 in special taxes. As development continues to occur at TRCC, new owners of land and new lease tenants, through triple net leases, will bear an increasing portion of the assessed special tax. This amount could change in the future based on the amount of bonds outstanding and the amount of taxes paid by others. The assessment of each individual property sold or leased is not determinable at this time because it is based on the current tax rate and the assessed value of the property at the time of sale or on its assessed value at the time it is leased to a third-party. Accordingly, the Company was not required to recognize an obligation at June 30, 2020.on March 31, 2021.
Tehachapi Uplands Multiple Species Habitat Conservation Plan Litigation
In July 2014, the Company received a copy of a Notice of Intent to Sue, dated July 17, 2014, indicating that the Center for Biological Diversity, or CBD, the Wishtoyo Foundation and Dee Dominguez (collectively the TUMSHCP Plaintiffs) intended to initiate a lawsuit against the U.S. Fish and Wildlife Service, or USFWS, challenging USFWS's approval of the Company's Tehachapi Uplands Multiple Species Habitat Conservation Plan, or TUMSHCP, and USFWS's issuance of an Incidental Take Permit, or ITP, for the take of federally listed species. The TUMSHCP approval and ITP issuance by the USFWS occurred in 2013. These approvals authorize, among other things, the removal of California condor habitat associated with the Company's potential future development of MV.
On April 25, 2019, the TUMSHCP Plaintiffs filed suit against the USFWS in the U.S. District Court for the Central District of California in Los Angeles (Case No. 2:19-CV-3322) (the TUMSHCP Suit). The Company was not initially named as a party in the TUMSHCP Suit and brought a motion to intervene, which the court granted. The TUMSHCP Suit seeks to invalidate the TUMSHCP as it pertains to the protection of the California condor (an endangered species), as well as the ITP.
The primary allegations in the TUMSHCP Suit are that California condors or their habitat are “Traditional Cultural Properties” within the meaning of the National Historic Preservation Act (NHPA), that the USFWS failed to take into account the impact of the TUMSHCP and ITP on these “Traditional Cultural Properties” and failed to adequately consult with affected Native American tribes or their representatives with respect to these “Traditional Cultural Properties.”
Management considers the allegations in the TUMSHCP Suit to be beyond the scope of the law and regulations referenced in the TUMSHCP Suit and believes that the issues raised by the TUMSHCP Plaintiffs were adequately addressed by USFWS during the consultation process with Native American tribes. The Company is supportinghas supported USFWS's efforts to vigorously defend this matter. On October 30, 2019, the TUMSCHCP Plaintiffs filed an amended complaint after the court previously granted the Company’s motion to dismiss the TUMSCHP Suit on the basis that the TUMSCHP Plaintiffs lacked standing. The Company broughtmatter during this litigation.
In a second motion to dismiss on the same basis, which the court denied on December 18, 2019. In its December 18, 2019 ruling, the court ordered that the parties proceed to bring motions for summary judgment on the question of whether the USFWS correctly determined that the California condor is not a “Traditional Cultural Property” under the NHPA. As ofIn response to this order, both the date of this report,TUMSCHP Plaintiffs and the USFWS hasand the Company filed cross-motions for summary judgment.
On December 4, 2020, the record ofcourt issued an order denying, in its decision in order to adjudicate that question. Onceentirety, the record is deemed complete, the parties will comply with the court’s order by bringing one or moreTUMSHCP Plaintiffs’ motions for summary judgment to adjudicate the question presented by the court.
The TUMSHCP Plaintiffs had previously raised essentially the same arguments regarding the Native American consultation processand granted, in their entirety, USFWS and the California condor in an earlier stateCompany’s motions for summary judgment. On December 18, 2020, the Company brought a motion to recover attorneys’ fees and costs, as the prevailing party, against the TUMSCHP Plaintiffs.
On February 2, 2021, the court litigation. In that litigation,denied the Californiafee motion. Following the court’s ruling on the fee motion, on February 2, 2021, Plaintiffs notified the court of their intent to appeal the court’s ruling on their claims. On April 2, 2021, the Ninth Circuit Court of Appeal rejectedissued a revised briefing schedule that requires opening and responsory briefs to be filed in May and June 2021. The appeal will be heard by the TUMSHCP Plaintiffs’ arguments as lacking merit in a decision issued on April 25, 2012. See Center for Biological Diversity, et al. v. Kern County, 2012 WL 1417682 (Case No. F061908).court following briefing, and the court will rule following the hearing.
As of June 30, 2020,March 31, 2021, the Company believes the TUMSHCP Suit does not impede its ability to start or complete the development of MV.
National Cement
The Company leases land to National Cement Company of California Inc., or National, for the purpose of manufacturing Portland cement from limestone deposits on the leased acreage. The California Regional Water Quality Control Board, or RWQCB, for the Lahontan Region issued orders in the late 1990s with respect to environmental conditions on the property currently leased to National.
The Company's former tenant Lafarge Corporation, or Lafarge, and current tenant National, continue to remediate these environmental conditions consistent with the RWQCB orders.
TheAs of March 31, 2021, the Company is not aware of any failure by Lafarge or National to comply with directives of the RWQCB. Under current and prior leases, National and Lafarge are obligated to indemnify the Company for costs and liabilities arising out of their use of the leased premises. The remediation of environmental conditions is included within the scope of the National or Lafarge indemnity obligations. If the Company were required to remediate the environmental conditions at its own cost, it is unlikely that the amount of any such expenditure by the Company would be material and there is no reasonable likelihood of continuing risk from this matter.
Antelope Valley Groundwater Cases
On November 29, 2004, a conglomerate of public water suppliers filed a cross-complaint in the Los Angeles Superior Court against landowners and others with interest in the groundwater basin within the Antelope Valley (including the Company) seeking a judicial determination of the rights to groundwater within the Antelope Valley basin, including the groundwater underlying the Company’s land near the Centennial project. Four phases of a multi-phase trial have been completed. Upon completion of the third phase, the court ruled that the groundwater basin was in overdraft and established a current total sustainable yield. The fourth phase of trial occurred in the first half of 2013 and resulted in confirmation of each party’s groundwater pumping for 2011 and 2012. The fifth phase of the trial commenced in February 2014 and concerned 1) whether the United States has a federal reserved water right to basin groundwater, and 2) the rights to return flows from imported water. The court heard evidence on the federal reserved right but continued the trial on the return flow issues while most of the parties to the adjudication discussed a settlement, including rights to return flows. In February 2015, more than 140 parties representing more than 99% of the current water use within the adjudication boundary agreed to a settlement. On March 4, 2015, the settling parties, including Tejon,the Company, submitted a Stipulation for Entry of Judgment and Physical Solution to the court for approval. On December 23, 2015, the court entered judgment approving the Stipulation for Entry of Judgment and Physical Solution, or the Judgment. The Company’s water supply plan for the Centennial project anticipated reliance on, among other sources, a certain quantity of groundwater underlying the Company’s lands in the Antelope Valley. The Company’s allocation in the Judgment is consistent with that amount. Prior to the Judgment becoming final, on February 19 and 22, 2016, several parties, including the Willis Class and(Willis), Phelan Pinon Hills Community Services District (Phelan), and Charles Tapia (Tapia) filed notices of appeal from the Judgment.Judgment (collectively, the Phelan Appeal). The Phelan Appeal has beenwas transferred from the Count of Appeal, Fourth Appellate District of California to the Court of Appeal, Fifth Appellate District.District of California, or the Fifth District Court of Appeal.
Appellate briefing beganOn December 9, 2020, the Fifth District Court of Appeal affirmed the Judgment as to the Phelan appeal, and the decision became final in 2019January 2021. On March 16, 2021, the Fifth District Court of Appeal issued two decisions affirming the Judgment as to both Willis and is scheduledTapia. The Tapia decision will become final within about 70 days from the date of issuance absent a petition to continue into the third quarter of 2020. NotwithstandingCalifornia Supreme Court. Willis filed a Petition for Rehearing which was denied April 6, 2021. Absent a petition to the appeals,California Supreme Court the Willis decision will come final on about June 7, 2021.
Despite the ongoing Phelan Appeal, the parties, with assistance from the court, have established the Watermaster Board, hired the Watermaster Engineer and Watermaster Legal Counsel, and begun administering the physical solution consistent with the Judgment.
Summary and Status of Kern Water Bank Lawsuits
On June 3, 2010, the Central Delta and South Delta Water Agencies and several environmental groups, including CBD, collectively, the Central Delta Petitioners, filed a complaint in the Sacramento County Superior Court, or the Central Delta Action, against the California Department of Water Resources, or DWR, Kern County Water Agency, or KCWA, and a number of “real parties in interest,” including the Company and TCWD. The lawsuit challenges certain amendments to the SWP contracts that were originally approved in 1995, known as the Monterey Amendments. The Central Delta Petitioners sought to invalidate the DWR's approval of the Monterey Amendments and also the 2010 environmental impact report, or 2010 EIR, regarding the Monterey Amendments prepared pursuant to the California Environmental Quality Act, or CEQA, pertaining to the Kern Water Bank, or KWB. Pursuant to the Monterey Amendments, DWR transferred approximately 20,000 acres in Kern County owned by DWR, or KWB property, to the KCWA.
A separate but parallel lawsuit, or Central Delta II, was also filed by the Central Delta Petitioners in Kern County Superior Court on July 2, 2010, against KCWA, also naming the Company and TCWD as real parties in interest. Central Delta II challenged the validity of the transfer of the KWB property from the KCWA to the Kern Water Bank Authority, or KWBA. The petitioners in this case alleged that (i) the transfer of the KWB property by KCWA to the KWBA was an unconstitutional gift of public funds, and (ii) the consideration for the transfer of the KWB property to the KWBA was unconscionable and illusory. This case has been stayed pending the outcome of the Central Delta Action.
In addition, another lawsuit was filed in Kern County Superior Court on June 3, 2010, by two districts adjacent to the KWB, namely Rosedale Rio Bravo and Buena Vista Water Storage Districts (collectively, the Rosedale Petitioners), asserting that the 2010 EIR did not adequately evaluate potential impacts arising from operations of the KWB, or Rosedale Action, but this lawsuit did not name the Company: it only named TCWD. TCWD has a contract right for water stored in the KWB and rights to recharge and withdraw water. This lawsuit was later moved to the Sacramento County Superior Court.
In the Central Delta Action and Rosedale Action, the trial courts concluded that the 2010 EIR for the Monterey Amendments was insufficient with regard to the EIR's evaluation of the potential impacts of the operation of the KWB, particularly on groundwater and water quality, and ruled that DWR was required to prepare a remedial EIR (which is further described below). In the Central Delta Action, the trial court also concluded that the challenges to DWR’s 1995 approval of the Monterey Amendments were barred by statutes of limitations and laches. The Central Delta Petitioners appealed the Sacramento County Superior Court Judgment, and certain real parties filed a cross-appeal. No party appealed the Kern County Superior Court Judgment in the Rosedale Action.
On November 24, 2014, the Sacramento County Superior Court in the Central Delta Action issued a writ of mandate, or 2014 Writ, that required DWR to prepare a revised EIR (described herein as the 2016 EIR because it was certified in 2016) regarding the Monterey Amendments evaluating the potential operational impacts of the KWB. The 2014 Writ, as revised by the court, required DWR to certify the 2016 EIR and file the response to the 2014 Writ by September 28, 2016. On September 20, 2016, the Director of DWR (a) certified the 2016 EIR prepared by DWR as in compliance with CEQA, (b) adopted findings, a statement of overriding considerations, and a mitigation, monitoring and reporting program as required by CEQA, (c) made a new finding pertaining to carrying out the Monterey Amendments through continued use and operation of the KWB by the KWBA, and (d) caused a notice of determination to be filed with the Office of Planning and Resources of the State of California on September 22, 2016. On September 28, 2016, DWR filed with the Sacramento County Superior Court its return to the 2014 Writ in the Central Delta Action.
On October 21, 2016, the Central Delta Petitioners and a new party, the Center for Food Safety (CFS) (collectively, the CFS Petitioners), filed a new lawsuit in Sacramento County Superior Court, (the CFS Action), against DWR and naming a number of real parties in interest, including KWBA and TCWD (but not including the Company). The CFS Action challenges DWR’s (i) certification of the 2016 EIR, (ii) compliance with the 2014 Writ and CEQA, and (iii) finding concerning the continued use and operation of the KWB by KWBA. On October 2, 2017, the Sacramento County Superior Court issued a ruling that the court shall deny the CFS petition and shall discharge the 2014 Writ. The CFS Petitioners appealed the Sacramento County Superior Court judgment denying the CFS petition. The Third Appellate District of the Court of Appeal granted DWR’s motion to consolidate the CFS Action appeal for hearing with the pending appeals in the Central Delta Action. Briefing on all of the appeals and cross-appeals is now complete. At this time, the Company anticipates having a ruling from the Court of Appeal on these consolidated appeals of the CFS Action and the Central Delta Action sometime in 2020,2021, but there is a possibility that the court’s hearing and disposition of the pending appeals could be delayed by the closure of the courts in response to the COVID-19 pandemic. To the extent there may be an adverse outcome of the claims still pending as described above, the monetary value cannot be estimated at this time.
Grapevine
On December 6, 2016, the Kern County Board of Supervisors unanimously granted entitlement approval for the Grapevine project. On January 5, 2017, the CBD and CFS, filed an action in Kern County Superior Court pursuant to CEQA against Kern County and the Kern County Board of Supervisors, or collectively, the County, concerning the County’s granting of the 2016 approvals for the Grapevine project, including certification of the final EIR (the 2017 Action). The Company was named as a real party in interest in the 2017 Action. The 2017 Action alleged that the County failed to properly follow the procedures and requirements of CEQA, including failure to identify, analyze and mitigate impacts to air quality, greenhouse gas emissions, biological resources, traffic, water supply and hydrology, growth inducing impacts, failure to adequately consider project alternatives and to provide support for the County’s findings and statement of overriding considerations in adopting the EIR and failure to adequately describe the environmental setting and project description. Petitioners sought to invalidate the County’s approval of the project and the environmental approvals and require the Company and the County to revise the environmental documentation.
On July 27, 2018, the court held a hearing on the petitioners’ claims in the 2017 Action. At that hearing, the court rejected all of petitioners’ claims raised in the litigation, except petitioners’ claims that (i) the project description was inadequate and (ii) such inadequacy resulted in aspects of certain environmental impacts being improperly analyzed. As to the claims described in “(i)” and “(ii)” in the foregoing sentence, the court determined that the EIR was inadequate. In that regard, the court determined the Grapevine project description contained in the EIR allowed development to occur in the time and manner determined by the real parties in interest and, as a consequence, such development flexibility could result in the project’s internal capture rate, or ICR, of the percent of vehicle trips remaining within the project actually being lower than the projected ICR levels used in the EIR and that lower ICR levels warranted supplemental traffic, air quality, greenhouse gas emissions, noise, public health and growth inducing impact analyses.
On December 11, 2018, the court in the 2017 Action ruled that portions of the EIR required corrections and supplemental environmental analysis and ordered that the County rescind the Grapevine project approvals until such supplemental environmental analysis was completed. The court issued a final judgment consistent with its ruling on February 15, 2019 and, on March 12, 2019, the County rescinded the Grapevine project approvals.
