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 the Company's crops and real estate operations, future prices, production and demand for oil and other minerals, future development of the Company's property, future revenue and income of its jointly-owned travel plaza and other joint venture operations, potential losses to
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 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 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, 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, including the development, distribution, efficacy and acceptance of vaccines and related mandates, 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 several reasons, including those described above and in the section entitled "Risk Factors" in our most recent Annual Report on Form 10-K.
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 Angelesand, at its most northerly border, is 15 miles east of Bakersfield.
Corporate goals 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-use master planned residential and commercial/industrial real estate development projects to serve the growing populations of Southern and
Central California. Our mixed-use master planned residential developments have been approved to collectively include up to 35,278 housing units, and more than 35 million square feet of commercial space. Over the next few years, it is possible that we will be engaged in continuous litigation defending the entitlements of our master planned developments. We are currently executing on value creation as we are engaged in construction, commercial sales, and leasing at our fully operational commercial/industrial center Tejon Ranch Commerce Center, or TRCC. In January 2021, the Kern County Board of Supervisorsapproved two Conditional Use Permits, authorizing development of multi-family apartment uses within the Tejon Ranch Commerce Center, on a 27-acre site located immediately north of the Outlets at Tejon. This authorization allows 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 we anticipate construction beginning late 2022. All of these efforts are supported by diverse revenue streams generated from other operations including: farming, mineral resources, and our various joint ventures.
We currently operate in five business segments: commercial/industrial real estate development; resort/residential real estate development; mineral resources; Agriculture; and ranch operations.
The activities of the commercial/industrial real estate development segment include the planning and approval of land for development; infrastructure construction; construction of pre-let buildings; construction of buildings intended to be rented 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 power plant leasing and communications leases.
At the heart of the commercial/industrial real estate development segment is TRCC, a 20 million square foot commercial/industrial development on
Interstate 5just north of the Los Angelesbasin. 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.
We are also involved in multiple joint ventures within TRCC with several partners that help us develop our commercial/industrial activities:
•A joint venture with Petro that owns and operates two travel and truck stop facilities, comprised of five separate gas stations with convenience stores and fast-food restaurants within TRCC-West and TRCC-East. •Two joint ventures with
Rockefeller Development Group, or Rockefeller: •18-19 West LLCowns 61.5 acres of land for future development within TRCC-West. In 2019, our 18-19 West LLCjoint venture entered into a land purchase option with the same third-party who purchased the Five West building and land. In November 2021, the third-party exercised the land option and purchased the land from the joint venture for $15,213,000; and
• TRCC/Rock Outlet Center LLC operates outlets at Tejon, a net shopping experience of 326,000 square feet at TRCC-East;
• Six joint ventures with
•TRC-MRC 1, LLC operates a 480,480 square foot industrial building at TRCC-Est, which was completed in 2017 and is fully leased;
•TRC-MRC 2, LLC owns and operates a 651,909 square foot building at TRCC-West that is fully leased;
•TRC-MRC 3, LLC operates a 579,040 square foot industrial building at TRCC-Est which 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. Grading on the site has been substantially completed and construction of the building has begun. The building is expected to be completed during the second half of 2022. •TRC-MRC 5 LLC was formed in
March 29, 2022to pursue the development, construction, lease-up, and management of an approximately 446,400 square foot industrial building located within TRCC-East. The project is currently in its initial planning and design phases with construction set to commence in 2023.
• TRC-MRC Multi I, LLC was formed in
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
Mountain Village at Tejon Ranch, or MV, Centennial at Tejon Ranch, or Centennial, and Grapevine at Tejon Ranch, or 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 first final map for the project consisting of 401 residential lots and parcels for hospitality, amenities, and public uses was approved by Kern Countyin December 2021; •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, including nearly 3,500 affordable units. Centennial had entitlements approved in December 2018and received legislative approvals in April 2019from the Los Angeles County Board of Supervisors. See Note 12 (Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements for additional information related to current litigation; and •Grapevine is an 8,010-acre development area located on the San Joaquin Valleyfloor 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. The 4,643 acres designated for mixed-use development will include housing, retail, commercial, and industrial components. 26 -------------------------------------------------------------------------------- •Immediately northeast of Grapevine is Grapevine North, a 7,655-acre development area, that is currently used for agricultural purposes. Identified as a development area in the RWA, Grapevine North presents a significant opportunity for future development. Grapevine North may feature mixed use community development similar to Grapevine at Tejon Ranch, or other development uses as appropriate based upon market conditions at the time.
Please refer to our Annual Report on Form 10-K for the year ended
Our mineral resources segment generates revenue from oil and gas royalty leases, rock and aggregate extraction leases, a lease with
The agricultural segment derives revenue from the sale of wine grapes, almonds and pistachios.
Finally, the ranch operations segment includes revenue from game management and ancillary land uses such as grazing leases and filming.
First quarter 2022 performance summary
For the three months ended
March 31, 2022, the Company had a net income attributable to common stockholders of $4,307,000compared to a net loss of $1,055,000for the three months ended March 31, 2021. Improvements in the Company's operating results are attributed to the following: commercial land sale resulting in a $3,937,000increase in Commercial/Industrial operating profits, additional water sales resulting in a $2,682,000improvement in Mineral Resources operating profits, and improved joint venture operating results of $1,272,000. Income tax expense increased accordingly by $3,025,000to reflect the improved operating results. For the first three months of 2021, we had a net loss attributable to common stockholders of $1,055,000compared to a net loss of $682,000during the first three months of 2020. The primary driver of this decrease was a $1,414,000decrease in the equity in earnings of unconsolidated joint ventures. For the quarter, Petro Travel Plaza Holdingsexperienced 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 California'sBlueprint for a Safer Economy. The decline in operating results from our joint ventures was offset by a $998,000increase in mineral resources revenues, driven by increased water sales due, in part, to drier conditions statewide which led to a lower SWP allocation over the 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 estimates
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, use of different estimates that we reasonably could have used in the current period, or 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 three months ended March 31, 2022, our critical accounting policies have not changed since the filing of our Annual Report on Form 10-K for the year ended December 31, 2021. 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. 27 --------------------------------------------------------------------------------
Operating results 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) 2022 2021 $ % Commercial/industrial revenues Pastoria Energy Facility $ 996
$ 1,016 $ (20)(2) % TRCC Leasing 388 399 (11) (3) % TRCC management fees and reimbursements 585 186 399 215 % Commercial leases 154 142 12 8 % Communication leases 253 227 26 11 % Landscaping and other 292 258 34 13 % Land sale 4,681 - 4,681 100 %
Total commercial/industrial income
Total Commercial/Industrial Expenditure
76 % Operating income from commercial/industrial
$ 4,613 $ 676 $ 3,937582 % •Commercial/industrial real estate development segment revenues were $7,349,000for the three months ended March 31, 2022, an increase of $5,121,000, or 230%, from $2,228,000for the three months ended March 31, 2021. The increase is attributed to a land sale to a third party for a 12.3-acre parcel for total consideration of $4,681,000. •Commercial/industrial real estate development segment expenses were $2,736,000for the three months ended March 31, 2022, an increase of $1,184,000, or 76%, from $1,552,000for the three months ended March 31, 2021. This increase is primarily attributed to recognizing cost of land sales associated with the 12.3-acre parcel noted above. The logistics operators currently located within TRCC have demonstrated success in serving all of Californiaand the western region of the United States, and the Company showcases their success in its marketing efforts. We expect to 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 location 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 many decentralized smaller distribution centers. The world-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 trade zone. This FTZ designation is further supplemented by the Advance Kern Incentive Program, or AKIP, adopted by the Kern County Board of Supervisors. AKIP 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. AKIP provides incentives such as assistance in obtaining tax incentives, building supporting infrastructure, and workforce development. We believe that the FTZ and AKIP, along with our ability to provide fully entitled, shovel-ready land parcels to support buildings of any size, including buildings one million square feet or larger, can provide us with a potential marketing advantage. Our marketing efforts target the Inland Empire region of Southern California, the Santa Clarita Valleyof 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 Valleyof 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 within our joint ventures. A potential disadvantage to our development strategy is our distance from the ports of Los Angelesand Long Beachin 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 Riversideand 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, the potential 28 --------------------------------------------------------------------------------
the inconvenience of our remoteness from the ports is mitigated. Strong demand for large distribution facilities is pushing development further east in search of large licensed parcels.