Following the County’s rescission of the Grapevine project approvals, the Company filed new applications to re-entitle the Grapevine project (the re-entitlement). The re-entitlement application involved processing project approvals that were substantively similar to the Grapevine project that was unanimously approved by the Kern County Board of Supervisors in December 2016. As part of the re-entitlement, supplemental environmental analysis was prepared to address the court’s ruling in the 2017 Action. Following a public comment and review period, the Kern County Planning Commission held a hearing on November 14, 2019 and unanimously recommended to the Kern County Board of Supervisors that it approve the re-entitlement of the Grapevine project. On December 10, 2019, the Kern County Board of Supervisors held a hearing and after considering the supplemental environmental analysis and material presented at the hearing unanimously voted to approve the re-entitlement of the Grapevine project. On January 9, 2020, the County filed a Supplemental and Final Return to Preemptory Writ of Mandate to inform the court of the re-entitlement in a manner that the County and the Company believes isbelieved was compliant with the court’s February 15, 2019 final judgment in the 2017 Action. Concurrently, the County and the Company filed a Motion for Order Discharging Writ of Mandate, which requestsrequested that the court determine that the re-entitlement compliescomplied with the court’s February 15, 2019 final judgment in the 2017 Action (the Motion for Order to Discharge 2017 Writ of Mandate). A hearing was held on February 14, 2020 for this motion and is further summarized below.
On January 10, 2020, CBD filed a new and separate action in Kern County Superior Court pursuant to CEQA against the County, concerning the County’s approval of the December 2019 re-entitlement, including certification of the final EIR (the 2020 Action). The Company iswas named as real party in interest in the 2020 Action. The 2020 Action allegesalleged that the County failed to properly follow the procedures and requirements of CEQA with respect to the re-entitlement of the Grapevine project, including failure to identify, analyze and mitigate impacts to air quality, greenhouse gas emissions, biological resources, public health, and traffic, and failed to provide support for the County’s findings and statement of overriding considerations in adopting the EIR. CBD seekssought to invalidate the County’s approval of the re-entitlement, the environmental approvals for the re-entitlement and require the Company and the County to revise the environmental documentation. The Company intends to vigorously defend the re-entitlement of the Grapevine project against claims made in the 2020 Action. On January 22, 2020, the Company and County filed a demurrer and motion to strike the claims in the 2020 Action on the basis that the claims brought by CBD must bewere resolved by the court in the 2017 action,Action, pursuant to the final judgment issued in the 2017 Action. The Company and County’s motion described in the previous sentence also included an alternative request that the court consolidate CBD’s claims in the 2020 Action with its disposition of any remaining matters relating to the 2017 Action. A hearing on these motions filed in the 2020 Action and on the Motion for Order Discharging Writ of Mandate (described above and relating to the 2017 Action) was held on February 14, 2020. At the hearing, the court granted the Company and County’s request to consolidate the 2020 Action with its adjudication of the Company and County’s compliance with the writ of mandate issued by the Court in the 2017 Action. The court denied, without prejudice, the Company’sCompany and County’s motion to discharge the writ in the 2017 Action and their demurrer and motion to strike the claims in the 2020 Action, but the court further ruled that the Company and County could re-assert these arguments at a later date once additional evidence was before the court.
As of the date of this filing, the County has certified and lodged the administrative record for the 2020 Action. The court has set
On January 22, 2021, as the court conducted a hearing date foron the 2020 Action and the Motion for Order to Discharge the 2017 Writ of Mandate. On June 8, 2020At the January 22nd hearing, the court ruled in favor of the Company and the County on all issues: (1) granting the County’s Motion for Order to Discharge the 2017 Writ of Mandate and Company filed their responsive pleadings(2) rejecting each and every claim made by CBD in the 2020 Action.
The court entered a final judgment reflecting its ruling in favor of the Company and the County on March 22, 2021. CBD may appeal the court’s decision prior to May 24, 2021.
Centennial
On April 30, 2019, the Los Angeles County Board of Supervisors granted final entitlement approval for the Centennial project. On May 15, 2019, Climate Resolve filed an action in Los Angeles Superior Court (the Climate Resolve Action), pursuant to CEQA and the California Planning and Zoning Law, against the County of Los Angeles and the Los Angeles County Board of Supervisors (collectively, LA County) concerning LA County’s granting of approvals for the Centennial project, including certification of the final environmental impact report and related findings (Centennial EIR); approval of associated general plan amendments; adoption of associated zoning; adoption of the Centennial Specific Plan; approval of a subdivision map for financing purposes; and adoption of a development agreement, among other approvals (collectively, the Centennial Approvals). Separately, on May 28, 2019, CBD and the California Native Plant Society (CNPS) filed an action in Los Angeles County Superior Court (the CBD/CNPS Action) against LA County; like the Climate Resolve Action, the CBD/CNPS Action also challenges the Centennial Approvals. The Company, its wholly owned subsidiary Tejon Ranchcorp, and Centennial Founders, LLC are named as real parties-in-interest in both the Climate Resolve Action and the CBD/CNPS Action.
The Climate Resolve Action and the CBD/CNPS Action collectively allege that LA County failed to properly follow the procedures and requirements of CEQA and the California Planning and Zoning Law. The Climate Resolve Action and the CBD/CNPS Action have been deemed “related” and have been consolidated for adjudication before the judge presiding over the Climate Resolve Action. As of the date of this filing, there have been no substantive hearings on this matter. However, on February 19, 2020, following a status conference, the court set September 30, 2020 as the hearing date for both the CBD/CNPS Action and the Climate Resolve Action. On June 19, 2020, LA County and the real parties in interest filed their responsive pleadings. The Climate Resolve Action and CBD/CNPS Action seek to invalidate the Centennial Approvals and require LA County to revise the environmental documentation related to the Centennial project. The court held three consolidated hearings for the CBD/CNPS Action and Climate Resolve Action on September 30, 2020, November 13, 2020, and January 8, 2021. On April 5, 2021 the court issued its decision denying the petition for writ of mandate by CBD/CNPS and granting the petition for writ of mandate filed by Climate Resolve. In granting Climate Resolve’s petition, the court found three specific areas where the EIR for the project was lacking. The court ruled that California’s Cap-and-Trade Program cannot be used as a compliance pathway for mitigating greenhouse gas (GHG) impacts for the project and therefore further ruled that additional analysis will be required related to all feasible mitigation of GHG impacts. The court also found that the EIR must provide additional analysis and explanation of how wildland fire risk on lands outside of the project site, posed by on-site ignition sources, is mitigated to less than significant. On April 19, 2021 CBD filed a motion for reconsideration with the court on the denial of their petition for writ of mandate. The hearing on this motion is scheduled for August 13, 2021. As of the date of this report, final judgement has not yet been issued by the court for either the CBD/CNPS or Climate Resolve actions. Once final judgements are entered, appellate litigation may follow.
Conservancy
On December 2, 2020, conservation groups filed an action against the Company in Kern County Superior Court, alleging that the Company breached its obligation under the Tejon Ranch Conservation and Land Use Agreement (or the “RWA”) by not making a payment for Q4 2020 to the Tejon Ranch Conservancy (or the “Conservancy”) – a non-profit organization created under the RWA to oversee conservation of portions of Tejon Ranch.
Pursuant to the terms of the RWA, the Company deposited the Q4 2020 payment to the Conservancy into a third-party escrow account pending a determination of the Company’s disputes with the Conservancy. The Company also deposited the payment for Q1 2021 and Q2 2021 into escrow. On January 25, 2021 in response to an objection to the complaint by the Company, a First Amended Complaint was filed adding the Tejon Ranch Conservancy as a party to the action.
As of the date of this report, the Company believes it has performed all its obligations under the RWA and has withheld the escrowed payments based on its belief that the Conservancy and other signatories to the RWA have violated the terms of the RWA. The Company will vigorously defend the action and does not believe that the resolution of the action will result in a liability to the Company beyond the costs associated with defending the action and the Company’s escrow deposits which are included in the Company’s annual budgets and a possibility that the Company be required to pay plaintiffs' cost of suit.
Proceedings Incidental to Business
From time to time, the Company is involved in other proceedings incidental to its business, including actions relating to employee claims, real estate disputes, contractor disputes and grievance hearings before labor regulatory agencies.
The outcome of these other proceedings is not predictable. However, based on current circumstances, the Company does not believe that the ultimate resolution of these other proceedings will have a material adverse effect on the Company's financial position, results of operations or cash flows, either individually or in the aggregate.
13. RETIREMENT PLANS
The Company sponsors a defined benefit retirement plan, or Benefit Plan, that covers eligible employees hired prior to February 1, 2007. The benefits are based on years of service and the employee’s five-year final average salary. Contributions are intended to provide for benefits attributable to service both to date and expected to be provided in the future. The Company funds the plan in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). In April 2017, the Company froze the Benefit Plan as it relates to future benefit accruals for participants. The Company plansexpects to contribute $165,000 to the Benefit Plan in 2020.2021.
Benefit Plan assets consist of equity, debt and short-term money market investment funds. The Benefit Plan’s current investment policy changed during the third quarter of 2018. The policy's strategy seeks to minimize the volatility of the funding ratio. This objective will result in a prescribed asset mix between "return seeking" assets (e.g., stocks) and a bond portfolio (e.g., long duration bonds) according to a pre-determined customized investment strategy based on the Benefit Plan's funded status as the primary input. This path will be used as a reference point as to the mix of assets, which by design will de-emphasize the return seeking portion as the funded status improves. At June 30,March 31, 2021, the investment mix was approximately 35% equity, 64% debt, and 1% money market funds. At December 31, 2020, the investment mix was approximately 65% equity, 34% debt, and 1% money market funds. At December 31, 2019, the investment mix was approximately 66% equity, 33% debt, and 1% money market funds. Equity investments comprise of value, growth, large cap, small cap and international stock funds. Debt investments consist of U.S. Treasury securities and investment grade corporate debt. A weighted average discount rate of 3.2%2.5% was used in determining the net periodic pension cost for 2020, along with the pension benefit obligation for 2019.fiscal 2021 and 2020. The assumed expected long-term rate of return on plan assets is 7.3% for both 2020fiscal 2021 and 2019.2020. The long-term rate of return on Benefit Plan assets is based on the historical returns within the plan and expectations for future returns.
Total pension and retirement earnings for the Benefit Plan was as follows:
|
| | | | | | | |
| Six Months Ended June 30, |
($ in thousands) | 2020 | | 2019 |
Earnings (cost) components: | | | |
Interest cost | $ | (170 | ) | | $ | (194 | ) |
Expected return on plan assets | 322 |
| | 262 |
|
Net amortization and deferral | (34 | ) | | (38 | ) |
Total net periodic pension earnings | $ | 118 |
| | $ | 30 |
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
($ in thousands) | 2021 | | 2020 |
Earnings (cost) components: | | | |
| | | |
Interest cost | $ | (73) | | | $ | (85) | |
Expected return on plan assets | 188 | | | 161 | |
Net amortization and deferral | (18) | | | (17) | |
Total net periodic pension earnings | $ | 97 | | | $ | 59 | |
The Company has a Supplemental Executive Retirement Plan, or SERP, to restore to executives designated by the Compensation Committee of the Board of Directors the full benefits under the pension plan that would otherwise be restricted by certain limitations now imposed under the Internal Revenue Code. The SERP is currently unfunded. In April 2017, the Company froze the SERP as it relates to the accrual of additional benefits.
The pension and retirement expense for the SERP was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
($ in thousands) | 2021 | | 2020 |
Cost components: | | | |
Interest cost | $ | (41) | | | $ | (57) | |
Net amortization and other | (31) | | | (22) | |
Total net periodic pension expense | $ | (72) | | | $ | (79) | |
|
| | | | | | | |
| Six Months Ended June 30, |
($ in thousands) | 2020 | | 2019 |
Cost components: | | | |
Interest cost | $ | (114 | ) | | $ | (152 | ) |
Net amortization and other | (44 | ) | | (32 | ) |
Total net periodic pension expense | $ | (158 | ) | | $ | (184 | ) |
14. REPORTING SEGMENTS AND RELATED INFORMATION
The Company currently operates in 5 reporting segments: commercial/industrial real estate development, resort/residential real estate development, mineral resources, farming, and ranch operations. For further details of the revenue components within each reporting segment, see Results of Operations by Segment in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations".Operations."
Real estate - Commercial/Industrial
Commercial/Industrial revenue consistsreal estate development segment revenues consist of land sale revenues, leases of land andand/or building leasesspace to tenants at the Company's commercial retail and industrial developments, base and percentage rents from the PEF power plant lease, communication tower leases,rents, land sales, and payments from easement leases. Refer to Note 15 for discussion over unconsolidated joint ventures. The following table summarizes revenues, expenses and operating income from this segment for the periods ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
($ in thousands) | 2021 | | 2020 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Commercial/industrial revenues | $ | 2,228 | | | $ | 2,320 | | | | | |
Equity in earnings of unconsolidated joint ventures | (59) | | | 1,355 | | | | | |
Commercial/industrial revenues and equity in earnings of unconsolidated joint ventures | 2,169 | | | 3,675 | | | | | |
Commercial/industrial expenses | 1,552 | | | 1,931 | | | | | |
Operating results from commercial/industrial and unconsolidated joint ventures | $ | 617 | | | $ | 1,744 | | | | | |
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Commercial/industrial revenues | $ | 2,114 |
| | $ | 6,595 |
| | $ | 4,434 |
| | $ | 9,421 |
|
Equity in earnings of unconsolidated joint ventures | 1,181 |
| | 1,971 |
| | 2,536 |
| | 2,847 |
|
Commercial/industrial revenues and equity in earnings of unconsolidated joint ventures | 3,295 |
| | 8,566 |
| | 6,970 |
| | 12,268 |
|
Commercial/industrial expenses | 1,747 |
| | 4,593 |
| | 3,678 |
| | 6,385 |
|
Operating results from commercial/industrial and unconsolidated joint ventures | $ | 1,548 |
| | $ | 3,973 |
| | $ | 3,292 |
| | $ | 5,883 |
|
Real Estate - Resort/Residential
The Resort/Residential real estate development segment is actively involved in pursuing land entitlement and development processprocesses both internally and through joint ventures. The segment incurs costs and expenses related to land management activities on land held for future development, but currently generates 0 revenue. The segment generated losses of $326,000$553,000 and $642,000$626,000 for the three months ended June 30,March 31, 2021 and 2020, and 2019, and $952,000 and $1,290,000 for the six months ended June 30, 2020 and 2019, respectively.