During the quarter ended
March 31, 2022, vacancy rates in the Inland Empire dipped another 20 basis points to a historical low of 0.3%, leading to an increase in lease rate of 18.7%, both setting new records when compared to the fourth quarter of 2021. Demand for Inland Empire logistics space continues to be strong, as net absorption reached 3.1 million square feet. As lease rates increase in the Inland Empire, we may experience greater pricing advantages due to our lower land basis. During the quarter ended March 31, 2022, vacancy rates in the San Fernando Valleyand Ventura Countywere unchanged at 0.5% quarter over quarter and 120 basis points below its mark from one year ago. Rents are at $1.16square feet, which increased by 5% over the fourth quarter of 2021. Industrial vacancy rates are expected to remain low, and industrial users seeking larger spaces are going further north into neighboring Kern County, and particularly, TRCC, which has attracted increased attention as market conditions continue to tighten. Additionally, TRCC is in a position to capture tenant awareness due to our ability to provide a competitive alternative for users in the Inland Empire and the Santa Clarita Valley. The Company's TRC-MRC 4 joint venture is currently constructing a 629,274 square foot industrial building while Scannell Properties, a third-party land purchaser, is building a 252,000 square foot industrial building. We expect our 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 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.
Real Estate – Resort/Residential:
We are in the preliminary stages of real estate development for this segment; therefore, no revenue or profit is attributed to this segment.
Resort/residential real estate development segment expenses were
$423,000for the three months ended March 31, 2022, a decrease of $130,000, or 24%, from $553,000for the three months ended March 31, 2021. The decrease is attributed to additional payroll capitalized to qualifying real estate development projects. Our long-term business plan of developing the communities of MV, Centennial, and Grapevine remains unchanged. As home buyer trends change in Californiato 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'spopulation growth and household formation will also support housing demand in our region. Californiaalso has a significant documented housing shortage, which we believe our communities will help ease as the population base within Californiacontinues to grow. Most of the expenditures and capital investment to be incurred within our resort/residential real estate segment are expected to continue to focus on the mixed use master planned communities of Centennial, Grapevine, and Mountain Village. •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 Angelesto address litigation filed in the Los Angeles Superior Court. See Note 12 (Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements for further discussion. •Grapevine - an 8,010-acre development area located on the San Joaquin Valleyfloor 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. •MV - a fully entitled project that obtained final map approvals in 2021 for 401 residential lots and parcels for hospitality, amenities, and public uses. 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 consumer and market research studies, fine tuning of development business 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. 29 --------------------------------------------------------------------------------
Mineral Resources: Three Months Ended March 31, Change ($ in thousands) 2022 2021 $ % Mineral resources revenues Oil and gas $ 274
$ 174 $ 10057 % Cement 583 466 117 25 % Rock aggregate 251 258 (7) (3) % Exploration leases 43 25 18 72 % Water Sales 10,157 6,252 3,905 62 % Reimbursables and other 660 1 659 65,900 %
Total revenue from mineral resources $11,968
$ 4,79267 %
Total Mineral Resource Expenditures $7,157
$ 2,11042 % Operating income from mineral resources $ 4,811 $ 2,129 $ 2,682126 % •Mineral resources segment revenues were $11,968,000for the three months ended March 31, 2022, an increase of $4,792,000, or 67%, from $7,176,000for the three months ended March 31, 2021. The dry 2021/2022 winter diminished water availability in Californiaand eventually resulted in a SWP allocation of 5%. As a result, the Company generated $3,905,000in additional water sales during the quarter ended March 31, 2022. Comparatively the Company sold 6,970 and 5,881 acre-feet of water as of March 31, 2022and 2021, respectively. The remainder of the increase is attributed to the timing of property tax reimbursements from our mineral leases. •Mineral resources segment expenses were $7,157,000for the three months ended March 31, 2022, an increase of $2,110,000, or 42%, from $5,047,000for the three months ended March 31, 2021. This increase in expenses is primarily attributed to an increase in water cost of sales resulting from the increased water sales volumes along with the prices associated with the mix of water sold. As anticipated changes arise in the future related to groundwater management in California, such as limits on groundwater pumping in over drafted water basins outside of our lands, we believe that our water assets, including water banking operations, ground water recharge programs, and access to water contracts like those we have purchased in the past, will become even more important and valuable in servicing our projects and providing opportunities for water sales to third parties. With 2021 and the first quarter of 2022 being drought periods, local water market participants had few alternative water sources. Current forecasts indicate that this trend may continue beyond the first quarter of 2022, which may lead to favorable water sales opportunities. The price per barrel of oil has increased over 42% from December 31, 2021levels. California Resources Corporation, or CRC, our largest oil royalty tenant currently has 13 wells in production, with the expectation of returning more wells into production in the near future. So far in 2022, we have seen a small increase in oil production. Prices for oil, natural gas fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, such as: changes in domestic and global supply and demand, domestic and global inventory levels, political and regulatory conditions in California, and international disputes such as current conflicts in Eastern Europe. 