Mineral Resources
The Mineral Resources segment receivesrevenues include water sales and oil and mineral royalties from the exploration and development companies that extract or mine the natural resources from the Company's land and receives revenue from water sales.land. The following table summarizes revenues, expenses and operating results from this segment for the periods ended:
| | | | Three Months Ended March 31, | |
($ in thousands) | | ($ in thousands) | 2021 | | 2020 | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
($ in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
| Mineral resources revenues | $ | 1,776 |
| | $ | 660 |
| | $ | 7,954 |
| | $ | 6,792 |
| Mineral resources revenues | $ | 7,176 | | | $ | 6,178 | | |
Mineral resources expenses | 714 |
| | 598 |
| | 4,592 |
| | 4,430 |
| Mineral resources expenses | 5,047 | | | 3,878 | | |
Operating results from mineral resources | $ | 1,062 |
| | $ | 62 |
| | $ | 3,362 |
| | $ | 2,362 |
| Operating results from mineral resources | $ | 2,129 | | | $ | 2,300 | | |
Farming
The Farming segment revenues include the sale of almonds, pistachios, wine grapes, and hay. The following table summarizes revenues, expenses and operating results from this segment for the periods ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
($ in thousands) | 2021 | | 2020 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Farming revenues | $ | 607 | | | $ | 952 | | | | | |
Farming expenses | 1,478 | | | 1,702 | | | | | |
Operating results from farming | $ | (871) | | | $ | (750) | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2020 |
| 2019 | | 2020 | | 2019 |
Farming revenues | $ | 209 |
| | $ | 886 |
| | $ | 1,161 |
| | $ | 1,701 |
|
Farming expenses | 1,099 |
| | 825 |
| | 2,801 |
| | 2,423 |
|
Operating results from farming | $ | (890 | ) | | $ | 61 |
| | $ | (1,640 | ) | | $ | (722 | ) |
Ranch Operations
The Ranch Operations segment consists of game management revenues and ancillary land uses such as grazing leases.leases and on-location filming. The following table summarizes revenues, expenses and operating results from this segment for the periods ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
($ in thousands) | 2021 | | 2020 | | | | |
| | | | | | | |
| | | | | | | |
Ranch operations revenues | $ | 1,043 | | | $ | 863 | | | | | |
Ranch operations expenses | 1,187 | | | 1,406 | | | | | |
Operating results from ranch operations | $ | (144) | | | $ | (543) | | | | | |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Ranch operations revenues | $ | 676 |
| | $ | 805 |
| | $ | 1,539 |
| | $ | 1,694 |
|
Ranch operations expenses | 1,178 |
| | 1,393 |
| | 2,584 |
| | 2,743 |
|
Operating results from ranch operations | $ | (502 | ) | | $ | (588 | ) | | $ | (1,045 | ) | | $ | (1,049 | ) |
15. INVESTMENT IN UNCONSOLIDATED AND CONSOLIDATED JOINT VENTURES
The Company maintains investments in joint ventures. The Company accounts for its investments in unconsolidated joint ventures using the equity method of accounting unless the venture is a variable interest entity, or VIE, and meets the requirements for consolidation. The Company’s investment in its unconsolidated joint ventures as of June 30, 2020March 31, 2021 was $41,246,000. Equity in earnings from$33,403,000. The unconsolidated joint ventures was $2,536,000generated a $59,000 loss for the sixthree months ended June 30, 2020.March 31, 2021. The unconsolidated joint ventures have not been consolidated as of June 30, 2020,March 31, 2021, because the Company does not control the investments. The Company’s current joint ventures are as follows:
•Petro Travel Plaza Holdings LLC – Petro Travel Plaza Holdings LLC, Petro, is an unconsolidated joint venture with TravelCenters of America that develops and manages travel plazas, gas stations, convenience stores, and fast foodfast-food restaurants throughout TRCC. The Company has 50% of the voting rights but participates in 60% of all profits and losses. The Company does not control the investment due to having only 50% of the voting rights. The Company's partner is the managing partner and performs all of the day-to-day operations and has significant decision-making authority over key business components such as fuel inventory and pricing at the facilities. The Company's investment in this joint venture was $26,618,000$23,504,000 as of June 30, 2020.March 31, 2021.
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◦ | On April 17, 2020, the Company sold the land and a building formerly leased to a tenant operating a fast food restaurant, to Petro. The Company received cash proceeds of $2,000,000 from Petro, and realized a gain of $1,333,000 under ASC 610-20, "Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets." |
◦On April 17, 2020, the Company sold land and a building formerly leased to a tenant operating a fast food restaurant, to Petro. The Company received cash proceeds of $2,000,000 from Petro, and realized a gain of $1,331,000 under ASC 610-20, "Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets."
•Majestic Realty Co. – Majestic Realty Co. (Majestic) is a privately-held developer and owner of master planned business parks throughout the United States. The Company has formed 34 50/50 joint ventures with Majestic to acquire, develop, manage, and operate industrial real estate at TRCC. The partners have equal voting rights and equally share in the profit and loss of the joint ventures. The Company and Majestic guarantee the performance of all outstanding debt.
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◦ | In November 2018, TRC-MRC 3, LLC was formed to pursue the development, construction, leasing, and management of a 579,040 square foot industrial building located within TRCC-East. TRC-MRC 3, LLC qualified as a VIE from inception, but the Company is not the primary beneficiary; therefore, it does not consolidate TRC-MRC 3, LLC in its financial statements. The construction of the building was completed in the fourth quarter of 2019, and the Company has leased 100% of the rentable space to two tenants. In March 2019, the joint venture entered into a promissory note with a financial institution to finance the construction of the building. The note matures on May 1, 2030 and had an outstanding principal balance of $35,785,000 as of June 30, 2020. On April 1, 2019, the Company contributed land with a fair value of $5,854,000 to TRC-MRC 3, LLC in accordance with the limited liability agreement. The Company's investment in this joint venture was $6,081,000 as of June 30, 2020. |
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◦ | In August 2016, the Company partnered with Majestic to form TRC-MRC 2, LLC to acquire, lease, and maintain a fully occupied warehouse at TRCC-West. The partnership acquired the 651,909 square foot building for $24,773,000, which was largely financed through a promissory note guaranteed by both partners. The promissory note was refinanced on June 1, 2018 with a $25,240,000 promissory note. The note matures on July 1, 2028 and has an outstanding principal balance of $24,165,000 as of June 30, 2020. Since its inception, the Company has received excess distributions resulting in a deficit balance of $2,210,000. In accordance with the applicable accounting guidance, the Company reclassified excess distributions to Other Liabilities within the Consolidated Balance Sheets. The Company will continue to record equity in earnings as a debit to the investment account and if it were to become positive, the Company would reclassify the liability to an asset. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), the Company will immediately recognize the liability as income. |
◦On March 25, 2021, TRC-MRC4 LLC was formed to pursue the development, construction, leasing, and management of a 629,274 square foot industrial building located within TRCC-East. Construction of the building is schedule to begin in 2021 with completion targeted in 2022. The joint venture is in the process of securing a construction loan to finance the construction of the building. The Company has zero investment in the joint venture as of March 31, 2021 as no contributions by either partner have yet been made to the joint venture.
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◦ | In September 2016, TRC-MRC 1, LLC was formed to develop and operate an approximately 480,480 square foot industrial building at TRCC-East that is 100% leased. Since its inception, the Company has received excess distributions resulting in a deficit balance of $474,000. In accordance with the applicable accounting guidance, the Company reclassified excess distributions to Other Liabilities within the Consolidated Balance Sheets. The Company will continue to record equity in earnings as a debit to the investment account and if it were to become positive, the Company will reclassify the liability to an asset. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), the Company will immediately recognize the liability as income. The joint venture refinanced its construction loan in December 2018 with a mortgage loan. The original balance of the mortgage loan was $25,030,000, of which $24,267,000 was outstanding as of June 30, 2020. |
◦In November 2018, TRC-MRC 3, LLC was formed to pursue the development, construction, leasing, and management of a 579,040 square foot industrial building located within TRCC-East. TRC-MRC 3, LLC qualified as a VIE from inception, but the Company is not the primary beneficiary; therefore, it does not consolidate TRC-MRC 3, LLC in its financial statements. The construction of the building was completed in the fourth quarter of 2019, and the joint venture has leased 100% of the rentable space to 2 tenants. In March 2019, the joint venture entered into a promissory note with a financial institution to finance the construction of the building. The note matures on May 1, 2030 and had an outstanding principal balance of $35,785,000 as of March 31, 2021. On April 1, 2019, the Company contributed land with a fair value of $5,854,000 to TRC-MRC 3, LLC in accordance with the limited liability agreement. The Company's investment in this joint venture was $1,348,000 as of March 31, 2021.
◦In August 2016, the Company partnered with Majestic to form TRC-MRC 2, LLC to acquire, lease, and maintain a fully occupied warehouse at TRCC-West. The partnership acquired the 651,909 square foot building for $24,773,000, which was largely financed through a promissory note guaranteed by both partners. The promissory note was refinanced on June 1, 2018 with a $25,240,000 promissory note. The note matures on July 1, 2028 and has an outstanding principal balance of $23,718,000 as of March 31, 2021. Since its inception, the Company has received excess distributions resulting in a deficit balance in its investment of $1,874,000. In accordance with the applicable accounting guidance, the Company reclassified excess distributions to Other Liabilities within the Consolidated Balance Sheets. The Company will continue to record equity in earnings as a debit to the investment account and if it were to become positive, the Company would reclassify the liability to an asset. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), the Company will immediately recognize the liability as income.
◦In September 2016, TRC-MRC 1, LLC was formed to develop and operate an approximately 480,480 square foot industrial building at TRCC-East that is 100% leased. Since its inception, the Company has received excess distributions resulting in a deficit balance in its investment of $1,251,000. In accordance with the applicable accounting guidance, the Company reclassified excess distributions to Other Liabilities within the Consolidated Balance Sheets. The Company will continue to record equity in earnings as a debit to the investment account and if it were to become positive, the Company will reclassify the liability to an asset. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), the Company will immediately recognize the liability as income. The joint venture refinanced its construction loan in December 2018 with a mortgage loan. The original balance of the mortgage loan was $25,030,000, of which $23,841,000 was outstanding as of March 31, 2021.
•Rockefeller Joint Ventures – The Company has 32 active joint ventures with Rockefeller Group Development Corporation, or Rockefeller. At June 30, 2020,March 31, 2021, the Company’s combined equity investment balance in these 32 joint ventures was $8,547,000.$8,551,000.
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◦ | NaN joint ventures are for the development of buildings on approximately 91 acres of land and are part of an agreement for the potential development of up to 500 acres of land in TRCC. The Company owns a 50% interest in each of the joint ventures. |
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▪ | The Five West Parcel LLC joint venture owned and leased a 606,000 square foot building, the joint venture's primary asset, to Dollar General until the building was sold to a third party in November 2019 for a purchase price of $29,088,000, realizing a gain of $17,537,000. The outstanding term loan of the joint venture was paid off upon the sale. |
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▪ | The second of these joint ventures, 18-19 West LLC, was formed in August 2009 through the contribution of 61.5 acres of land by the Company that is being held for future development. The Company's 18-19 West LLC joint venture is contracted with the third-party who purchased the Five West building and land (noted above), to purchase lots 18 and 19 at a price of $13.8 million through the option period ending May 21, 2021. If the option is extended to November 21, 2021, the price increases to $15.2 million. The land option expires in the fourth quarter of 2021. Both of these joint ventures are being accounted for under the equity method due to both members having significant participating rights in the management of the ventures. |
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◦ | The third joint venture is the TRCC/Rock Outlet Center LLC joint venture that was formed during the second quarter of 2013 to develop, own, and manage a net leasable 326,000 square foot outlet center on land at TRCC-East. The cost of the outlet center was approximately $87,000,000 and was funded through a construction loan for up to 60% of the costs and the remaining 40% through equity contributions from the 2 members. The Company controls 50% of the voting interests of TRCC/Rock Outlet Center LLC; thus, it does not control the joint venture by voting interest alone. The Company is the named managing member. The managing member's responsibilities relate to the routine day-to-day activities of TRCC/Rock Outlet Center LLC. However, all operating decisions during the development period and ongoing operations, including the setting and monitoring of the budget, leasing, marketing, financing and selection of the contractor for any construction, are jointly made by both members of the joint venture. Therefore, the Company concluded that both members have significant participating rights that are sufficient to overcome the presumption of the Company controlling the joint venture through it being named the managing member. Therefore, the investment in TRCC/Rock Outlet Center LLC is being accounted for under the equity method. The TRCC/Rock Outlet Center LLC joint venture has a term note with a financial institution that matures on September 5, 2021. As of June 30, 2020, the outstanding balance of the term note was $38,027,000. The Company and Rockefeller guarantee the performance of the debt. |
◦18-19 West LLC was formed in August 2009 through the contribution of 61.5 acres of land by the Company that is being held for future development. The Company owns a 50% interest in this joint venture, and the joint venture is being accounted for under the equity method due to both members having significant participating rights in the management of the venture.
▪The 18-19 West LLC joint venture has a purchase option in place with the third-party to purchase lots 18 and 19 at a price of $13.8 million through the option period ending May 21, 2021. If the option is extended to November 21, 2021, the price increases to $15.2 million. The land option expires in the fourth quarter of 2021.
◦TRCC/Rock Outlet Center LLC was formed during 2013 to develop, own, and manage a net leasable 326,000 square foot outlet center on land at TRCC-East. The Company controls 50% of the voting interests of TRCC/Rock Outlet Center LLC; thus, it does not control the joint venture by voting interest alone. The Company is the named managing member. The managing member's responsibilities relate to the routine day-to-day activities of TRCC/Rock Outlet Center LLC. However, all operating decisions, including the setting and monitoring of the budget, leasing, marketing, financing, and selection of the contractor for any construction, are jointly made by both members of the joint venture. Therefore, the Company concluded that both members have significant participating rights that are sufficient to overcome the presumption of the Company controlling the joint venture through it being named the managing member. Therefore, the investment in TRCC/Rock Outlet Center LLC is being accounted for under the equity method. The TRCC/Rock Outlet Center LLC joint venture has a term note with a financial institution that matures on September 5, 2021. As of March 31, 2021, the outstanding balance of the term note was $34,404,000. The Company and Rockefeller guarantee the performance of the debt.
•Centennial Founders, LLC – Centennial Founders, LLC, CFL, is a joint venture that was initially formed with TRI Pointe Homes, Lewis Investment Company, Lewis), and CalAtlantic to pursue the entitlement and development of land that the Company owns in Los Angeles County. Based on the Second Amended and Restated Limited Company Agreement of CFL and the change in control and funding that resulted from the amended agreement, CFL qualified as a VIE beginning in 2009, and the Company was determined to be the primary beneficiary. As a result, CFL is consolidated into the Company's financial statements. In 2016 and 2018, Lewis Investment Company and CalAtlantic left the joint venture. The Company's partnersremaining partner, TRI Pointe Homes, retained a noncontrolling interest in the joint venture. At June 30, 2020,As of March 31, 2021, the Company owned 92.67%92.87% of CFL.
The Company’s investment balance in its unconsolidated joint ventures differs from its respective capital accounts in the respective joint ventures. The difference represents the difference between the cost basis of assets contributed by the Company and the agreed upon fair value of the assets contributed.