30 -------------------------------------------------------------------------------- Farming: Three Months Ended March 31, Change ($ in thousands) 2022 2021 $ % Farming revenues Almonds $ 483 $ 304 $ 17959 % Pistachios - 14 $ (14)(100) % Wine grapes - 16 $ (16)(100) % Hay 114 129 (15) (12) % Other 58 144 (86) (60) % Total farming revenues $ 655 $ 607 $ 488 % Total farming expenses $ 1,762 $ 1,478 $ 28419 % Operating loss from farming $ (1,107) $
•Farming segment revenues were
$655,000for the three months ended March 31, 2022, an increase of $48,000, or 8%, from $607,000during the same period in 2021. The improvement is primarily attributed to an $185,000increase in almond revenues. Comparatively, we sold 269,000 and 161,000 pounds of almonds as of March 31, 2022and 2021, respectively. This increase was offset by a $74,000decline in water usage reimbursements associated with a farmland lease. •Farming segment expenses were $1,762,000for the three months ended March 31, 2022, an increase of $284,000, or 19%, from $1,478,000during the same period in 2021. The increase in expenses resulted from higher fixed water costs resulting from increased costs associated with maintaining local water district infrastructure. Our almond, pistachio, and wine grape crop sales are highly seasonal with most 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. As witnessed in 2020, large crop yields in Californiaand abroad can rapidly depress prices. Tariffs from India, which is a major customer of almonds and pistachios, can make American products less competitive and push customers to switch to another producing country. Weather conditions can also impact the number of tree and vine dormant hours, which are integral to tree and vine growth. We will not know the impact of current weather conditions on 2022 production until the summer of 2022. Thus far, we have experienced a warm winter, which reduces the number of chilling hours for our pistachio and almond trees. In the past, this has had a very adverse effect on pistachio yields. The current SWP allocation of 5% alone is inadequate for our farming needs. As such, management will use a portion of the Company's water sources to cover any shortfall and may incur additional water delivery charges, which will increase overall 2022 crop production costs. Labor shortages are increasing the cost of labor for the Company's farming segment, while supply chain disruptions such as shortages of drivers for trucking companies and availability of food grade containers are impacting our ability to deliver goods to customers. Because a majority of the Company's almonds are sold to customers in Indiaand China, it is very likely that there will be continued sales delays given the current disruption in the global supply chain network. The Company, along with the rest of the farming industry, is experiencing increased costs for chemicals, herbicides and fertilizers. For the remainder of 2022, we expect these issues to have an adverse effect on the Company's farming operations. Lastly, the impact of 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 next crop year. 31 --------------------------------------------------------------------------------
Ranch Operations: Three Months Ended March 31, Change ($ in thousands) 2022 2021 $ % Ranch Operations revenues Game management and other 1 $ 702
$ 646 $ 569 % Grazing 346 397 (51) (13) %
Total revenue from ranch operations $1,048
$ 5 - %
Total Ranch Operating Expenses $1,315
$ 12811 %
Operating loss from ranch operation $ (267)
$ (123)85 %
1 Game management and other income includes income from hunting, filming, the High Desert Game Club (a leading upland bird hunting club) and other ancillary activities.
•Ranch operations revenues were
$1,048,000for the three months ended March 31, 2022, an increase of $5,000, or 0%, from $1,043,000for the same period in 2021. The fluctuation is in line with expectations •Ranch operations expenses were $1,315,000for the three months ended March 31, 2022, an increase of $128,000, or 11%, from $1,187,000for the same period in 2021. This increase is primarily attributed to an increase in repairs and maintenance costs resulting from a shift in business strategy. Historically, the Company has maintained property grounds using internal sources, during 2022 we began outsourcing this effort which is attributing to the aforementioned increase in repairs and maintenance costs during the quarter.
Companies and others:
Corporate general and administrative costs were
$2,415,000for the three months ended March 31, 2022, an increase of $124,000, or 5%, from $2,291,000for the same period in 2021. The increase in 2022 is attributed to the fact that the Company did not have an in-house counsel during the first quarter of 2021.