Unaudited condensed statement of operations for the three months ended June 30, 2020March 31, 2021 and condensed balance sheet information of the Company’s unconsolidated joint ventures as of June 30, 2020March 31, 2021 and December 31, 20192020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Joint Venture | | TRC |
($ in thousands) | Revenues | | Earnings (Loss) | | Equity in Earnings (Loss) |
Petro Travel Plaza Holdings, LLC | $ | 23,821 | | | $ | 23,213 | | | $ | 243 | | | $ | 2,539 | | | $ | 146 | | | $ | 1,523 | |
Five West Parcel, LLC | 0 | | | 0 | | | 0 | | | (1) | | | 0 | | | (1) | |
18-19 West, LLC | 2 | | | 3 | | | (35) | | | (30) | | | (17) | | | (15) | |
TRCC/Rock Outlet Center, LLC1 | 1,275 | | | 1,863 | | | (689) | | | (812) | | | (344) | | | (406) | |
TRC-MRC 1, LLC | 847 | | | 787 | | | 87 | | | 40 | | | 43 | | | 20 | |
TRC-MRC 2, LLC | 1,015 | | | 1,020 | | | 336 | | | 343 | | | 168 | | | 172 | |
TRC-MRC 3, LLC | 971 | | | 625 | | | (109) | | | 125 | | | (55) | | | 62 | |
Total | $ | 27,931 | | | $ | 27,511 | | | $ | (167) | | | $ | 2,204 | | | $ | (59) | | | $ | 1,355 | |
| | | | | | | | | | | |
Centennial Founders, LLC | $ | 129 | | | $ | 47 | | | $ | 111 | | | $ | (27) | | | Consolidated |
| | | | | | | | | | | |
(1) Revenues for TRCC/Rock Outlet Center are presented net of non-cash tenant allowance amortization of $0.3 million and $0.5 million as of March 31, 2021 and March 31, 2020, respectively. |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Joint Venture | TRC | | Joint Venture | TRC |
($ in thousands) | Assets | Debt | Equity | Equity | | Assets | Debt | Equity | Equity |
Petro Travel Plaza Holdings, LLC | $ | 78,697 | | $ | (14,653) | | $ | 59,840 | | $ | 23,504 | | | $ | 77,516 | | $ | (15,291) | | $ | 59,597 | | $ | 23,358 | |
| | | | | | | | | |
18-19 West, LLC | 4,704 | | 0 | | 4,449 | | 1,654 | | | 4,733 | | 0 | | 4,483 | | 1,672 | |
TRCC/Rock Outlet Center, LLC | 65,435 | | (34,404) | | 29,920 | | 6,897 | | | 65,475 | | (34,845) | | 29,608 | | 6,741 | |
TRC-MRC 1, LLC | 26,337 | | (23,841) | | 1,956 | | 0 | | | 26,502 | | (23,985) | | 2,059 | | 0 | |
TRC-MRC 2, LLC | 20,835 | | (23,718) | | (6,296) | | 0 | | | 20,191 | | (23,869) | | (7,741) | | 0 | |
TRC-MRC 3, LLC | 38,328 | | (35,785) | | 1,592 | | 1,348 | | | 38,502 | | (35,785) | | (2,001) | | 1,753 | |
Total | $ | 234,336 | | $ | (132,401) | | $ | 91,461 | | $ | 33,403 | | | $ | 232,919 | | $ | (133,775) | | $ | 86,005 | | $ | 33,524 | |
| | | | | | | | | |
Centennial Founders, LLC | $ | 99,149 | | $ | 0 | | $ | 98,926 | | *** | | $ | 98,898 | | $ | 0 | | $ | 98,565 | | *** |
| | | | | | | | | |
*** Centennial Founders, LLC is consolidated within the Company's financial statements. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Joint Venture | | TRC |
($ in thousands) | Revenues | | Earnings(Loss) | | Equity in Earnings(Loss) |
Petro Travel Plaza Holdings, LLC | $ | 16,701 |
| | $ | 31,394 |
| | $ | 2,430 |
| | $ | 3,923 |
| | $ | 1,458 |
| | $ | 2,354 |
|
Five West Parcel, LLC | — |
| | 736 |
| | 19 |
| | 240 |
| | 10 |
| | 120 |
|
18-19 West, LLC | 1 |
| | 4 |
| | (34 | ) | | (26 | ) | | (17 | ) | | (13 | ) |
TRCC/Rock Outlet Center, LLC1 | 929 |
| | 1,313 |
| | (1,028 | ) | | (1,334 | ) | | (514 | ) | | (667 | ) |
TRC-MRC 1, LLC | 786 |
| | 766 |
| | 29 |
| | 26 |
| | 15 |
| | 13 |
|
TRC-MRC 2, LLC | 1,003 |
| | 996 |
| | 327 |
| | 328 |
| | 163 |
| | 164 |
|
TRC-MRC 3, LLC | 731 |
| | — |
| | 131 |
| | — |
| | 66 |
| | — |
|
Equity in earnings of unconsolidated joint ventures, net | $ | 20,151 |
| | $ | 35,209 |
| | $ | 1,874 |
| | $ | 3,157 |
| | $ | 1,181 |
| | $ | 1,971 |
|
| | | | | | | | | | | |
Centennial Founders, LLC | $ | 185 |
| | $ | 114 |
| | $ | 94 |
| | $ | 28 |
| | Consolidated |
| | | | | | | | | | | |
(1) Revenues for TRCC/Rock Outlet Center are presented net of non-cash tenant allowance amortization of $0.3 million and $0.4 million as of June 30, 2020 and June 30, 2019, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Joint Venture | | TRC |
($ in thousands) | Revenues | | Earnings(Loss) | | Equity in Earnings(Loss) |
Petro Travel Plaza Holdings, LLC | $ | 39,914 |
| | $ | 56,800 |
| | $ | 4,969 |
| | $ | 5,793 |
| | $ | 2,981 |
| | $ | 3,476 |
|
Five West Parcel, LLC | — |
| | 1,420 |
| | 18 |
| | 411 |
| | 9 |
| | 206 |
|
18-19 West, LLC | 4 |
| | 7 |
| | (64 | ) | | (54 | ) | | (32 | ) | | (27 | ) |
TRCC/Rock Outlet Center, LLC1 | 2,792 |
| | 3,211 |
| | (1,840 | ) | | (2,119 | ) | | (920 | ) | | (1,060 | ) |
TRC-MRC 1, LLC | 1,573 |
| | 1,502 |
| | 69 |
| | 21 |
| | 35 |
| | 11 |
|
TRC-MRC 2, LLC | 2,023 |
| | 1,980 |
| | 670 |
| | 482 |
| | 335 |
| | 241 |
|
TRC-MRC 3, LLC | 1,356 |
| | — |
| | 256 |
| | — |
| | 128 |
| | — |
|
Equity in earnings of unconsolidated joint ventures, net | $ | 47,662 |
| | $ | 64,920 |
| | $ | 4,078 |
| | $ | 4,534 |
| | $ | 2,536 |
| | $ | 2,847 |
|
| | | | | | | | | | | |
Centennial Founders, LLC | $ | 232 |
| | $ | 236 |
| | $ | 67 |
| | $ | 92 |
| | Consolidated |
| | | | | | | | | | | |
(1) Revenues for TRCC/Rock Outlet Center are presented net of non-cash tenant allowance amortization of $0.6 million and $0.9 million as of June 30, 2020 and June 30, 2019, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| Joint Venture | TRC | | Joint Venture | TRC |
($ in thousands) | Assets | Debt | Equity | Equity | | Assets | Debt | Equity | Equity |
Petro Travel Plaza Holdings, LLC | $ | 81,774 |
| $ | (15,225 | ) | $ | 65,030 |
| $ | 26,618 |
| | $ | 77,835 |
| $ | (15,287 | ) | $ | 60,061 |
| $ | 23,636 |
|
Five West Parcel, LLC | 666 |
| — |
| 666 |
| 149 |
| | 694 |
| — |
| 648 |
| 140 |
|
18-19 West, LLC | 4,665 |
| — |
| 4,415 |
| 1,637 |
| | 4,849 |
| — |
| 4,600 |
| 1,730 |
|
TRCC/Rock Outlet Center, LLC | 68,244 |
| (38,027 | ) | 29,649 |
| 6,761 |
| | 69,459 |
| (38,909 | ) | 29,688 |
| 6,781 |
|
TRC-MRC 1, LLC | 28,589 |
| (24,267 | ) | 3,599 |
| — |
| | 28,673 |
| (24,542 | ) | 3,623 |
| — |
|
TRC-MRC 2, LLC | 20,171 |
| (24,165 | ) | (8,776 | ) | — |
| | 20,026 |
| (24,455 | ) | (7,094 | ) | — |
|
TRC-MRC 3, LLC | 42,625 |
| (35,785 | ) | 6,308 |
| 6,081 |
| | 37,292 |
| (28,061 | ) | 6,052 |
| 5,953 |
|
Total | $ | 246,734 |
| $ | (137,469 | ) | $ | 100,891 |
| $ | 41,246 |
| | $ | 238,828 |
| $ | (131,254 | ) | $ | 97,578 |
| $ | 38,240 |
|
| | | | | | | | | |
Centennial Founders, LLC | $ | 97,529 |
| $ | — |
| $ | 97,135 |
| *** |
| | $ | 96,415 |
| $ | — |
| $ | 96,143 |
| *** |
|
| | | | | | | | | |
*** Centennial Founders, LLC is consolidated within the Company's financial statements. |
16. RELATED PARTY TRANSACTIONS
TCWD is a not-for-profit governmental entity organized on December 28, 1965, pursuant to Division 13 of the Water Code, State of California. TCWD is a landowner voting district, which requires an elector, or voter, to be an owner of land located within the district. TCWD was organized to provide the water needs for future municipal and industrial development. The Company is the largest landowner and taxpayer within TCWD and currently has one member of the Company's management on the board of directors of TCWD. The Company has a water service contract with TCWD that entitles the Company to receive substantially all of TCWD’s State Water Project entitlement and all of TCWD’s banked water. TCWD is also entitled to make assessments of all taxpayers within the district, to the extent funds are required to cover expenses and to charge water users within the district for the use of water. From time to time, Tejon transacts with TCWD in the ordinary course of business.
The Company has water contracts with WRMWSD for SWP water deliveries to ourits agricultural and municipal/industrial operations in the San Joaquin Valley. The terms of these contracts extend to 2035. Under the contracts, the Company is entitled to annual water for 5,496 acres of land, or 15,547 acre-feet of water, subject to SWP allocations. The Company's Executive Vice President and Chief Operating Officer is one of nine9 directors at WRMWSD. As of June 30, 2020,March 31, 2021, the Company paid $3,702,000$1,561,000 for these water contracts and related costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, including without limitation statements regarding strategic alliances, the almond, pistachio and grape industries, the future plantings of permanent crops, future yields, prices and water availability for ourthe Company's crops and real estate operations, future prices, production and demand for oil and other minerals, future development of ourthe Company's property, future revenue and income of ourits jointly-owned travel plaza and other joint venture operations, potential losses to the Tejon Ranch Co. and its subsidiaries (the Company, Tejon, we, us, and our), as a result of pending environmental proceedings, the adequacy of future cash flows to fund our operations, and of current assets and contracts to meet our water and other commitments, market value risks associated with investment and risk management activities and with respect to inventory, accounts receivable and our own outstanding indebtedness, ongoing negotiations, the uncertainties regarding the expected impact of COVID-19 on the Company, its customers and suppliers, and global economic conditions, and other future events and conditions. In some cases, these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “will,” “should,” “would,” “likely,” and similar expressions such as “in the process.” In addition, any statements that refer to projections of our future financial performance, our anticipated growth, and trends in our business and other characterizations of future events or circumstances are forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to assumptions and involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance, or achievement implied by such forward-looking statements. These risks, uncertainties and important factors include, but are not limited to, the impacts of COVID-19 and the actions taken by governments, businesses, and individuals in response to it, weather, market and economic forces, availability of financing for land development activities, and competition and success in obtaining various governmental approvals and entitlements for land development activities. No assurance can be given that the actual future results will not differ materially from the forward-looking statements that we make for a number of reasons, including those described above and in the section entitled “Risk Factors” in this report and our most recent Annual Report on Form 10-K, and our Quarterly Report for the period ending March 31, 2020.10-K.
OVERVIEW
We are a diversified real estate development and agribusiness company committed to responsibly using our land and resources to meet the housing, employment, and lifestyle needs of Californians and to create value for our shareholders. In support of these objectives, we have been investing in land planning and entitlement activities for new industrial and residential land developments and in infrastructure improvements within our active industrial development. Our prime asset is approximately 270,000 acres of contiguous, largely undeveloped land that, at its most southerly border, is 60 miles north of Los Angeles and, at its most northerly border, is 15 miles east of Bakersfield.
Business Objectives and Strategies
Our primary business objective is to maximize long-term shareholder value through the monetization of our land-based assets. A key element of our strategy is to entitle and then develop large-scale mixed usemixed-use master planned residential and commercial/industrial real estate development projects to serve the growing populations of Southern and Central California. Our mixed usemixed-use master planned residential developments have been approved to collectively include up to 34,78335,278 housing units, and more than 35 million square feet of commercial space. We have obtained entitlements on Mountain Village at Tejon Ranch, (MV)or MV, and are pursuinghave submitted the final tract maps.maps to Kern County. Over the next few years, it is possible that we will be engaged in continuous litigation challenging and defending ourthe entitlements against litigation forof our Grapevine at Tejon Ranch, or Grapevine, and Centennial at Tejon Ranch, or Centennial, projects.
We are currently engaged in construction, commercial sales and leasing at our fully operational commercial/industrial center, the Tejon Ranch Commerce Center, or TRCC. All of these efforts are supported by diverse revenue streams generated from other operations, including commercial/industrial real estate, farming, mineral resources, ranch operations, and our various joint ventures.
Our Business
We currently operate in five reporting segments: commercial/industrial real estate development; resort/residential real estate development; mineral resources; farming; and ranch operations.
Activities within the commercial/industrial real estate development segment include:include planning and permitting of land for development; construction of infrastructure; construction of pre-leased buildings; construction of buildings to be leased or sold; and the sale of land to third parties for their own development. The commercial/industrial real estate development segment also includes activities related to communications leases and landscape maintenance fees.
At the heart of the commercial/industrial real estate development segment is TRCC, a 20 million square foot commercial/industrial development on Interstate 5 just north of the Los Angeles basin. Nearly six million square feet of industrial, commercial and retail space has already been developed, including distribution centers for IKEA, Caterpillar, Famous Footwear, L'Oreal, Camping World, and Dollar General. TRCC sits on both sides of Interstate 5, giving distributors immediate access to the west coast’s principal north-south goods movement corridor.
On January 5, 2021, the Kern County Board of Supervisors approved two Conditional Use Permits (CUP) which will authorize development of multi-family apartment uses within the TRCC. The approved CUPs authorize the Company to develop up to a maximum of 495 multi-family residences, in thirteen apartment buildings, as well as approximately 6,500 square feet of community amenity space and 8,000 square feet of community retail on the ground floor of a portion of the residential buildings. The development would be located on an approximately 23-acre site located immediately north of the Outlets at Tejon. During 2021 the Company will devote the necessary resources to advance this new project at TRCC, providing the much-needed housing for the thousands of employees currently working at the various distribution centers, retailers, and fast-food restaurants at TRCC.
We are also involved in multiple joint ventures within TRCC with several partners that help us expand our commercial/industrial business activities within TRCC:activities:
Our•A joint venture with TravelCenters of America, or TA/Petro, owns and operates two travel and truck stop facilities, and also operates five separate gas stations with convenience stores and fast foodfast-food restaurants within TRCC-West and TRCC-East.
Three•Two joint ventures with Rockefeller Development Group, or Rockefeller:
| |
◦ | Five West Parcel LLC owned a 606,000 square foot building in TRCC-West that was fully leased. In 2019, Five West Parcel sold the building and land to a third party; |
| |
◦ | 18-19 West LLC owns 63.5 acres of land for future development within TRCC-West. In 2019, our 18-19 West LLC joint venture entered into a land purchase option with the same third-party who purchased the Five West building and land, to purchase lots 18 and 19 at a price of $13.8 million through the option period ending May 21, 2021. If the option is extended to November 21, 2021, the price increases to $15.2 million. The land option expires in the fourth quarter of 2021; and |
| |
◦ | TRCC/Rock Outlet Center LLC operates the Outlets at Tejon, a net leasable 326,000 square foot shopping experience in TRCC-East; |
Three◦18-19 West LLC owns 63.5 acres of land for future development within TRCC-West. In 2019, our 18-19 West LLC joint venture entered into a land purchase option with the same third-party who purchased the Five West building and land, to purchase lots 18 and 19 at a price of $13.8 million through the option period ending May 21, 2021. If the option is extended to November 21, 2021, the price increases to $15.2 million. The land option expires in the fourth quarter of 2021; and
◦TRCC/Rock Outlet Center LLC operates the Outlets at Tejon, a net leasable 326,000 square foot shopping experience in TRCC-East;
•Four joint ventures with Majestic Realty Co., or Majestic, to develop, manage, and operate industrial buildings within TRCC:
| |
◦ | TRC-MRC 1, LLC was formed to develop and operate a 480,480 square foot industrial building in TRCC-East, which was completed during 2017 and is fully leased; |
| |
◦ | TRC-MRC 2, LLC owns a 651,909 square foot building in TRCC-West that is fully leased; and |
| |
◦ | TRC-MRC 3, LLC was formed to pursue the development, construction, leasing and management of a 579,040 square foot industrial building in TRCC-East. The construction of the building was completed in the fourth quarter of 2019 and is fully leased. |
◦TRC-MRC 1, LLC operates a 480,480 square foot industrial building in TRCC-East, which was completed during 2017 and is fully leased;
◦TRC-MRC 2, LLC owns and operates a 651,909 square foot building in TRCC-West that is fully leased;
◦TRC-MRC 3, LLC operates a 579,040 square foot industrial building in TRCC-East, which was completed during the fourth quarter of 2019 and is fully leased; and
◦TRC-MRC 4, LLC was formed in 2021 to pursue the development, construction, leasing and management of a 629,274 square foot industrial building in TRCC-East. The construction of the building is scheduled to begin in 2021, with a target completion in 2022.
The resort/residential real estate development segment is actively involved in the land entitlement and development process internally and through a joint venture. Our active developments within this segment are MV, Centennial, and Grapevine.
•MV encompasses a total of 26,417 acres, of which 5,082 acres will be used for a mixed-use development that will include housing, retail, and commercial components. MV is entitled for 3,450 homes, 160,000 square feet of commercial development, 750 hotel keys, and more than 21,335 acres of open space. The tentative tract map for the first four phases of residential development has been approved, as well as the commercial site plan for the first phase of commercial development;development. The Company is currently focusing on the completion of the final map for first phases of MV, consumer and market research studies and fine tuning of development business plans as well as defining the capital funding sources for this development.
•The Centennial development is a mixed-use master planned community development encompassing 12,323 acres of our land within Los Angeles County. Upon completion of Centennial, it is estimated that the community will include approximately 19,333 homes and 10.1 million square feet of commercial development. Centennial hashad entitlements approved in December 2018 and received legislative approvals in April 2019 from the Los Angeles County Board of Supervisors.Supervisors; and
•Grapevine is an 8,010-acre potential development area located on the San Joaquin Valley floor area of our lands, adjacent to TRCC. Upon completion of Grapevine, the community will include 12,000 homes, 5.1 million square feet for commercial development, and more than 3,367 acres of open space and parks. On December 10, 2019, the Kern County Board of Supervisors adopted the supplemental re-circulated environmental impact report, or EIR, prepared in response to a court ruling and reapprovedre-approved the development of Grapevine unanimously.
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2019,2020, for a more detailed description of our active developments within the resort/residential real estate development segment.
Our mineral resources segment generates revenues from oil and gas royalty leases, rock and aggregate mining leases, a lease with National Cement Company of California Inc., and water sales.
The farming segment produces revenues from the sale of wine grapes, almonds, and pistachios.
Lastly, the ranch operations segment consists of game management revenues and ancillary land uses such as grazing leases and filming.
The COVID-19 Pandemic
The U.S.Company operates solely in California, which continued its vaccine rollout in the first quarter of 2021 and global economies continueopened up vaccinations to individuals who are 16 years old and older in April 2021. California is currently projected to fully reopen on June 15, if vaccine supply is sufficient for Californians aged 16 years and older who wish to be dramatically affected by the COVID-19 pandemic. Thereinoculated and if hospitalization rates are no reliable estimates of how long the pandemicstable and low. We will last or how many more people will be affected by it, or its full impact on our business and operations. We operate in the State of California and our operations have been subject to the "shelter-in-place" order issued by the California Governor in March 2020 (the Stay at Home Order) in addition to orders set by Los Angeles and Kern county governments. The State of California has taken a more cautious approach in reopening and has even reversed or delayed reopening initiatives in accordance with the California Department of Health's Guidance on Closure of Sectors in Response to COVID-19 on July 1, 2020. Our first priority with regard to the COVID-19 pandemic iscontinue to provide for the health and safety of our employees, customers, suppliers and others with whom we partner, in our business activities. All employees are required to wear masks when working in offices, while also maintaining proper safe social distancing. Subject to the use of appropriate risk mitigation and safety practices, we are continuing our business operations in this unprecedented business environment. SeeBoth farm and office employees are required to wear masks along with following other common-sense health measures.
Kern and Los Angeles Counties are rated "Orange" under California’s rating system for the Resultsspread of OperationsCOVID-19, as of the date of this report, representing moderate COVID-19 transmission risk under California's Blueprint for a Safer Economy, or Blueprint. Under such circumstances, our farming and mineral resources segments have operated and may continue to operate as normal while following common-sense health measures. Our retail outlets can now operate at full capacity, following guidelines provided by segmentthe Blueprint. Lastly, restaurants can resume indoor dining at 50% capacity, which led to the re-opening of the full-service restaurant at TRCC in April 2021.
Despite the current recovery phase, uncertainty remains over long-term vaccine efficacy, virus mutations, vaccine availability, California's ability to meet reopening guidelines, and continued vaccine adoption for further discussion on COVID-19the next phase of the pandemic. The long-term impact of such uncertainties on our various reporting segments.
Inbusiness are currently unknown and may vary in scope and severity from the second quarter of 2020, our mineral resource segment has seen declines in oil royalties when compared to previous years as the global supply of oil exceeds demand. In our commercial/industrial real estate development segment, we have worked with all our commercial tenants, at their request, and agreed to rent payment deferrals into 2021 in order to ease some of the financial burden our tenants have experienced due to the limited foot traffic in their stores. Lastly, pricing for almonds and pistachios in our farming segment has seen a bit of a downward trend that may persist for the remainder of the year, largely due to anticipated production levels.impacts to-date.
The broader and long-term implications of COVID-19 and actions taken by governments, other businesses, and individuals in response to the pandemic ondid have and will continue to have an impact our results of operations and overall financial performance still remain uncertain. Asperformance. In 2020, we manage through the pandemic, we will continue to evaluateevaluated our operations for expense reductions and cash savings. So far, measures that we have taken includesavings by renegotiating contracts and pricing with a significant portion of our vendors, and right sizingrightsizing our labor needs. We will continue to monitor and evaluate our needs for expense reduction throughout 2021.
Summary of SecondFirst Quarter 2021Performance
For the first sixthree months of 2020,2021, we had a net loss attributable to common stockholders of $1,015,000$1,055,000 compared to a net incomeloss of $826,000$682,000 during the first sixthree months of 2019.2020. The primary driver of this decrease was a $1,414,000 decrease in the equity in earnings of unconsolidated joint ventures. For the quarter, Petro Travel Plaza Holdings experienced significant declines in fuel margins resulting from higher fuel costs. Additionally, full-service restaurant margins within the Petro joint venture decreased due to ongoing closures during the period, driven by operating capacity limitations under the Blueprint. The decline is attributed to the fact that the commercial/industrial real estate development segment did not generate land sale revenues and construction management fees as it did in 2019. This declineoperating results from our joint ventures was partially offset by higher profits generated by thea $998,000 increase in mineral resources segment due to favorable price adjustments on priorrevenues, driven by increased water sales as a result of low State Water Project (SWP) allocation levels, triggering additional water revenues. Lastly, the Company recognized a gain of $1,333,000 after selling building and landdue, in part, to drier conditions statewide which led to a joint venture partner in April 2020 that will later be redeployed atlower SWP allocation over the joint venture level.comparative period.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations provides a narrative discussion of our results of operations. It contains the results of operations for each reporting segment of the business and is followed by a discussion of our financial position. It is useful to read the reporting segment information in conjunction with Note 14 (Reporting Segments and Related Information) of the Notes to Unaudited Consolidated Financial Statements.
Critical Accounting Policies
The preparation of our interim financial statements in accordance with generally accepted accounting principles in the United States, or GAAP, requires us to make estimates and judgments that affect the reported amounts for assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimates that are likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, impairment of long-lived assets, capitalization of costs, allocation of costs related to land sales and leases, stock compensation, our future ability to utilize deferred tax assets, and defined benefit retirement plan. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
During the sixthree months ended June 30, 2020,March 31, 2021, our critical accounting policies have not changed since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019.2020. Please refer to that filing for a description of our critical accounting policies. Please also refer to Note 1 (Basis of Presentation) in the Notes to Unaudited Consolidated Financial Statements in this report for newly adopted accounting principles.
Results of Operations by Segment
We evaluate the performance of our reporting segments separately to monitor the different factors affecting financial results. Each reporting segment is subject to review and evaluation as we monitor current market conditions, market opportunities, and available resources. The performance of each reporting segment is discussed below:
Real Estate – Commercial/Industrial:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
($ in thousands) | 2021 | | 2020 | | $ | | % |
Commercial/industrial revenues | | | | | | | |
Pastoria Energy Facility | $ | 1,016 | | | $ | 1,065 | | | $ | (49) | | | (5) | % |
TRCC Leasing | 399 | | | 406 | | | (7) | | | (2) | % |
TRCC management fees and reimbursements | 186 | | | 236 | | | (50) | | | (21) | % |
Commercial leases | 142 | | | 157 | | | (15) | | | (10) | % |
Communication leases | 227 | | | 225 | | | 2 | | | 1 | % |
Landscaping and other | 258 | | | 231 | | | 27 | | | 12 | % |
| | | | | | | |
Total commercial/industrial revenues | $ | 2,228 | | | $ | 2,320 | | | $ | (92) | | | (4) | % |
Total commercial/industrial expenses | $ | 1,552 | | | $ | 1,931 | | | $ | (379) | | | (20) | % |
Operating income from commercial/industrial | $ | 676 | | | $ | 389 | | | $ | 287 | | | 74 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Commercial/industrial revenues | | | | | | | |
Pastoria Energy Facility | $ | 931 |
| | $ | 934 |
| | $ | (3 | ) | | — | % |
TRCC Leasing | 418 |
| | 416 |
| | 2 |
| | — | % |
TRCC management fees and reimbursements | 140 |
| | 359 |
| | (219 | ) | | (61 | )% |
Commercial leases | 127 |
| | 152 |
| | (25 | ) | | (16 | )% |
Communication leases | 245 |
| | 226 |
| | 19 |
| | 8 | % |
Landscaping and other | 253 |
| | 195 |
| | 58 |
| | 30 | % |
Land sale | — |
| | 4,313 |
| | (4,313 | ) | | (100 | )% |
Total commercial/industrial revenues | $ | 2,114 |
| | $ | 6,595 |
| | $ | (4,481 | ) | | (68 | )% |
Total commercial/industrial expenses | $ | 1,747 |
| | $ | 4,593 |
| | $ | (2,846 | ) | | (62 | )% |
Operating income from commercial/industrial | $ | 367 |
| | $ | 2,002 |
| | $ | (1,635 | ) | | (82 | )% |
•Commercial/industrial real estate development segment revenues were $2,114,000$2,228,000 for the three months ended June 30, 2020,March 31, 2021, a decrease of $4,481,000,$92,000, or 68%4%, from $6,595,000$2,320,000 for the three months ended June 30, 2019. UnlikeMarch 31, 2020. The decrease is primarily attributed to lower spark spread revenues from the Company's Pastoria Energy Facility lease due to lower energy demand and reduced reimbursable costs for Company's management of the outlet center due to a reduction in 2019, we did not have land sale revenues and construction management fees opportunities associated with our TRC-MRC 3 joint venture in 2020, which primarily drove the decline.personnel.
•Commercial/industrial real estate development segment expenses were $1,747,000$1,552,000 for the three months ended June 30, 2020,March 31, 2021, a decrease of $2,846,000,$379,000, or 62%20%, from $4,593,000$1,931,000 for the three months ended June 30, 2019. The decrease is primarily attributed to not recognizing the cost of sales associated with the 2019 land sale discussed above.
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Commercial revenues | | | | | | | |
Pastoria Energy Facility | $ | 1,996 |
| | $ | 2,399 |
| | $ | (403 | ) | | (17 | )% |
TRCC Leasing | 824 |
| | 868 |
| | (44 | ) | | (5 | )% |
TRCC management fees and reimbursements | 376 |
| | 594 |
| | (218 | ) | | (37 | )% |
Commercial leases | 284 |
| | 319 |
| | (35 | ) | | (11 | )% |
Communication leases | 470 |
| | 472 |
| | (2 | ) | | — | % |
Landscaping and other | 484 |
| | 456 |
| | 28 |
| | 6 | % |
Land sale | — |
| | 4,313 |
| | (4,313 | ) | | (100 | )% |
Total commercial revenues | $ | 4,434 |
| | $ | 9,421 |
| | $ | (4,987 | ) | | (53 | )% |
Total commercial expenses | $ | 3,678 |
| | $ | 6,385 |
| | $ | (2,707 | ) | | (42 | )% |
Operating income from commercial/industrial | $ | 756 |
| | $ | 3,036 |
| | $ | (2,280 | ) | | (75 | )% |
Commercial/industrial real estate development segment revenues were $4,434,000 for the first six months of 2020, a decrease of $4,987,000, or 53%, from $9,421,000 for the first six months of 2019. A lack of land sales and construction management fees drove a majority of this decrease as discussed in the segment's quarterly operating results. Another factor contributing to the decline is the Company's 2019 recognition of a true-up related to 2018 spark spread revenues from the Pastoria Energy Facility that was greater than their original estimates. This true-up did not reoccur inMarch 31, 2020.