Joint Ventures: Three Months Ended March 31, Change ($ in thousands) 2022 2021 $ % Equity in earnings (loss) Petro Travel Plaza Holdings, LLC $ 1,161
$ 146 $ 1,015695 % Five West Parcel, LLC - - - - % 18-19 West, LLC - (17) 17 (100) % TRCC/Rock Outlet Center, LLC (207) (344) 137 (40) % TRC-MRC 1, LLC 9 43 (34) (79) % TRC-MRC 2, LLC 172 168 4 2 % TRC-MRC 3, LLC 79 (55) 134 (244) % TRC-MRC 4, LLC (1) - (1) 100 % Total equity in earnings $ 1,213 $ (59) $ 1,272(2,156) % •Equity in earnings were $1,213,000for the three months ended March 31, 2022, an increase of $1,272,000, from a loss of $59,000during the same period in 2021. The improvement is primarily attributed to the Company's Petro joint venture that saw an increase in overall traffic and fuel sales volumes when compared to the prior year. Additionally, the joint venture's full service restaurants were open during the first quarter of 2022, but were closed due to COVID-19 mandates during the same period in 2021.
Please refer to the “Non-GAAP Financial Measures” section for a more in-depth financial discussion of the results of our joint ventures.
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. 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, 2021, 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 three months ended March 31, 2022, the Company had net income tax expense of $3,046,000compared to $21,000for the three months ended March 31, 2021. The effective tax rates approximated 41% and -2% for the three months ended March 31, 2022and 2021, respectively. As of March 31, 2022, income tax payables were $4,591,000. The Company classifies interest and penalties incurred on tax payments as income tax expenses. The Company's effective tax rates were higher than statutory rates primarily because permanent differences related to Section 162(m) limitations and discrete tax expense associated with stock compensation. The Section 162(m) compensation deduction limitations occurred due to changes in tax law arising from the 2017 Tax Cuts Jobs 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 a material 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 expect to continue to make investments in our real estate segments to secure land entitlement approvals, build infrastructure for our developments, provide adequate water supplies, and provide 33 -------------------------------------------------------------------------------- funds for general land development activities. Within our farming segment, we intend to 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
$56,242,000as of March 31, 2022, an increase of $9,064,000from $47,178,000as of December 31, 2021. The following table shows our cash flow activities for the three months ended March 31, (in thousands) 2022 2021 Operating activities $ 7,984 $ 3,714Investing activities $ (5,243) $ (11,679)Financing activities $ (2,231) $ (2,032)Operating Activities
During the first three months of 2022, the Company’s activities provided
During the first three months of 2021, the Company’s activities provided
During the first three months of 2022, investing activities used
$5,243,000. The Company made capital expenditures, inclusive of capitalized interest and payroll (exclusive of stock compensation), of $4,432,000, which includes predevelopment activities for our master planned communities; $517,000consisting of permitting efforts for MV; $156,000consisting of permitting efforts for Grapevine, and costs related to litigation defense for Centennial of $1,274,000. At TRCC, we spent $642,000on infrastructure improvements, qualifying costs related to land development and the residential community at TRCC-East. Within our farming segment, we spent $1,673,000which includes cultural costs for orchards not currently in production and replacing machinery and equipment. Lastly, the Company used $941,000to acquire water assets. During the first three months of 2021, investing activities used $11,679,000. The Company made capital expenditures, inclusive of capitalized interest and payroll (exclusive of stock compensation), of $5,218,000, which includes predevelopment activities for our master planned communities; $1,064,000consisting of planning and permitting primarily related to the preparation of final maps for Phase 1 of MV; expenditures relating to litigation of $293,000for Grapevine, and costs related to litigation defense for Centennial of $529,000. At TRCC, we spent $721,000on water treatment infrastructure improvements and road improvements tied to the ongoing development of the industrial building currently under construction at TRCC-East. Within our farming segment, we spent $2,178,000, which includes cultural costs for orchards not currently in production and replacing machinery and equipment. We also invested $5,715,000in marketable securities. Lastly, the Company used $1,653,000to acquire long-term water assets. As we move forward, we anticipate 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, including the investments summarized below. Our estimated capital investment, inclusive of capitalized interest and payroll, for the remainder of 2022 is primarily related to our real estate projects. These estimated investments include approximately $12,074,000of 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 $1,664,000for cultural costs tied to new almond orchards and vineyards, 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 $6,566,000for land planning, litigation/appeals, federal and state agency permitting activities, and development activities at MV, Centennial, and Grapevine during the remainder of 2022. We capitalize interest cost as a cost of the project only during the period for which activities necessary to prepare an asset for its intended use are ongoing, provided expenditures for the asset have been made and interest cost has been incurred. Capitalized interest for the three months ended March 31, 2022and 2021, was $579,000and $624,000, respectively, and is classified within real estate development. We also capitalized payroll costs related to development, pre-construction, and construction projects which aggregated $719,000and $519,000for the three months ended March 31, 2022and 2021, respectively. Expenditures for repairs and maintenance are expensed as incurred. 34 --------------------------------------------------------------------------------
During the first three months of 2022, financing activities used
$2,231,000, which was attributable to long-term debt service of $1,109,000and tax payments on vested share grants of $1,122,000. During the first three months of 2021, financing activities used $2,032,000, which was attributable to long-term debt service of $1,066,000and tax payments on vested share grants of $966,000. 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 certain years or periods having different earnings than comparable periods. Based on the Company's experience, the Company believes it 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. As we move forward with the completion of our 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.
Capital structure and financial situation
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 $70,000,000term loan, or Term Loan, to the then existing $30,000,000revolving line of credit, or RLC. In August 2019, the Company amended the Term Note (Amended Term Note) and extended its maturity to June 2029and amended the RLC to expand the capacity from $30,000,000to $35,000,000and extend the maturity to October 5, 2024. The Amended Term Note had a $49,790,000balance as of March 31, 2022. The interest rate per annum applicable to the Amended Term Loan is LIBOR (as defined in the Amended Term Note) plus a margin of 170 basis points. The interest rate for the term of the Amended Term Note has been fixed through the use of an interest rate swap at a rate of 4.16%. The Amended Term Note requires monthly amortization payments pursuant to a schedule set forth in the Amended Term Note, with the final outstanding principal amount due June 5, 2029. The Amended Credit Facility is secured by the Company's farmland and farm assets, which include equipment, crops and crop receivables; the PEF power plant lease and lease site; and related accounts and other rights to payment and inventory. The RLC had no outstanding balance as of March 31, 2022and December 31, 2021. At the Company's option, the interest rate on this line of credit can float at 1.50% over a selected LIBOR rate or can be fixed at 1.50% above LIBOR for a fixed rate term. During the term of this RLC (which matures in October 2024), the Company can borrow at any time and partially or wholly repay any outstanding borrowings and then re-borrow, as necessary. 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 March 31, 2022and December 31, 2021, the Company was in compliance with those financial covenants.
The Amended Credit Facility also contains customary negative covenants which limit TRC’s ability to, among other things, make capital expenditures, incur indebtedness and issue guarantees, complete the sale, acquisition or merger of certain assets, to make investments, to pay dividends or to repurchase shares, or to incur liens on all 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 35 -------------------------------------------------------------------------------- (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. The Company also has a
$4,750,000promissory note agreement whose principal and interest due monthly began October 1, 2013. The interest rate on this promissory note is 4.25% per annum, with principal and interest payments ending on September 1, 2028. The balance as of March 31, 2022was $1,884,000. Current and future capital resource requirements will be provided primarily from current cash and marketable securities, cash flow from ongoing operations, distributions from joint ventures, proceeds from the sale of developed and undeveloped land parcels, potential sales of assets, additional use of debt or drawdowns against our line of credit, proceeds from the reimbursement of public infrastructure costs through CFD bond debt (described below under "Off-Balance Sheet Arrangements"), and the issuance of additional common stock. 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 not to exceed $200,000,000, 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. Although we have a strong liquidity position at March 31, 2022with $56,242,000in cash and securities and $35,000,000available on our RLC to meet any short-term liquidity needs, we have taken steps to maximize positive cash flow, in case a lack of liquidity in the economy limits our access to third party funding by responsibly limiting cash expenditures to the extent practical. See Note 3 ( Marketable Securities) and Note 7 (Line of Credit and Long-Term Debt) of the Notes to Unaudited Consolidated Financial Statements for more information. We continue to expect that substantial investments will be required to develop our land assets. To meet these capital requirements, we may need to secure additional debt financing and continue to renew our existing credit facilities. In addition to debt financing, we will use other capital alternatives such as joint ventures with financial partners, sales of assets, and the issuance of common stock. We will use a combination of the above funding sources to properly match funding requirements with the assets or development project being funded. There is no assurance that we can obtain financing or that we can obtain financing at favorable terms. We believe we have adequate capital resources to fund our cash needs and our capital investment requirements in the near-term as described earlier in the cash flow and liquidity discussions.
Cash contractual obligations
The following table summarizes our contractual cash obligations and commercial commitments as of
March 31, 2022, to be paid over the next five years and thereafter: Payments Due by Period (In thousands) Total One Year or Less Years 2-3 Years 4-5 Thereafter Contractual Obligations: Estimated water payments $ 277,288$ 11,632 $ 24,321 $ 25,804 $ 215,531Long-term debt 51,674 4,531 9,700 10,569 26,874 Interest on long-term debt 10,083 2,051 3,513 2,668 1,851 Cash contract commitments 8,850 5,605 1,656 518 1,071 Defined Benefit Plan 4,568 317 712 973 2,566 SERP 5,099 526 997 1,115 2,461 Financing fees 163 163 - - -
Total contractual obligations
The categories above include purchase obligations and other long-term liabilities reflected on our balance sheet under GAAP. We define a "purchase obligation" a "an agreement to purchase goods or services that is enforceable and legally binding on the registrant that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction." Based on this definition, the table above includes only those contracts that include fixed or minimum obligations. It does not include normal purchases, which are made in the ordinary course of business. 36 -------------------------------------------------------------------------------- Estimated water payments include the
Nickel Family, LLCwater contract, which obligates us to purchase 6,693 acre-feet of water annually through 2044 and SWP contracts with Wheeler Ridge Maricopa Water Storage District, TCWD, Tulare Lake Basin Water Storage District, and Dudley-Ridge Water Storage District. These contracts for the supply of future water run through 2035. Please refer to Note 5 (Long-Term Water Assets) of the Notes to Consolidated Financial Statements for additional information regarding water assets. Our cash contract commitments consist of contracts in various stages of completion related to infrastructure development within our industrial developments and entitlement costs related to our industrial and residential development projects. Also included in the cash contract commitments are operating lease obligations. Our operating lease obligations are for office equipment. At the present time, we do not have any capital lease obligations or purchase obligations outstanding. As discussed in Note 13 (Retirement Plans) of the Notes to Unaudited Consolidated Financial Statements, we have long-term liabilities for deferred employee compensation, including pension and supplemental retirement plans. Payments in the above table reflect estimates of future defined benefit plan contributions from the Company to the plan trust, estimates of payments to employees from the plan trust, and estimates of future payments to employees from the Company that are in the SERP program. We expect to contribute $165,000to our defined benefit plan in 2022. 37 --------------------------------------------------------------------------------
Off-balance sheet arrangements
The following table sets out the potential obligations we have in respect of certain bonds issued by CFDs:
Amount of Commitment Expiration Per Period ($ in thousands) Total < 1 year 2 -3 Years 4 -5 Years After 5 Years Other Commercial Commitments: Standby letter of credit
$ 4,393 $ 4,393$ - $ - $ -
Total other trade commitments
$ - $ - $ -
The Tejon Ranch Public Facilities Financing Authority, or TRPFFA, is a joint powers authority formed by Kern Countyand TCWD to finance public infrastructure within the Company's Kern Countydevelopments. TRPFFA created two 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 $28,620,000of 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 $75,965,000of bond debt sold by TRPFFA for TRCC-East. At TRCC-West, the West CFD has no additional bond debt approved for issuance. At TRCC-East, the East CFD has approximately $44,035,000of additional bond debt authorized by TRPFFA. In connection with the sale of the bonds there is a standby letter of credit for $4,393,000related 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. As development occurs within TRCC-East, there is a mechanism in the bond documents to reduce the amount of the letter of credit. The Company believes as of March 31, 2022, that the letter of credit will likely never be drawn upon. This letter of credit is for a two-year period and will be renewed in two-year intervals as necessary. The annual cost related to the letter of credit is approximately $68,000. The tax assessment of each individual property sold or leased within each CFD is not determinable at this time because it is based on the current tax rate of the property at the time of sale or at the time it is leased to a third-party. Accordingly, the Company is not required to recognize an obligation as of March 31, 2022. As of March 31, 2022, aggregate outstanding debt of unconsolidated joint ventures was $148,679,000. We provided a guarantee on $134,022,000of this debt, relating to our joint ventures with Rockefeller and Majestic. Because of positive cash flow generation within the Rockefeller and Majestic joint ventures, we, as of March 31, 2022, do not expect the guarantee to be called upon. We do not provide a guarantee on the $14,657,000of debt related to our joint venture with TA/Petro. 38 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
EBITDA represents earnings before interest, taxes, depreciation, and amortization, a non-GAAP financial measure, and is used by us and others as a supplemental measure of performance. Adjusted EBITDA is used to assess the performance of our core operations, for financial and operational decision making, and as a supplemental or additional means of evaluating period-to-period comparisons on a consistent basis. Adjusted EBITDA is calculated as EBITDA, excluding stock compensation expense. We believe Adjusted EBITDA provides investors relevant and useful information because it permits investors to view income from our operations on an unleveraged basis before the effects of taxes, depreciation and amortization, and stock compensation expense. By excluding interest expense and income, EBITDA and Adjusted EBITDA allow investors to measure our performance independent of our capital structure and indebtedness and, therefore, allow for a more meaningful comparison of our performance to that of other companies, both in the real estate industry and in other industries. We believe that excluding charges related to share-based compensation facilitates a comparison of our operations across periods and among other companies without the variances caused by different valuation methodologies, the volatility of the expense (which depends on market forces outside our control), and the assumptions and the variety of award types that a company can use. EBITDA and Adjusted EBITDA have limitations as measures of our performance. EBITDA and Adjusted EBITDA do not reflect our historical cash expenditures or future cash requirements for capital expenditures or contractual commitments. While EBITDA and Adjusted EBITDA are relevant and widely used measures of performance, they do not represent net income or cash flows from operations as defined by GAAP. Further, our computation of EBITDA and Adjusted EBITDA may not be comparable to similar measures reported by other companies. Three Months Ended March 31, ($ in thousands) 2022 2021 Net income (loss) $ 4,314
$ (1,063)Net income (loss) attributable to non-controlling interest 7 (8) Net income (loss) attributable to common stockholders 4,307 (1,055) Interest, net Consolidated (17) (7) Our share of interest expense from unconsolidated joint ventures 591 624 Total interest, net 574 617 Income taxes 3,046 21 Depreciation and amortization: Consolidated 967 965
Our share of the amortization of unconsolidated joint ventures
1,149 1,175 Total depreciation and amortization 2,116 2,140 EBITDA 10,043 1,723 Stock compensation expense 1,219 1,276 Adjusted EBITDA
$ 11,262 $ 2,999Net operating income (NOI) is a non-GAAP financial measure calculated as operating income, the most directly comparable financial measure calculated and presented in accordance with GAAP, excluding general and administrative expenses, interest expense, depreciation and amortization, and gain or loss on sales of real estate. We believe NOI provides useful information to investors regarding our financial condition and results of operations because it primarily reflects those income and expense items that are incurred at the property level. Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets. Three Months Ended March 31, ($ in thousands) 2022 2021 Commercial/Industrial operating income $ 4,613 $ 676Plus: Commercial/Industrial depreciation and amortization 116 116 Plus: General, administrative, cost of sales and other expenses 2,518 1,338 Less: Other revenues including land sales (5,559) (434) Total Commercial/Industrial net operating income $
39 -------------------------------------------------------------------------------- ($ in thousands) Three Months Ended March 31, Net operating income 2022 2021 Pastoria Energy Facility $ 993
$ 1,012TRCC 304 318 Communication leases 246 221 Other commercial leases 145 145 Total Commercial/Industrial net operating income
The Company utilizes NOI of unconsolidated joint ventures as a measure of financial or operating performance that is not specifically defined by GAAP. We believe NOI of unconsolidated joint ventures provides investors with additional information concerning operating performance of our unconsolidated joint ventures. We also use this measure internally to monitor the operating performance of our unconsolidated joint ventures. Our computation of this non-GAAP measure may not be the same as similar measures reported by other companies. This non-GAAP financial measure should not be considered as an alternative to net income as a measure of the operating performance of our unconsolidated joint ventures or to cash flows computed in accordance with GAAP as a measure of liquidity, nor are they indicative of cash flows from operating and financial activities of our unconsolidated joint ventures. The following schedule reconciles net income of unconsolidated joint ventures to NOI of unconsolidated joint ventures. Please refer to Note 15 (Investment in
Unconsolidated and Consolidated Joint Ventures) of the Notes to Unaudited Consolidated Financial Statements for further discussion on joint ventures. Three Months Ended March 31, ($ in thousands) 2022 2021 Net income of unconsolidated joint ventures $ 2,040 $ (167)Interest expense of unconsolidated joint ventures 1,166 1,232 Operating income of unconsolidated joint ventures 3,206 1,065
Depreciation and amortization of non-consolidated joint ventures 2,143
2,214 Net operating income of unconsolidated joint ventures $
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