Commercial/industrial real estate development segment expenses were $3,678,000 during the first six months of 2020, a decrease of $2,707,000, or 42%, from $6,385,000 during the first six months of 2019. The decrease is attributed to not recognizing land costlower payroll and stock compensation costs, net of sales associated withcapitalization, of $206,000 and reduced general and overhead allocations of $107,000 resulting from the land sale transaction discussed previously.Company's 2020 right-sizing initiatives.
The logistics operators currently located within TRCC have demonstrated success in serving all of California and the western region of the United States, and we are building fromthe Company showcases their success in ourits marketing efforts. We will continue to focus our marketing strategy for TRCC-East and TRCC-West on the significant labor and logistical benefits of our site, the pro-business approach of Kern County, and the demonstrated success of the current tenants and owners within our development. Our strategylocation fits within the logistics model that many companies are using, which favors large, centralized distribution facilities which have been strategically located to maximize the balance of inbound and outbound efficiencies, rather than a number ofmany decentralized smaller distribution centers. The world classworld-class logistics operators located within TRCC have demonstrated success through utilization of this model. With access to markets of over 40 million people for next-day delivery service, they are also demonstrating success with e-commerce fulfillment.
Our Foreign Trade Zone (FTZ) designation allows businesses to secure the many benefits and cost reductions associated with streamlined movement of goods in and out of the zone. This FTZ designation is further supplemented by the Economic Development Incentive Policy, or EDIP, adopted by the Kern County Board of Supervisors. EDIP is aimed to expand and enhance the County's competitiveness by taking affirmative steps to attract new businesses and to encourage the growth and resilience of existing businesses. EDIP provides incentives such as assistance in obtaining tax incentives, building supporting infrastructure, and workforce development.
We believe that the FTZ and EDIP, along with our ability to provide fully-entitled,fully entitled, shovel-ready land parcels to support buildings of any size, including buildings 1.0one million square feet or larger, can provide us with a potential marketing advantage in the future. Our marketing efforts includetarget the Inland Empire region of Southern California, the Santa Clarita Valley of northern Los Angeles County, the northern part of the San Fernando Valley - due to the limited availability of new product and high real estate costs in these locations, and the San Joaquin Valley of California. The Company continues to analyze the market and evaluate expansions of industrial buildings for lease either on our own or in partnerships, as we have done with the buildings developed by TRC-MRC 1 and TRC-MRC 3, and pending development by TRC-MRC 4.
A potential disadvantage to our development strategy is our distance from the ports of Los Angeles and Long Beach in comparison to the warehouse/distribution centers located in the Inland Empire, a large industrial area located east of Los Angeles, which continues its expansion eastward beyond Riverside and San Bernardino, to include Perris, Moreno Valley, and Beaumont. As development in the Inland Empire continues to move east and farther away from the ports, ourthe potential disadvantage of our distance from the ports is being mitigated. Strong demand for large distribution facilities is driving development farther east in a search for large, entitled parcels.
During the quarter ended June 30, 2020,March 31, 2021, vacancy rates in the Inland Empire increased by 0.4%decreased to 3.3% from prior quarter, while remaining at six-year lows. Construction completions totaled 2.9 million square feet in the quarter ended June 30, 2020, which is lower than the 5.2 million square feet typically added each quarter for the past five years. Thea historical low vacancy rates have ledof 1.9%, leading to an increase in lease ratesrate of 1.4% within the1.3%, both setting new records. Demand for Inland Empire.Empire logistics space continues to be strong, as net absorption reached 10 million square feet. As lease rates increase in the Inland Empire, we may begin to haveexperience greater pricing advantages due to our lower land basis.
During the quarter ended June 30, 2020,March 31, 2021, vacancy rates in the northern Los Angeles industrial market, which includes the San Fernando Valley and Santa Clarita Valley, increased by 1.5%decreased from 2.3% as of December 31, 2020 to 2.7%, while remaining at six-year record low.1.8%. Rents remain at an all-time high and have well surpassed the previous peak seen in 2007.high. Average asking rents increased 2.5%by 9% over the prior quarter.
We expect theour commercial/industrial real estate development segment to continue to experience costs, net of amounts capitalized, primarily related to professional service fees, marketing costs, commissions, planning costs, and staffing costs as we continue to pursue development opportunities. These costs are expected to remain consistent with current levels of expense with any variability in the future costs tied to specific absorption transactions in any given year.
The actual timing and completion of development is difficult to predict due to the uncertainties of the market. Infrastructure development and marketing activities and costs could continue to increase over several years as we develop our land holdings. We will also continue to evaluate land resources to determine the highest and best uses for our land holdings. Future land sales are dependent on market circumstances and specific opportunities. Our goal in the future is to increase land value and create future revenue growth through planning and development of commercial and industrial properties.
As described earlier, inIn March and July 2020, in response to the COVID-19 pandemic, California issuedtook actions to limit exposure to the Stay at Home Order which shut down allvirus through restrictions on non-essential businesses and services. Most of our operations in this segment have been deemed an "essential" business. Commercial retail tenants at TRCC and the Outlets at Tejon joint venture have had difficulty making timely rent payments due to reduced traffic at TRCC and the Outlets at Tejon resulting from California guidelines and social distancing practices.
Tenants began requesting various forms of rent relief beginning in March 2020 and throughout the second quarter.rest of 2020. Although the requests rangeranged in scope, the most common request iswas for a full or partial rent deferment for three months.
During the three months ended June 30, 2020, the The Company has agreed to defer rent for April, May or June 2020 of certain tenants at TRCC, with the requirement that a significant amount ofall the deferred rent will be fully repaid inby 2021. The following table sets forth information regarding the cumulative minimum rents billeddeferred rent and deferred for the three months ended June 30, 2020.collected rent as of March 31, 2021.
|
| | | | | | | | | | | | | | | | | | |
($ in thousands, except for impacted tenants) | Impacted Tenants | | Contractual Rent Billing1 | | Deferred Rent due to COVID-19 | | Deferred Rent to be Collected in 2020 | | Deferred Rent to be Collected in 2021 |
TRCC Leasing | 5 |
| | $ | 312 |
| | $ | 44 |
| | $ | 5 |
| | $ | 39 |
|
Other Commercial Leases | 3 |
| | 125 |
| | 18 |
| | 7 |
| | 11 |
|
| 8 |
| | $ | 437 |
| | $ | 62 |
| | $ | 12 |
| | $ | 50 |
|
| | | | | | | | | |
Percentage of Rent Deferred | | | 14 | % | | | | |
| | | | | | | | | |
1Amounts shown represent contractual rent for all tenants for the three months ended June 30, 2020, regardless of whether or not a tenant has requested a rent deferral. |
Our financial results will be impacted by our ability to collect contractual rents due under our long-term net leases and any additional rent deferrals or contractual modifications. | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands, except for impacted tenants) | Impacted Tenants | | | | Cumulative Deferred Rent due to COVID-19 | | Cumulative Deferred Rent Collected | | Deferred Rent to be Collected rest of 2021 |
TRCC Leasing | 5 | | | | | $ | 118 | | | $ | 51 | | | $ | 67 | |
Other Commercial Leases | 3 | | | | | 57 | | | 24 | | | 33 | |
| 8 | | | | $ | 175 | | | $ | 75 | | | $ | 100 | |
| | | | | | | | | |
| | | | | | |
| | | | | | | | | |
|
Real Estate – Resort/Residential:
We are in the preliminary stages of property development for this segment; hence, no revenues or profits are attributed to this segment.
Resort/residential real estate development segment expenses were $326,000$553,000 for the three months ended June 30, 2020,March 31, 2021, a decrease of $316,000,$73,000, or 49%12%, from $642,000$626,000 for the three months ended June 30, 2019. Thus far in 2020, the Company experienced a $302,000March 31, 2020. The decrease in professional service costs as comparedis attributed to the prior period, the segment's development projects are engaged in litigation and final map processes, resulting in fewer ongoing projects.
Resort/residential real estate segment expenses were $952,000 for the first six months of 2020, a decrease of $338,000, or 26%, from $1,290,000 for the first six months of 2019. The Company had a $543,000 decrease in professional service costs for the same reasons discussed above for the segment's quarterly operating results. Increases inlower payroll and overheadstock compensation costs, net of capitalization, of $226,000 offset some$23,000 and reduced general and overhead allocations of $36,000.
Our long-term business plan of developing the savingscommunities of MV, Centennial, and Grapevine remains unchanged. As home buyer trends change in professional services. The increaseCalifornia to a more suburban orientation and the economy stabilizes, we believe the perception of land values will continue to improve. Long-term macro fundamentals, primarily California's population growth and household formation will also support housing demand in payroll is primarily attributedour region. California also has a significant documented housing shortage, which we believe our communities will help ease as the population base within California continues to non-recurring severance payments.
As of June 30, 2020 COVID-19 has not had a material impact on this segment. The Company will aggressively defend its entitlements against litigation for both Grapevine and Centennial. However, extended court closures under local and state ordinances may delay previously scheduled hearings.
grow. Most of the expenditures and capital investment to be incurred within our resort/residential real estate segment will continue to focus on the following:
For •Centennial – the approved Centennial specific plan includes 19,333 residential units and more than 10.1 million square feet of commercial space. The Company is working with the County of Los Angeles to address the recentlylitigation filed action in the Los Angeles Superior Court. See Note 12 (Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements for further discussion.
For •Grapevine – on December 11, 2018, the Kern County Superior Court ruled we had to amend our EIR by preparing supplemental environmental documentation to further analyze the Grapevine project’s internal capture rate (ICR), which is the percent of vehicle trips remaining within the project. On December 10, 2019, the Kern County Board of Supervisors adopted the supplemental re-circulated EIR prepared in response to the court ruling and reapproved the development of Grapevine unanimously. The Company is working with Kern County to address the recentlyOn January 10, 2020, an action was filed action in the Kern County Superior Court.Court pursuant to CEQA against Kern County, concerning Kern County’s approval of the December 2019 re-entitlement, including certification of the final EIR. On January 22, 2021 the court ruled in favor of the Company and Kern County on all issues. See Note 12 (Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements for further discussion.
For •MV we have– a fully entitled project andhas received approvals of Tentative Tract Map 1 for ourthe first four phases of development and approval of ourthe commercial site plan for the first phase of commercial development. The timing of the MV development in the coming years will depend on the strength of both the economy and the real estate market, including both primary and second home markets. In moving the project forward, we will focus on the preparationcompletion of engineering leading to the final map for the first phases of MV, consumer and market research studies, and fine tuning of development business plans, as well as defining the possible capital funding sources for this development.plans.
•Over the next several years, we expect to explore funding opportunities for the future development of our projects. Such funding opportunities could come from a variety of sources, such as joint ventures with financial partners, debt financing, or the Company’s issuance of additional common stock.
Mineral Resources:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
($ in thousands) | 2021 | | 2020 | | $ | | % |
Mineral resources revenues | | | | | | | |
Oil and gas | $ | 174 | | | $ | 334 | | | $ | (160) | | | (48) | % |
Cement | 466 | | | 454 | | | 12 | | | 3 | % |
Rock aggregate | 258 | | | 242 | | | 16 | | | 7 | % |
Exploration leases | 25 | | | 25 | | | — | | | — | % |
Water Sales | 6,252 | | | 5,121 | | | 1,131 | | | 22 | % |
Reimbursables and other | 1 | | | 2 | | | (1) | | | (50) | % |
Total mineral resources revenues | $ | 7,176 | | | $ | 6,178 | | | $ | 998 | | | 16 | % |
Total mineral resources expenses | $ | 5,047 | | | $ | 3,878 | | | $ | 1,169 | | | 30 | % |
Operating income from mineral resources | $ | 2,129 | | | $ | 2,300 | | | $ | (171) | | | (7) | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Mineral resources revenues | | | | | | | |
Oil and gas | $ | 98 |
| | $ | 437 |
| | $ | (339 | ) | | (78 | )% |
Cement | 540 |
| | 520 |
| | 20 |
| | 4 | % |
Rock aggregate | 328 |
| | 297 |
| | 31 |
| | 10 | % |
Exploration leases | 25 |
| | 25 |
| | — |
| | — | % |
Water Sales | 350 |
| | (1,046 | ) | | 1,396 |
| | (133 | )% |
Reimbursables and other | 435 |
| | 427 |
| | 8 |
| | 2 | % |
Total mineral resources revenues | $ | 1,776 |
| | $ | 660 |
| | $ | 1,116 |
| | 169 | % |
Total mineral resources expenses | $ | 714 |
| | $ | 598 |
| | $ | 116 |
| | 19 | % |
Operating income from mineral resources | $ | 1,062 |
| | $ | 62 |
| | $ | 1,000 |
| | 1,613 | % |
•Mineral resources segment revenues were $1,776,000$7,176,000 for the three months ended June 30, 2020,March 31, 2021, an increase of $1,116,000,$998,000, or 169%16%, from $660,000$6,178,000 for the three months ended June 30, 2019. In 2019, the Company had an unfavorable water sales adjustment of $1,046,000 that was tiedMarch 31, 2020. This increase is primarily attributed to ana $1,131,000 increase in SWP allocation levels, which impacted prior sales pricing. In 2020, however, SWP allocation levels were more favorable to the Company and resulted in $350,000 in additional water sales revenues. IncreasesThere were more water sales opportunities in 2021 because of the dry 2021 winter that has led to a SWP allocation of 5%. We sold 5,881 acre-feet and 4,625 acre-feet of water in 2021 and 2020, respectively. The increase in water sales revenues werewas partially offset by a $339,000 decreasedecline in oil and gas royalties, driven by depressed oil prices resulting from reduced demand and oversupply over the comparative periods.which have not returned to pre-pandemic levels.
•Mineral resources segment expenses were $714,000$5,047,000 for the three months ended June 30, 2020,March 31, 2021, an increase of $116,000$1,169,000, or 19%30%, from $598,000$3,878,000 for the three months ended June 30, 2019. IncreasesMarch 31, 2020. This increase in expenses is primarily attributed to an increase in water transmission costs and property taxes werecost of sales driven by the main drivers of this increase.
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Mineral resources revenues | | | | | | | |
Oil and gas | $ | 432 |
| | $ | 992 |
| | $ | (560 | ) | | (56 | )% |
Cement | 994 |
| | 816 |
| | 178 |
| | 22 | % |
Rock aggregate | 570 |
| | 505 |
| | 65 |
| | 13 | % |
Exploration leases | 50 |
| | 51 |
| | (1 | ) | | (2 | )% |
Water Sales | 5,471 |
| | 3,980 |
| | 1,491 |
| | 37 | % |
Reimbursables and other | 437 |
| | 448 |
| | (11 | ) | | (2 | )% |
Total mineral resources revenues | $ | 7,954 |
| | $ | 6,792 |
| | $ | 1,162 |
| | 17 | % |
Total mineral resources expenses | $ | 4,592 |
| | $ | 4,430 |
| | $ | 162 |
| | 4 | % |
Operating income from mineral resources | $ | 3,362 |
| | $ | 2,362 |
| | $ | 1,000 |
| | 42 | % |
Mineral resources segment revenues were $7,954,000 for the first six months of 2020, an increase of $1,162,000, or 17%, from $6,792,000 for the first six months of 2019. The overall increase is attributed to the same factors discussed within the segment's quarterly operating resultsincreased water sales volume noted above. Additionally, in 2020, the Company's tenant, National Cement, experienced an up-tick in the demand for cement.
Mineral resources segment expenses were $4,592,000 for the first six months of 2020, an increase of $162,000, or 4%, when compared to the same period in 2019. The increase is attributed to the same factors discussed within the segment's quarterly operating results above.
As anticipated changes arise in the future related to groundwater management withinin California, such as limitedlimits on groundwater pumping in the over drafted groundwaterwater basins outside of our lands, we believe that our water assets, including water banking operations, ground water recharge programs, and access to water contracts like those we have purchased in the past, will become even more important and valuable in servicing our projects. Althoughprojects and providing opportunities for water sales to third parties. With 2020 being a dry year, local water market participants will have fewer alternative water sources in 2021, especially given the current 5% SWP water allocation is at 20%, we are uncertain overallocation. As such, the possibility of havingCompany anticipates additional water sales this year givenopportunities over the level of water currently being recovered from Kern County water banks as a result of prior year water banking activities.next few months.
Agreed upon output cuts by the Organization of the Petroleum Exporting Countries has somewhat stabilized oil prices from April lows. However, recent discussions over easing those cuts, if approved, may further disrupt pricing. Social distancing and California's Stay at Home Order have reduced the demand for oil, leading to an oil surplus. Thus far, theThe price per barrel of oil has decreasedincreased over 36%30% from its December 31, 20192020 levels. At these levels, the Company does not expect an increase in oil royalties for the foreseeable future. The Company believes that pricing will slowly and gradually improve once consumers feel safe and the economy reopens, fully. However, it is very difficult to predict when this will occur given recent spikes in COVID-19 cases across the United States and the reversal of re-opening initiatives in many states, including California.
On July 15, 2020, our largest oil royalty tenant, California Resources Corporation, or CRC, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code that will allow them to improve their liquidity and debt positions. CRC is currently seeking permission from the courts to allow them to pay lease and oil royalty obligations without interruption. Thus far we do not have any delinquent receivables with CRC. At current prices, CRC has reduced production with no near-term intent to begin new drilling programs until oil prices reach higher levels. CRC, has approved permits and drill sites on our land and has delayed the start of drillingnew exploration as it evaluates the market. A positive aspect of our lease with CRC is that the approved drill sites are in an area of the ranch where the development and production costs are moderate due to the relatively shallow depths being drilled.
Farming:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
($ in thousands) | 2021 | | 2020 | | $ | | % |
Farming revenues | | | | | | | |
Almonds | $ | 304 | | | $ | 861 | | | $ | (557) | | | (65) | % |
Pistachios | 14 | | | 34 | | | (20) | | | (59) | % |
Wine grapes | 16 | | | — | | | 16 | | | 100 | % |
Hay | 129 | | | 47 | | | 82 | | | 174 | % |
Other | 144 | | | 10 | | | 134 | | | 1,340 | % |
Total farming revenues | $ | 607 | | | $ | 952 | | | $ | (345) | | | (36) | % |
Total farming expenses | $ | 1,478 | | | $ | 1,702 | | | $ | (224) | | | (13) | % |
Operating income (loss) from farming | $ | (871) | | | $ | (750) | | | $ | (121) | | | 16 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Farming revenues | | | | | | | |
Almonds | $ | — |
| | $ | 319 |
| | $ | (319 | ) | | (100 | )% |
Pistachios | — |
| | 391 |
| | (391 | ) | | (100 | )% |
Wine grapes | — |
| | 10 |
| | (10 | ) | | (100 | )% |
Hay | 185 |
| | 114 |
| | 71 |
| | 62 | % |
Other | 24 |
| | 52 |
| | (28 | ) | | (54 | )% |
Total farming revenues | $ | 209 |
| | $ | 886 |
| | $ | (677 | ) | | (76 | )% |
Total farming expenses | $ | 1,099 |
| | $ | 825 |
| | $ | 274 |
| | 33 | % |
Operating loss from farming | $ | (890 | ) | | $ | 61 |
| | $ | (951 | ) | | (1,559 | )% |
•Farming segment revenues were $209,000$607,000 for the three months ended June 30, 2020,March 31, 2021, a decrease of $677,000,$345,000, or 76%36%, from $886,000$952,000 during the same period in 2019.2020. The changes are primarily due to:
◦Reduced almond sales revenues of $557,000 attributed to:to a 138,000 pound reduction in the number of pounds sold due to timing. Additionally, there was a 36% decrease in the selling price of almonds, driven by record 2020 California almond crop yields.
| |
◦ | Almond revenues decreased $319,000 as a result of not having any almond sales due to timing of sales, whereas the Company sold 140,000 pounds during the prior year. The Company has approximately 165,000 pounds of 2019 carryover almonds in inventory. |
| |
◦ | The Company did not have pistachio revenues during the second quarter of 2020 as it sold nearly all of its 2019 crop in 2019. |
◦Other revenues increased $134,000, resulting from higher water reimbursements from a farming land lease.
•Farming segment expenses were $1,099,000$1,478,000 for the three months ended June 30, 2020, an increaseMarch 31, 2021, a decrease of $274,000,$224,000, or 33%13%, from $825,000$1,702,000 during the same period in 2019.2020. The increasedecrease is mainly attributed to an increasea $130,000 decrease in water holdingcost of sales due to lower almond sales volumes and irrigation costs of $130,000 and $79,0000, respectively, as a result of 2020 being a dry year, as well as an increase in insurance of $79,000. Lastly, there was a $34,000 increase$100,000 decrease in depreciation expense resulting from placing in-service new farming and irrigation equipment.
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Farming revenues | | | | | | | |
Almonds | $ | 861 |
| | $ | 695 |
| | $ | 166 |
| | 24 | % |
Pistachios | 34 |
| | 645 |
| | (611 | ) | | (95 | )% |
Wine grapes | — |
| | 10 |
| | (10 | ) | | (100 | )% |
Hay | 232 |
| | 236 |
| | (4 | ) | | (2 | )% |
Other | 34 |
| | 115 |
| | (81 | ) | | (70 | )% |
Total farming revenues | $ | 1,161 |
| | $ | 1,701 |
| | $ | (540 | ) | | (32 | )% |
Total farming expenses | $ | 2,801 |
| | $ | 2,423 |
| | $ | 378 |
| | 16 | % |
Operating (loss) income from farming | $ | (1,640 | ) | | $ | (722 | ) | | $ | (918 | ) | | 127 | % |
Farming segment revenues were $1,161,000 for the first six months of 2020, a decrease of $540,000, or 32%, from $1,701,000 during the same period in 2019. The changes are primarily attributed to:
| |
◦ | Pistachio and almond revenues decreased for the same reasons discussed within the quarterly operating results. |
| |
▪ | Comparatively, we sold 299,000 and 170,000 pounds of prior year carryover almonds as of June 30, 2020 and 2019, respectively. The fluctuations in sales volumes are due to timing. |
| |
▪ | We did not sell any pistachios during the first six months of 2020 as a result of no 2019 crop carryforward, and sold 280,000 pounds in 2019. |
| |
◦ | Other revenues decreased $81,000 as a result of having less water usage reimbursements from a land lease. The decrease is attributed to the lessee obtaining water directly from the water district in 2020. |
Farming segment expenses were $2,801,000 for the first six months of 2020, an increase of $378,000, or 16%, from $2,423,000 when compared to the same period in 2019. The Company experienced increases in depreciation, water holding costs, insurance and irrigation of $31,000, $53,000, $107,000, and $56,000, respectively for the same reasons discussed within the segment's quarterly operating results above.amortization.
Our almond, pistachio, and wine grape crop sales are highly seasonal with a majoritymost of our sales occurring during the third and fourth quarters. Nut and grape crop markets are particularly sensitive to the size of each year’s world crop and the demand for those crops. Large cropsAs witnessed in 2020, large crop yields in California and abroad can rapidly depress prices. Crop prices, especially almonds, are also adversely affected by a strong U.S. dollar, which makes U.S. exports more expensive and decreases demand for the products we produce. China is the second largest purchaser of California almonds and its currency exchange rate has remained steady thus far in 2020. The low value of the U.S. dollar in prior years has helped to maintain strong almond prices in overseas markets. Lastly, increased tariffsTariffs from China and India, which are major customers of almonds and pistachios, can make American products less competitive and push customers to switch to another producing country.
The Company's agribusiness operations are deemed essential and have been allowed to operate under California's Stay at Home Order. The Company continues to provide its employees with face masks and safety training to promote a safe working environment. A portion of the Company's farm labor force is contracted to an outside third party. Thus far, COVID-19 has not impacted our ability to hire outside labor.
For 2020, the almond industry is expecting record production due to a great bloom cycle and favorable weather. The industry does continue to see strong demand for its product but the expected increase in production has begun to negatively impact prices. The mix of demand has been changed in the near term as a result of COVID-19 as more product is moving through wholesale markets and less through high end users such as restaurants. This temporary trend has also negatively impacted pricing. We expect pricing could fall as much as $.50 per pound for the 2020 crop.
For pistachios, 2020 is the on production year but current industry estimates for 2020 production are less than originally forecasted. This change in estimate is allowing prices to stay in line with 2019 crop pricing. Demand has continued to stay strong for pistachios thus far this year.
Weather conditions can also impact the number of tree and vine dormant hours, which are integral to tree and vine growth. During 2020, pistachios enduredWe will not know the impact of current weather conditions on 2021 production until the summer of 2021. Thus far, we have experienced a warm winter, limiting much neededwhich reduces the number of chilling hours. We do however, expecthours for our pistachio yieldsand almond trees. In the past, this has had a very adverse effect on pistachio yields. The current SWP allocation of 5% is inadequate for our farming needs. As such, management will seek out alternate sources of water and will incur additional water delivery charges, which will increase overall 2021 crop production costs.
The Company's agribusiness operations are deemed essential and have been allowed to improve over prior year's levels but as noted above at levels less than originally estimated. We expect almondoperate under California's COVID-19 restrictions. The Company continues to provide its employees with face masks and winegrape yieldssafety training to remain consistent withpromote a safe working environment. As in 2020, COVID-19 restrictions have not had a measurable impact on the prior year given the current status of the crops.Company's farming operations in 2021 to-date.
Lastly, the impact of new state ground water management laws on new plantings and continuing crop production remains unknown. Water delivery and water availability continues to be a long-term concern within California. Any limitation of delivery of SWP water and the absence of available alternatives during drought periods could potentially cause permanent damage to orchards and vineyards throughout California. While this could impact us, we believe we have sufficient water resources available to meet our requirements for the remainder of 2020.
2021 and into the future.
Ranch Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
($ in thousands) | 2021 | | 2020 | | $ | | % |
Ranch Operations revenues | | | | | | | |
Game management and other 1 | $ | 646 | | | $ | 458 | | | $ | 188 | | | 41 | % |
Grazing | 397 | | | 405 | | | (8) | | | (2) | % |
Total Ranch Operations revenues | $ | 1,043 | | | $ | 863 | | | $ | 180 | | | 21 | % |
Total Ranch Operations expenses | $ | 1,187 | | | $ | 1,406 | | | $ | (219) | | | (16) | % |
Operating loss from Ranch Operations | $ | (144) | | | $ | (543) | | | $ | 399 | | | (73) | % |
1 Game management and other revenues consist of revenues from hunting, filming, high desert hunt club (a premier upland bird hunting club), and other ancillary activities. |
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Ranch Operations revenues | | | | | | | |
Game management and other 1 | $ | 247 |
| | $ | 385 |
| | $ | (138 | ) | | (36 | )% |
Grazing | 429 |
| | 420 |
| | 9 |
| | 2 | % |
Total Ranch Operations revenues | $ | 676 |
| | $ | 805 |
| | $ | (129 | ) | | (16 | )% |
Total Ranch Operations expenses | $ | 1,178 |
| | $ | 1,393 |
| | $ | (215 | ) | | (15 | )% |
Operating loss from Ranch Operations | $ | (502 | ) | | $ | (588 | ) | | $ | 86 |
| | (15 | )% |
1 Game management and other revenues consist of revenues from hunting, filming, high desert hunt club (a premier upland bird hunting club), and other ancillary activities. |
•Ranch operations revenues were $676,000$1,043,000 for the three months ended June 30, 2020, a decreaseMarch 31, 2021, an increase of $129,000,$180,000, or 16%21%, from $805,000$863,000 for the same period in 2019.2020. The decreaseincrease in revenues is primarily attributed to shutting down our primary ranch operations (hunting and filming) for three monthsan increase in film location fee revenues of $146,000, driven by increased demand, resulting from closures of comparable filming locations in LA County because of COVID-19 restrictions. The remainder of the increase is attributed to a $38,000 increase in guided hunts, which saw less activity during 2020 due to COVID-19.COVID-19 restrictions.
•Ranch operations expenses were $1,178,000$1,187,000 for the three months ended June 30, 2020,March 31, 2021, a decrease of $215,000,$219,000, or 15%16%, from $1,393,000$1,406,000 for the same period in 2019.2020. This segment saw wholesaledecline is largely attributed to declines in payroll supplies, and fuel expenses as a result of having less activity within game management due to shutting down operationsreduced staffing levels as note above.
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Ranch Operations revenues | | | | | | | |
Game Management and other 1 | $ | 705 |
| | $ | 882 |
| | $ | (177 | ) | | (20 | )% |
Grazing | 834 |
| | 812 |
| | 22 |
| | 3 | % |
Total Ranch Operations revenues | $ | 1,539 |
| | $ | 1,694 |
| | $ | (155 | ) | | (9 | )% |
Total Ranch Operations expenses | $ | 2,584 |
| | $ | 2,743 |
| | $ | (159 | ) | | (6 | )% |
Operating loss from Ranch Operations | $ | (1,045 | ) | | $ | (1,049 | ) | | $ | 4 |
| | — | % |
1 Game management and other revenues consist of revenues from hunting, filming, high desert hunt club (a premier upland bird hunting club), and other ancillary activities. |
Ranch operations revenues were $1,539,000 for the first six months of 2020, a decrease of $155,000, or 9%, from $1,694,000 for the same period in 2019. The decrease is attributedcompared to the same factors discussed within the segment's quarterly operating results above, in addition to the closure of High Desert Hunt Club in March, April and May.prior year.
Ranch operations expenses were $2,584,000 for the first six months of 2020, a decrease of $159,000, or 6%, from $2,743,000 for the same period in 2019. The decrease is attributed to the same factors discussed within the segment's quarterly operating results above.
Corporate and Other:
Corporate general and administrative costs were $2,494,000$2,291,000 for the three months ended June 30, 2020, an increaseMarch 31, 2021, a decrease of $204,000,$242,000, or 9%10%, from $2,290,000$2,533,000 for the same period in 2019.2020. The increasedecrease is primarily attributed to increasedreduced payroll and stock compensation, net of $406,000capitalization, of $310,000, which resulted from factors such as a resultthe 2020 right sizing initiative and the recent departure of implementing a new performance stock compensation plan.the Company's general counsel. This increasedecrease was offset by a decline in professional services of $209,000 as a result of having fewer corporate projects.
Corporate general and administrative costs were $5,027,000 for the first six months of 2020, an increase of $263,000, or 6%, from $4,764,000 for the same period in 2019. The Company experienced a $725,000$60,000 increase in stock compensation expense as a result of the new performance stock compensation plan discussed above. This increase was offset by a decrease in professional services of $375,000 and depreciation and amortization of $90,000.
On April 17, 2020, the Company sold building and land that was previously operated by a fast food tenant to its joint venture, Petro Travel Plaza, LLC. The Company received a cash distribution of $2,000,000 from the joint venture, and realized a Gain on Sale of Real Estate of $1,333,000.
insurance expense.
Joint Ventures:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
($ in thousands) | 2021 | | 2020 | | $ | | % |
Equity in earnings (loss) | | | | | | | |
Petro Travel Plaza Holdings, LLC | $ | 146 | | | $ | 1,523 | | | $ | (1,377) | | | (90) | % |
Five West Parcel, LLC | — | | | (1) | | | 1 | | | (100) | % |
18-19 West, LLC | (17) | | | (15) | | | (2) | | | 13 | % |
TRCC/Rock Outlet Center, LLC | (344) | | | (406) | | | 62 | | | (15) | % |
TRC-MRC 1, LLC | 43 | | | 20 | | | 23 | | | 115 | % |
TRC-MRC 2, LLC | 168 | | | 172 | | | (4) | | | (2) | % |
TRC-MRC 3, LLC | (55) | | | 62 | | | (117) | | | (189) | % |
Total equity in (losses) earnings | $ | (59) | | | $ | 1,355 | | | $ | (1,414) | | | (104) | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Equity in earnings (loss) | | | | | | | |
Petro Travel Plaza Holdings, LLC | $ | 1,458 |
| | $ | 2,354 |
| | $ | (896 | ) | | (38 | )% |
Five West Parcel, LLC | 10 |
| | 120 |
| | (110 | ) | | (92 | )% |
18-19 West, LLC | (17 | ) | | (13 | ) | | (4 | ) | | 31 | % |
TRCC/Rock Outlet Center, LLC | (514 | ) | | (667 | ) | | 153 |
| | (23 | )% |
TRC-MRC 1, LLC | 15 |
| | 13 |
| | 2 |
| | 15 | % |
TRC-MRC 2, LLC | 163 |
| | 164 |
| | (1 | ) | | (1 | )% |
TRC-MRC 3, LLC | 66 |
| | — |
| | 66 |
| | 100 | % |
Total equity in earnings | $ | 1,181 |
| | $ | 1,971 |
| | $ | (790 | ) | | (40 | )% |
•Equity in earningslosses were $1,181,000$59,000 for the three months ended June 30, 2020,March 31, 2021, a decrease of $790,000$1,414,000 or 40%104%, from $1,971,000$1,355,000 during the same period in 2019.2020. The changes are primarily attributed to the following:
An $896,000 decrease for our•For the quarter, the Petro Travel Plaza Holdings joint venture. Whileventure experienced lower fuel margins improved over the comparison period, the joint venture experienced significant declines in quick and full servicedue to higher fuel costs. Additionally, full-service restaurant margins resulting from closuresdecreased due to COVID-19.
A $110,000 decreaseoperating capacity limitations under the California's Blueprint for our Five West Travel Plaza joint venture as a result of selling the building and landSafer Economy. Full-service restaurants began reopening during the fourthsecond quarter of 2019.
A $153,000 improvementas infection and hospitalization rates have dropped, allowing for our TRCC/Rock Outlet Center joint venture as a result of lower interest expense driven by lower interest rates and lowerhigher operating costs as a result of the COVID-19 closure.
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
($ in thousands) | 2020 | | 2019 | | $ | | % |
Equity in earnings (loss) | | | | | | | |
Petro Travel Plaza Holdings, LLC | $ | 2,981 |
| | $ | 3,476 |
| | $ | (495 | ) | | (14 | )% |
Five West Parcel, LLC | 9 |
| | 206 |
| | (197 | ) | | (96 | )% |
18-19 West, LLC | (32 | ) | | (27 | ) | | (5 | ) | | 19 | % |
TRCC/Rock Outlet Center, LLC | (920 | ) | | (1,060 | ) | | 140 |
| | (13 | )% |
TRC-MRC 1, LLC | 35 |
| | 11 |
| | 24 |
| | 218 | % |
TRC-MRC 2, LLC | 335 |
| | 241 |
| | 94 |
| | 39 | % |
TRC-MRC3, LLC | 128 |
| | — |
| | 128 |
| | 100 | % |
Total equity in earnings | $ | 2,536 |
| | $ | 2,847 |
| | $ | (311 | ) | | (11 | )% |
Equity in earnings were $2,536,000 for the six months ended June 30, 2020, a decrease of $311,000, or 11%, from $2,847,000 during the same period in 2019. The decline is attributed to the same factors discussed within the segment's quarterly operating results.
capacity.
In conjunction with providing relief to certain tenants, the TRCC/Rock Outlet Center has agreed to defer rent for April, May or June to certain tenants due to the closure of the outlet center from March 20, 2020 through May 27, 2020. The following table sets forth information regarding the minimum rents billed and deferred to-date at the TRCC/Rock Outlet Center property level for the three months ended June 30, 2020.March 31, 2021. TRCC/Rock Outlet Center is continuing to work with two of its tenants to document temporary rent payment relief through rent deferrals. We continue to assess the probability of collecting outstanding receivables related to the 29two tenants that are currently in on-going negotiations. Management will continue to monitor each negotiation diligently, and when determined collectibilitycollectability is not probable, will reserve accordingly.
| | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands, except number of tenants) | Tenants1 | | | | Cumulative Deferred Rent due to COVID-19 | | Cumulative Deferred Rent Collected | | Deferred Rent to be Collected rest of 2021 |
Rent Deferral Agreements | 8 | | | | | $ | 217 | | | $ | 130 | | | $ | 87 | |
Rent Abatement Agreements | 17 | | | | | 575 | | | N/A2 | | N/A2 |
On-Going Deferral Negotiations | 2 | | | | | — | | | — | | | — | |
| | | | | | | | | |
| | | | | | |
| 27 | | | | | $ | 792 | | | $ | 130 | | | $ | 87 | |
|
1 Excludes percentage rent tenants. |
2 There are no subsequent collections to be made under a rent abatement scenario. |
|
| | | | | | | | | | | | | | | | | | |
($ in thousands, except number of tenants) | Tenants2 | | Contractual Rent Billing1 | | Deferred Rent due to COVID-19 | | Deferred Rent to be Collected in 2020 | | Deferred Rent to be Collected in 2021 |
Rent Deferral Agreements | 4 |
| | $ | 143 |
| | $ | 83 |
| | $ | 23 |
| | $ | 60 |
|
On-Going Deferral Negotiations | 29 |
| | $ | 870 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
Percentage of Rent Deferred | | | 58 | % | | | | |
| | | | | | | | | |
1Amounts shown represent contractual rent for all tenants for the three months ended June 30, 2020, regardless of whether or not a tenant has requested a rent deferral. |
2 Excludes percentage rent tenants |
Please refer to "Non-GAAP Financial Measures" for further financial discussion of the results of our joint ventures.
General Outlook
The operations of the Company are seasonal and future results of operations cannot reliably be predicted based on quarterly results. Historically, the Company's largest percentages of farming revenues are recognized during the third and fourth quarters of the fiscal year. Real estate activity and leasing activities are dependent on market circumstances and specific opportunities and therefore are difficult to predict from period to period.
The COVID-19 pandemic and resulting global economic disruptions have impacted our operations and are expected to continue to impact our operations for the foreseeable future. For a detailed discussion of the pandemic and its expected effects, refer to the section above titled "The COVID-19 Pandemic" and "Results of Operations by Segment."
For further discussion of the risks and uncertainties that could potentially adversely affect us, please refer to Part I, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, or Annual Report, and to Part I, Item 1A - "Risk Factors" of our Annual Report. We continue to be involved in various legal proceedings related to leased acreage. For a further discussion, please refer to Note 12 (Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements in this report.
Income Taxes
For the sixthree months ended June 30, 2020,March 31, 2021, the Company had net income tax expense of $708,000$21,000 compared to $313,000$512,000 for the sixthree months ended June 30, 2019.March 31, 2020. The effective tax rates approximated 234%-2% and 27%-298% for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. As of June 30, 2020,March 31, 2021, income tax receivables were $676,000.$1,148,000. The Company classifies interest and penalties incurred on tax payments as income tax expenses. Although the Company had a net loss for the six months ended June 30, 2020, theThe Company recognized income tax expense primarily as a result ofbecause permanent differences related to Section 162(m) limitations and discrete tax expense associated with stock compensation. The Section 162(m) compensation deduction limitations occurred as a result ofdue to changes in tax law arising from the 2017 Tax Cuts Jobs Act, which did not impact the Company until this year.Act. The discrete item was triggered when stock grants were issued to participants at a price less than the original grant price, causing a deferred tax shortfall. The shortfall recognized during the quarter represents the reversal of excess deferred tax assets recognized in prior periods. The recognition of the shortfall is not anticipated to have an impact on the Company's current income tax payable.
Cash Flow and Liquidity
Our financial position allows us to pursue our strategies of land entitlement, development, and conservation. Accordingly, we have established well-defined priorities for our available cash, including investing in core operating segments to achieve profitable future growth. We have historically funded our operations with cash flows from operating activities, investment
proceeds, and short-term borrowings from our bank credit facilities. In the past, we have also issued common stock and used the proceeds for capital investment activities.
To enhance shareholder value over the long-term, we will continue to make investments in our real estate segments to secure land entitlement approvals, build infrastructure for our developments, ensure adequate future water supplies, and provide funds for general land development activities. Within our farming segment, we will make investments as needed to improve efficiency and add capacity to its operations when it is profitable to do so.
Our cash, cash equivalents and marketable securities totaled $49,298,000 at June 30, 2020,$52,286,000 as of March 31, 2021, a decrease of $16,892,000$5,805,000 from $66,190,000$58,091,000 as of December 31, 2019.2020.
The following table shows our cash flow activities for the sixthree months ended June 30,March 31, | | (in thousands) | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Operating activities | $ | 51 |
| | $ | (1,278 | ) | Operating activities | | $ | 3,714 | | | $ | 4,037 | |
Investing activities | $ | (852 | ) | | $ | (8,282 | ) | Investing activities | | $ | (11,679) | | | $ | (2,802) | |
Financing activities | $ | (4,330 | ) | | $ | (2,843 | ) | Financing activities | | $ | (2,032) | | | $ | (3,293) | |
As we move forward, we will continue to use cash from operations, proceeds from the maturity of securities, and anticipated distributions from joint ventures to fund real estate project investments.investments, including the investments summarized below.
Our estimated capital investment, inclusive of capitalized interest and payroll, for the remainder of 20202021 is primarily related to our real estate projects. These estimated investments include approximately $3,492,000$6,209,000 of infrastructure development at TRCC-East to support continued commercial retail and industrial development and to expand water facilities to support future anticipated absorption. We also plan to invest approximately $557,000$3,487,000 to continue the development of new almond orchards and replacingvineyards, and to replace farm equipment. The farm investments are part of a long-term farm management program to redevelop declining orchards and vineyards to maintain and improve future farm revenues. Lastly, we expect to invest up to $5,201,000$7,667,000 for land planning, litigation,litigation/appeals, mapping, federal and state agency permitting activities, and development activities at MV, Centennial, and Grapevine during the remainder of 2020.2021.
It is difficult to accurately predict cash flows due to the nature of our businesses and fluctuating economic conditions. Our earnings and cash flows will be affected from period to period by the commodity nature of our farming and mineral operations, the timing of sales and leases of property within our development projects, and the beginning of development within our residential projects. The timing of sales and leases within our development projects is difficult to predict due to the time necessary to complete the development process and negotiate sales or lease contracts. Often, the timing aspect of land development can lead to particularcertain years or periods having more or lessdifferent earnings than comparable periods. The ongoing pandemic, COVID-19, continues to have a negative impact on traffic, consumer spend and demand for fuel, which have a direct impact on our operations. In response to this,Although California's vaccination efforts appear promising, we will continue to evaluate our operations for expense reductions and cash savings. Based on our experience, and assuming the impacts of the COVID-19 do not materially worsen, we believe we will have adequate cash flows, cash balances, and availability on our line of credit (discussed below) over the next twelve months to fund internal operations. COVID-19 restrictions have not impacted our ability to access traditional funding sources. As we move forward with the completion of the litigation, permitting and engineering design for our master planned communities and prepare to move into the development stage, we will need to secure additional funding through the issuance of equity and secure other forms of financing such as joint ventures and possibly debt financing.
We continuously evaluate our short-term and long-term capital investment needs. Based on the timing of capital investments, we may supplement our current cash, marketable securities, and operational funding sources through the sale of common stock and the incurrence of additional debt.
On October 13, 2014, the Company as borrower, entered into an Amended and Restated Credit Agreement, a Term Note and a
Revolving Line of Credit Note, with Wells Fargo, or collectively the Credit Facility. The Credit Facility added a $70,000,000
term loan, or Term Loan, to the then existing $30,000,000 revolving line of credit, or RLC. In August 2019, the Company
amended the Term Note (Amended Term Note) and extended its maturity to June 2029 and amended the RLC to expand
the capacity from $30,000,000 to $35,000,000 and extend the maturity to October 5, 2024.
Any future borrowings under the RLC are expected to be used for ongoing working capital requirements and other general corporate purposes. To maintain availability of funds under the RLC, undrawn amounts under the RLC will accrue a commitment fee of 10 basis points per annum. The Company's ability to borrow additional funds in the future under the RLC is subject to compliance with certain financial covenants and making certain representations and warranties, which are typical in this type of borrowing arrangement.
The Amended Credit Facility requires compliance with three financial covenants: (a) total liabilities divided by tangible net worth not greater than 0.75 to 1.0 at each quarter end; (b) a debt service coverage ratio not less than 1.25 to 1.00 as of each quarter end on a rolling four quarter basis; and (c) maintain liquid assets equal to or greater than $20,000,000. At June 30, 2020March 31, 2021 and December 31, 2019, we were2020, the Company was in compliance with thethose financial covenants.
The Amended Credit Facility also contains customary negative covenants that limit the ability of TRC to, among other things, make capital expenditures, incur indebtedness and issue guaranties, consummate certain assets sales, acquisitions or mergers, make investments, pay dividends or repurchase stock, or incur liens on any assets.
The Amended Credit Facility contains customary events of default, including: failure to make required payments; failure to comply with terms of the Amended Credit Facility; bankruptcy and insolvency; and a change in control without consent of bank (which consent will not be unreasonably withheld). The Amended Credit Facility contains other customary terms and conditions, including representations and warranties, which are typical for credit facilities of this type.
In May 2019, we filed an updated shelf registration statement on Form S-3, which went effective in May 2019. Under the shelf registration statement, we may offer and sell in the future one or more offerings of, common stock, preferred stock, debt securities, warrants or any combination of the foregoing. The shelf registration allows for efficient and timely access to capital markets and when combined with our other potential funding sources just noted, provides us with a variety of capital funding options that can then be used and appropriately matched to the funding needs of the Company.
The following table summarizes our contractual cash obligations and commercial commitments as of June 30, 2020,March 31, 2021, to be paid over the next five years and thereafter: