NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The summarized information of Tejon Ranch Co. and its subsidiaries (the Company, Tejon, we, us and our), provided pursuant to Part I, Item 1 of Form 10-Q, is unaudited and reflects all adjustments which are, in the opinion of the Company’s management, necessary for a fair statement of the results for the interim period. All such adjustments are of a normal recurring nature. We have evaluated subsequent events through the date of issuance of our consolidated financial statements.
The periods ending
March 31, 2019
and
2018
include the consolidation of Centennial Founders, LLC’s statement of operations within the resort/residential real estate development segment and statements of cash flows. The Company’s
March 31, 2019
and
December 31, 2018
balance sheets and statements of changes in equity and noncontrolling interests are presented on a consolidated basis, including the consolidation of Centennial Founders, LLC.
The Company has identified
five
reportable segments: commercial/industrial real estate development, resort/residential real estate development, mineral resources, farming, and ranch operations. Information for the Company’s reportable segments are presented in its Consolidated Statements of Operations. The Company’s reportable segments follow the same accounting policies used for the Company’s consolidated financial statements. We use segment profit or loss, along with equity in earnings of unconsolidated joint ventures, as the primary measure of profitability to evaluate operating performance and to allocate capital resources.
The results of the period reported herein are not indicative of the results to be expected for the full year due to the seasonal nature of the Company’s agricultural activities, water activities, and the timing of real estate sales and leasing activities. Historically, the Company’s largest percentages of farming revenues are recognized during the third and fourth quarters of the fiscal year.
For further information and a summary of significant accounting policies, refer to the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
Recent Accounting Pronouncements
Allowance for Credit Losses
In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-13, "Financial Instruments — Credit Losses (Topic 326)," changing the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The ASU will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, available-for-sale and held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures. The ASU is effective for the Company on January 1, 2020, and will be applied as a cumulative adjustment to retained earnings as of the effective date.
The Company is currently in the process of evaluating the impact of the adoption of this ASU on its consolidated financial statements. The Company's implementation efforts include, but are not limited to, identifying key interpretive issues, assessing its policies and processes, and evaluating related control activities to determine if modifications or enhancements may be required. The Company's accounts receivable balance is primarily composed of crop receivables. Based on historical experience with our current customers and periodic credit evaluations of our customers' financial conditions, we believe our credit risk is minimal. With regards to the marketable securities, as the Company limits its investment to securities with investment grade rating from Moody's or Standard and Poor's, and it generally does not sell securities before recovery of their amortized cost basis, we do not expect this ASU to have any material impact on its accounting of marketable securities.
Fair Value of Financial Instruments
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement". This ASU removes certain disclosure requirements related to the fair value hierarchy, such as disclosure of amounts and reasons for transfers between Level 1 and Level 2, and adds new disclosure requirements, such as disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurement. For the Company, the new standard will be effective on January 1, 2020. The Company does not expect this ASU to have any material impact on its consolidated financial statements, as the Company does not have financial instruments classified as Level 3.
Retirement Benefits
In August 2018, the FASB issued ASU No. 2018-14, "Changes to the Disclosure Requirements for Defined Benefit Plans." This ASU removes certain disclosure requirements, including the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and the amount and timing of plan assets expected to be returned to the employer. This ASU also requires additional disclosures for the weighted average interest crediting rates for cash balance plans and explanations for significant gains and losses related to changes in the benefit plan obligation. This ASU is effective for fiscal years beginning after December 15, 2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements and related disclosures.
Newly Adopted Accounting Pronouncements
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, "Leases." From the lessee's perspective, the new standard establishes a right-of-use, or ROU, model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. Entities are prohibited from using a full retrospective transition approach to adopt this guidance, and a modified retrospective approach is required to be used for all leases that exist at or commence after the beginning of the earliest comparative period presented. Entities are permitted to elect a package of expedients where an entity need not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases.
In January 2018, the FASB issued ASU No. 2018-01, "Land Easement Practical Expedient for Transition to Topic 842," which permits entities to elect a transition practical expedient to not assess land easements that exist or expired before the adoption of the new standard in order to reduce the costs and complexity of complying with the transition provisions. If this practical expedient is elected, entities are effectively allowed to grandfather the accounting for easements entered into prior to the adoption of the new standards.
In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements to Leases (Topic 842)," which allows entities to not apply the new leases standard in the comparative periods they present in their financial statements. Under this transition option, entities can continue to apply the legacy guidance in the comparative periods presented in the year they adopt the new standard. ASU No. 2018-11 also provides a practical expedient for lessors to combine the lease and non-lease components under certain circumstances to simplify lessor's implementation of the new guidance.
The Accounting Standards Codification Topic 842: Leases, or ASC 842, became effective on January 1, 2019. The Company adopted the new standards using the modified retrospective method on January 1, 2019. The optional transition method was elected during this transition, and comparative information is not restated and will continue to be reported under the legacy guidance. The Company also elected the package of practical expedients and will account for its existing leases under the new guidance without reassessing its prior conclusions of lease identification, lease classification and initial direct costs.
Lessee Impact:
The Company currently leases several office copiers under
48
-month lease terms. On January 1, 2019, an operating lease ROU asset and an operating lease liability were recorded on the consolidated balance sheets, both in the amount of
$52,000
, as a result of adopting the new guidance. The
$52,000
was determined by calculating the present value of the future annual cash lease payments using a discount rate of
4.11%
. The
4.11%
discount rate represents the Company's incremental borrowing rate as of January 1, 2019. The implementation of the new standards did not have any impact on the consolidated statements of operations or the opening balance of retained earnings on the consolidated statements of equity.
Lessor Impact:
The Company elected the land easement practical expedient upon adoption of the new guidance and is thus permitted to continue its current accounting policy for land easements that exist or expired before the effective date of the adoption. The Company will evaluate new or modified land easements under ASC 842 beginning on the adoption date of the new guidance.
Additionally, the Company elected the lessor's practical expedient and combined the lease and non-lease components due to the following criteria being met: (i) the timing and pattern of recognizing revenue for the lease components are the same as its associated non-lease components, (ii) the lease component, if accounted for separately, would be classified as an operating lease, and (iii) the lease component is the predominant component within the contract. The Company believes that combining the lease component, which is the lease revenue, and non-lease components such as common area maintenance revenue and provisions of real estate taxes and insurance, will provide more meaningful information as it is more reflective of the predominant component in the lease contracts.
We expect no significant differences in the timing and pattern of revenue recognition under the new lease guidance for all our existing leases from the lessor's perspective. For new leases originated after the adoption date, we expect to capitalize less initial direct cost, as the definition of initial direct cost is narrower under the new guidance. Certain costs, such as legal costs incurred, were eligible for capitalization under the legacy guidance, but are no longer eligible for capitalization under the new standards. The amounts capitalized as legal costs have been de minimis in the past and would not have a material impact to our results of operations.
Derivatives and Hedging
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting model and allows entities to better portray the economics of their risk management activities in their financial statements. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as hedged item. The Company adopted ASU No. 2017-12 on January 1, 2019 using a modified retrospective approach. The Company utilizes an interest rate swap to hedge its exposure to variable interest rate associated with borrowings based on London Interbank Offered Rate (LIBOR). The interest rate swap is designated as a cash flow hedge, and the hedge has been highly effective since inception. Therefore, no cumulative effective adjustment of previously recognized ineffectiveness was required to be recorded as a result of adopting this new guidance. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes". This ASU identified SOFR as the preferred reference rate alternative to LIBOR. The Company adopted this new guidance on January 1, 2019, and the adoption did not have an impact on the Company's consolidated financial statements. For a more detailed discussion of the benchmark interest rate, see Part I, Item 1A, "Risk Factors" included in the Annual Report on Form 10-K for the year ended
December 31, 2018
.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows a reclassification from accumulated other comprehensive income, or AOCI, to retained earnings for stranded tax effects resulting from the U.S. government’s comprehensive tax legislation enacted in December 2017, commonly referred to as U.S. Tax Reform. The guidance became effective for the Company on January 1, 2019, and the Company adopted the provisions of the guidance as of the effective date. The Company did not make an election to reclassify the income tax effects of the U.S Tax Reform from AOCI to retained earnings.
Please also refer to Critical Accounting Policies in Part I, Item 2 of this report for discussion on changes to critical accounting policies.
2. EQUITY
Earnings Per Share (EPS)
Basic net income per share attributable to common stockholders is based upon the weighted average number of shares of common stock outstanding during the year. Diluted net income per share attributable to common stockholders is based upon the weighted average number of shares of common stock outstanding and the weighted average number of shares outstanding assuming the vesting of restricted stock grants per ASC 260, “Earnings Per Share.”
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Weighted average number of shares outstanding:
|
|
|
|
Common stock
|
25,992,374
|
|
|
25,912,819
|
|
Common stock equivalents
|
17,707
|
|
|
28,509
|
|
Diluted shares outstanding
|
26,010,081
|
|
|
25,941,328
|
|
3. MARKETABLE SECURITIES
ASC 320, “Investments – Debt and Equity Securities” requires that an enterprise classify all debt securities as either held-to-maturity, trading or available-for-sale. The Company has elected to classify its securities as available-for-sale and therefore is required to adjust securities to fair value at each reporting date. All costs and both realized and unrealized gains and losses on securities are determined on a specific identification basis. The following is a summary of available-for-sale securities at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Marketable Securities:
|
Fair Value
Hierarchy
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
Certificates of deposit
|
|
|
|
|
|
|
|
|
with unrecognized losses for less than 12 months
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250
|
|
|
$
|
248
|
|
with unrecognized losses for more than 12 months
|
|
4,012
|
|
|
3,991
|
|
|
3,861
|
|
|
3,812
|
|
with unrecognized gains
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Certificates of deposit
|
Level 1
|
4,012
|
|
|
3,991
|
|
|
4,111
|
|
|
4,060
|
|
U.S. Treasury and agency notes
|
|
|
|
|
|
|
|
|
with unrecognized losses for less than 12 months
|
|
4,064
|
|
|
4,058
|
|
|
3,112
|
|
|
3,105
|
|
with unrecognized losses for more than 12 months
|
|
19,472
|
|
|
19,391
|
|
|
23,564
|
|
|
23,415
|
|
with unrecognized gains
|
|
2
|
|
|
3
|
|
|
3
|
|
|
4
|
|
Total U.S. Treasury and agency notes
|
Level 2
|
23,538
|
|
|
23,452
|
|
|
26,679
|
|
|
26,524
|
|
Corporate notes
|
|
|
|
|
|
|
|
|
with unrecognized losses for less than 12 months
|
|
14,780
|
|
|
14,760
|
|
|
13,696
|
|
|
13,665
|
|
with unrecognized losses for more than 12 months
|
|
9,383
|
|
|
9,334
|
|
|
12,542
|
|
|
12,431
|
|
with unrecognized gains
|
|
1,795
|
|
|
1,797
|
|
|
—
|
|
|
—
|
|
Total Corporate notes
|
Level 2
|
25,958
|
|
|
25,891
|
|
|
26,238
|
|
|
26,096
|
|
Municipal notes
|
|
|
|
|
|
|
|
|
with unrecognized losses for less than 12 months
|
|
—
|
|
|
—
|
|
|
2,994
|
|
|
2,982
|
|
with unrecognized losses for more than 12 months
|
|
6,949
|
|
|
6,936
|
|
|
4,116
|
|
|
4,087
|
|
with unrecognized gains
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Municipal notes
|
Level 2
|
6,949
|
|
|
6,936
|
|
|
7,110
|
|
|
7,069
|
|
|
|
$
|
60,457
|
|
|
$
|
60,270
|
|
|
$
|
64,138
|
|
|
$
|
63,749
|
|
We evaluate our securities for other-than-temporary impairment based on the specific facts and circumstances surrounding each security valued below its cost. Factors considered include the length of time the securities have been valued below cost, the financial condition of the issuer, industry reports related to the issuer, the severity of any decline, our intention not to sell the security, and our assessment as to whether it is not more likely than not that we will be required to sell the security before a recovery of its amortized cost basis. We then segregate the loss between the amounts representing a decrease in cash flows expected to be collected, or the credit loss, which is recognized through earnings, and the balance of the loss, which is recognized through other comprehensive income. At
March 31, 2019
, the fair market value of investment securities was
$187,000
below
their cost basis. The Company’s gross unrealized holding gains equaled
$3,000
and gross unrealized holding losses equaled
$190,000
. The Company has determined that any unrealized losses in the portfolio were temporary as of
March 31, 2019
. As of
March 31, 2019
, the adjustment to accumulated other comprehensive loss reflected an improvement in market value of
$202,000
, including estimated taxes of
$42,000
.
The following tables summarize the maturities, at par, of marketable securities as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
($ in thousands)
|
2019
|
|
2020
|
|
2021
|
|
Total
|
Certificates of deposit
|
$
|
2,212
|
|
|
$
|
1,799
|
|
|
$
|
—
|
|
|
$
|
4,011
|
|
U.S. Treasury and agency notes
|
13,414
|
|
|
10,173
|
|
|
—
|
|
|
23,587
|
|
Corporate notes
|
11,871
|
|
|
13,700
|
|
|
400
|
|
|
25,971
|
|
Municipal notes
|
4,951
|
|
|
2,000
|
|
|
—
|
|
|
6,951
|
|
|
$
|
32,448
|
|
|
$
|
27,672
|
|
|
$
|
400
|
|
|
$
|
60,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
($ in thousands)
|
2019
|
|
2020
|
|
2021
|
|
Total
|
Certificates of deposit
|
$
|
2,311
|
|
|
$
|
1,799
|
|
|
$
|
—
|
|
|
$
|
4,110
|
|
U.S. Treasury and agency notes
|
17,574
|
|
|
9,174
|
|
|
—
|
|
|
26,748
|
|
Corporate notes
|
18,671
|
|
|
7,150
|
|
|
400
|
|
|
26,221
|
|
Municipal notes
|
5,111
|
|
|
2,000
|
|
|
—
|
|
|
7,111
|
|
|
$
|
43,667
|
|
|
$
|
20,123
|
|
|
$
|
400
|
|
|
$
|
64,190
|
|
The Company’s investments in corporate notes are with companies that have an investment grade rating from Standard & Poor’s.
4. REAL ESTATE
|
|
|
|
|
|
|
|
|
($ in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
Real estate development
|
|
|
|
Mountain Village
|
$
|
138,521
|
|
|
$
|
137,571
|
|
Centennial
|
101,331
|
|
|
100,311
|
|
Grapevine
|
31,896
|
|
|
31,175
|
|
Tejon Ranch Commerce Center
|
15,696
|
|
|
14,328
|
|
Real estate development
|
287,444
|
|
|
283,385
|
|
|
|
|
|
Real estate and improvements - held for lease
|
|
|
|
Tejon Ranch Commerce Center
|
21,328
|
|
|
21,327
|
|
Less accumulated depreciation
|
(2,469
|
)
|
|
(2,374
|
)
|
Real estate and improvements - held for lease, net
|
$
|
18,859
|
|
|
$
|
18,953
|
|
5. LONG-TERM WATER ASSETS
Long-term water assets consist of water and water contracts held for future use or sale. The water is held at cost, which includes the price paid for the water and the cost to pump and deliver the water from the California aqueduct into the water bank. Water is currently held in a water bank on Company land in southern Kern County. Company-banked water costs also include costs related to the right to receive additional acre-feet of water in the future from the Antelope Valley East Kern Water Agency, or AVEK. The Company has also banked water within an AVEK-owned water bank.
We have also been purchasing water for future use or sale. In 2008, we purchased
8,393
acre-feet of transferable water and in 2009 we purchased an additional
6,393
acre-feet of transferable water, all of which is now stored in the Company's water bank. We also have secured State Water Project, or SWP, entitlement under long-term SWP water contracts within the Tulare Lake Basin Water Storage District and the Dudley-Ridge Water District, totaling
3,444
acre-feet of SWP entitlement annually, subject to SWP allocations. These contracts extend through 2035 and have been transferred to AVEK for our use in the Antelope Valley. In 2013, the Company acquired a contract to purchase water that obligates the Company to purchase
6,693
acre-feet of water each year from the Nickel Family, LLC, or Nickel, a California limited liability company that is located in Kern County.
The initial term of the water purchase agreement with Nickel runs to 2044 and includes a Company option to extend the contract for an additional
35
years. The purchase cost of water in
2019
is
$769
per acre-foot. The purchase cost is subject to annual cost increases based on the greater of the consumer price index or
3%
.
The water purchased above will ultimately be used in the development of the Company’s land for commercial/industrial real estate development, resort/residential real estate development, and farming. Interim uses may include the sale of portions of this water to third party users on an annual basis until this water is fully allocated to Company uses, as just described.
Water revenues and cost of sales were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
|
Acre-Feet Sold
|
4,445
|
|
|
7,442
|
|
|
|
|
|
Revenues
|
$
|
5,026
|
|
|
$
|
7,992
|
|
Cost of sales
|
3,194
|
|
|
3,679
|
|
Profit
|
$
|
1,832
|
|
|
$
|
4,313
|
|
The costs assigned to water assets held for future use were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Banked water and water for future delivery
|
$
|
25,208
|
|
|
$
|
24,597
|
|
Transferable water
|
2,927
|
|
|
36
|
|
Total water held for future use at cost
|
$
|
28,135
|
|
|
$
|
24,633
|
|
Intangible Water Assets
The Company's carrying amounts of its purchased water contracts were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Costs
|
|
Accumulated Depreciation
|
|
Costs
|
|
Accumulated Depreciation
|
Dudley-Ridge water rights
|
$
|
12,203
|
|
|
$
|
(3,980
|
)
|
|
$
|
12,203
|
|
|
$
|
(3,860
|
)
|
Nickel water rights
|
18,740
|
|
|
(3,480
|
)
|
|
18,740
|
|
|
(3,320
|
)
|
Tulare Lake Basin water rights
|
5,857
|
|
|
(2,482
|
)
|
|
5,857
|
|
|
(2,421
|
)
|
|
$
|
36,800
|
|
|
$
|
(9,942
|
)
|
|
$
|
36,800
|
|
|
$
|
(9,601
|
)
|
Net cost of purchased water contracts
|
26,858
|
|
|
|
|
27,199
|
|
|
|
Total cost water held for future use
|
28,135
|
|
|
|
|
24,633
|
|
|
|
Net investments in water assets
|
$
|
54,993
|
|
|
|
|
$
|
51,832
|
|
|
|
Water contracts with the Wheeler Ridge Maricopa Water Storage District, or WRMWSD, and the Tejon-Castac Water District, or TCWD, are also in place, but were entered into with each district at inception of the contract and not purchased later from third parties, and do not have a related financial value on the books of the Company. Therefore, there is no amortization expense related to these contracts. Total water resources, including both recurring and one-time usage, are:
|
|
|
|
|
|
|
(in acre-feet, unaudited)
|
March 31, 2019
|
|
December 31, 2018
|
Water held for future use
|
|
|
|
AVEK water bank
|
13,033
|
|
|
13,033
|
|
Company water bank
|
37,316
|
|
|
35,793
|
|
Transferable water
|
5,999
|
|
|
500
|
|
Total water held for future use
|
56,348
|
|
|
49,326
|
|
Purchased water contracts
|
|
|
|
Water Contracts (Dudley-Ridge, Nickel and Tulare)
|
10,137
|
|
|
10,137
|
|
WRMWSD - Contracts with Company
|
15,547
|
|
|
15,547
|
|
TCWD - Contracts with Company
|
5,749
|
|
|
5,749
|
|
TCWD - Banked water contracted to Company
|
54,351
|
|
|
52,547
|
|
Total purchased water contracts
|
85,784
|
|
|
83,980
|
|
Total water held for future use and purchased water contracts
|
142,132
|
|
|
133,306
|
|
The Company entered into a Water Supply Agreement with Pastoria Energy Facility, L.L.C., or PEF in 2015. PEF is our current lessee under a power plant lease. Pursuant to the Water Supply Agreement, PEF may purchase from the Company up to
3,500
acre-feet of water per year from January 1, 2017 through July 31, 2030, with an option to extend the term. PEF is under no obligation to purchase water from the Company in any year but is required to pay the Company an annual option payment equal to
30%
of the maximum annual payment. The price of the water under the Water Supply Agreement for 2019 is
$1,120
per acre-foot, subject to
3%
annual increases over the life of the contract. The Water Supply Agreement contains other customary terms and conditions, including representations and warranties, which are typical for agreements of this type. The Company's commitments to sell water can be met through current water assets.
6. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
Accrued vacation
|
$
|
790
|
|
|
$
|
761
|
|
Accrued paid personal leave
|
428
|
|
|
416
|
|
Accrued bonus
|
647
|
|
|
2,071
|
|
Property tax payable
1
|
1,022
|
|
|
—
|
|
Other
|
331
|
|
|
327
|
|
|
$
|
3,218
|
|
|
$
|
3,575
|
|
|
|
|
|
1
California property taxes are paid every April and December.
|
7. LINE OF CREDIT AND LONG-TERM DEBT
Debt consists of the following:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
Notes payable
|
64,908
|
|
|
65,901
|
|
Other borrowings
|
—
|
|
|
14
|
|
Total short-term and long-term debt
|
64,908
|
|
|
65,915
|
|
Less: line-of-credit and current maturities of long-term debt
|
(4,048
|
)
|
|
(4,018
|
)
|
Less: deferred loan costs
|
(111
|
)
|
|
(117
|
)
|
Long-term debt, less current portion
|
$
|
60,749
|
|
|
$
|
61,780
|
|
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 (collectively, the Credit Facility) with Wells Fargo. The Credit Facility added a
$70,000,000
term loan, or Term Loan, to the existing
$30,000,000
revolving line of credit, or RLC. Funds from the Term Loan were used to finance the Company's purchase of DMB TMV LLC’s interest in TMV LLC in 2014.
The Term Loan had outstanding balances of
$61,561,000
and
$62,483,000
as of
March 31, 2019
and
December 31, 2018
, respectively. The interest rate per annum applicable to the Term Loan is LIBOR (as defined in the Term Note) plus a margin of 170 basis points. The interest rate for the term of the Term Note has been fixed through the use of an interest rate swap at a rate of
4.11%
. The Term Loan requires monthly amortization payments pursuant to a schedule set forth in the Term Note, with the final outstanding principal amount due October 5, 2024. The Company may make voluntary prepayments on the Term Loan at any time without penalty (excluding any applicable LIBOR or interest rate swap breakage costs). Each optional prepayment will be applied to reduce the most remote principal payment then unpaid. The 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, 2019
and
December 31, 2018
. 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 September 2019), we can borrow at any time and partially or wholly repay any outstanding borrowings and then re-borrow, as necessary. We anticipate renewing the RLC in September 2019 at similar terms as the expiring terms.
Any future borrowings under the RLC will 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 Credit Facility requires compliance with
three
financial covenants: (i) total liabilities divided by tangible net worth not greater than
0.75
to
1.0
at each quarter end; (ii) 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 (iii) maintain liquid assets equal to or greater than
$20,000,000
, including availability on RLC. At
March 31, 2019
and
December 31, 2018
, we were in compliance with all financial covenants.
The Credit Facility also contains customary negative covenants that limit the ability of the Company 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 Credit Facility contains customary events of default, including: failure to make required payments; failure to comply with terms of the Credit Facility; bankruptcy and insolvency; and a change in control without consent of the bank (which consent will not be unreasonably withheld). The Credit Facility contains other customary terms and conditions, including representations and warranties, which are typical for credit facilities of this type.
In 2013, we entered into a promissory note agreement, secured by real estate, with CMFG Life Insurance Company to pay a principal amount of
$4,750,000
with principal and interest due monthly starting on October 1, 2013. The interest rate on this promissory note is
4.25%
per annum, with monthly principal and interest payments of
$36,000
ending on September 1, 2028. The proceeds from this promissory note were used to eliminate debt that had been previously used to provide long-term financing for a building being leased to Starbucks and provide additional working capital for future investment. The current balance on the note was
$3,347,000
on
March 31, 2019
. The balance of this long-term debt instrument included in "Notes payable" above approximates the fair value of the instrument.
8. OTHER LIABILITIES
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
Pension liability (Note 13)
|
$
|
2,133
|
|
|
$
|
2,148
|
|
Interest rate swap liability (Note 10)
1
|
640
|
|
|
—
|
|
Supplemental executive retirement plan liability (Note 13)
|
7,709
|
|
|
7,750
|
|
Excess joint venture distributions and other
|
2,763
|
|
|
2,800
|
|
Total
|
$
|
13,245
|
|
|
$
|
12,698
|
|
|
|
|
|
1
The Company's interest rate swap had an asset balance of $93,000 as of December 31, 2018 and is recorded under the caption Other Assets on the Consolidated Balance Sheets.
|
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 Company’s stock incentive plans provide for the making of awards to employees based upon a service condition or through the achievement of performance-related objectives. The Company has issued
three
types of stock grant awards under these plans: restricted stock with service condition vesting; performance share grants that only vest upon the achievement of specified performance conditions, such as corporate cash flow goals, or Performance Condition Grants; and performance share grants that include threshold, target, and maximum achievement levels based on the achievement of specific performance milestones, or Performance Milestone Grants. The Company has also granted performance share grants that contain both performance-based and market-based conditions. Compensation cost for these awards is recognized based on either the achievement of the performance-based conditions, if they are considered probable, or if they are not considered probable, on the achievement of the market-based condition. Failure to satisfy the threshold performance conditions will result in the forfeiture of shares. Forfeiture of share awards with service conditions or performance-based restrictions will result in a reversal of previously recognized share-based compensation expense. Forfeiture of share awards with market-based restrictions do not result in a reversal of previously recognized share-based compensation expense.
The following is a summary of the Company's Performance Condition Grants as of the
three
months ended
March 31, 2019
:
|
|
|
|
Performance Condition Grants
|
Below threshold performance
|
—
|
|
Threshold performance
|
186,366
|
|
Target performance
|
422,264
|
|
Maximum performance
|
640,981
|
|
The following is a summary of the Company’s stock grant activity, both time and performance unit grants, assuming target achievement for outstanding performance grants for the
three
months ended
March 31, 2019
:
|
|
|
|
|
March 31, 2019
|
Stock Grants Outstanding Beginning of Period at Target Achievement
|
538,599
|
|
New Stock Grants/Additional Shares due to Achievement in Excess of Target
|
115,426
|
|
Vested Grants
|
(82,112
|
)
|
Expired/Forfeited Grants
|
—
|
|
Stock Grants Outstanding End of Period at Target Achievement
|
571,913
|
|
The unamortized cost associated with unvested stock grants and the weighted average period over which it is expected to be recognized as of
March 31, 2019
were
$5,695,000
and
21 months
, respectively. The fair value of restricted stock with time-based vesting features is based upon the Company’s share price on the date of grant and is expensed over the service period. Fair value of performance grants that cliff vest based on the achievement of performance conditions is based on the share price of the Company’s stock on the day of grant once the Company determines that it is probable that the award will vest. This fair value is expensed over the service period applicable to these grants. For performance grants that contain a range of shares from zero to a maximum we determine based on historic and projected results, the probability of (1) achieving the performance objective and (2) the level of achievement. Based on this information, we determine the fair value of the award and measure the expense over the service period related to these grants. Because the ultimate vesting of all performance grants is tied to the achievement of a performance condition, we estimate whether the performance condition will be met and over what period of time. Ultimately, we adjust compensation cost according to the actual outcome of the performance condition.
Under the Non-Employee Director Stock Incentive Plan, or NDSI Plan, each non-employee director receives his or her annual compensation in stock. The stock is granted at the end of each quarter based on the quarter end stock price.
The following table summarizes stock compensation costs for the Company's 1998 Stock Incentive Plan, or the Employee Plan, and NDSI Plan for the following periods:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Three Months Ended March 31,
|
Employee Plan:
|
2019
|
|
2018
|
Expensed
|
$
|
666
|
|
|
$
|
761
|
|
Capitalized
|
319
|
|
|
346
|
|
|
985
|
|
|
1,107
|
|
NDSI Plan - Expensed
|
147
|
|
|
187
|
|
Total Stock Compensation Costs
|
$
|
1,132
|
|
|
$
|
1,294
|
|
10. INTEREST RATE SWAP
In October 2014, the Company entered into an interest rate swap agreement to hedge cash flows tied to changes in the underlying floating interest rate tied to LIBOR for the Term Note as discussed in Note 7 (Line of Credit and Long-Term Debt). During the quarter ended
March 31, 2019
, our interest rate swap agreement was
100%
effective. Changes in fair value, including accrued interest and adjustments for non-performance risk, that qualify as cash flow hedges are classified in AOCI. Amounts classified in AOCI are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings. As of
March 31, 2019
, the fair value of our interest rate swap agreement was less than its cost basis and as such is recorded within Other Liabilities on the Consolidated Balance Sheets.
We had the following outstanding interest rate swap agreement designated as an interest rate cash flow hedge as of
March 31, 2019
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Maturity Date
|
|
Fair Value Hierarchy
|
|
Interest Rate
|
|
Fair Value
|
|
Notional Amount
|
October 15, 2014
|
|
October 5, 2024
|
|
Level 2
|
|
4.11%
|
|
$(640)
|
|
$61,561
|
11. INCOME TAXES
For the
three
months ended
March 31, 2019
, the Company's income tax
expense
was
$95,000
compared to
$526,000
for the
three
months ended
March 31, 2018
. Effective tax rates were
43%
and
27%
for the
three
months ended
March 31, 2019
and
2018
, respectively. The increase in effective tax rates resulted from tax shortfalls associated with stock compensation vesting. As of
March 31, 2019
, the Company had income tax receivables of
$181,000
. The Company classifies interest and penalties incurred on tax payments as income tax expense. During the
three
months ended
March 31, 2019
, the Company did not make any income tax payments. The Company did not record a provisional adjustment for the
three
-months ended
March 31, 2019
.
12. COMMITMENTS AND CONTINGENCIES
The Company's land is subject to water contracts with minimum annual payments, for which
$10,156,000
is expected to be paid in 2019. So far in 2019, the Company has paid
$7,038,000
for its water contracts. These estimated water contract payments consist of SWP, contracts with Wheeler Ridge Maricopa Water Storage District, TCWD, Tulare Lake Basin Water Storage District, Dudley-Ridge Water Storage District 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. As discussed in Note 5 (Long-Term Water Assets), we purchased the assignment of a contract to purchase water in late 2013. The assigned water contract is with Nickel and obligates us to purchase
6,693
acre-feet of water annually through the term of the contract. Our contractual obligation for future water payments was
$253,040,000
as of
March 31, 2019
.
The Company is obligated to make payments of approximately
$800,000
per year through 2021 to the Tejon Ranch Conservancy as prescribed in the Conservation Agreement we entered into with five major environmental organizations in 2008. Our 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. These amounts paid will be capitalized in real estate development for the Centennial, Grapevine and Mountain Village, or MV, projects.
The Company exited a consulting contract during the second quarter of 2014 related to the Grapevine Development and is obligated to pay an earned incentive fee at the time of 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 fees will not be finalized until the future payment dates. The Company believes that net savings from exiting the contract over this future time period will more than offset the incentive payment costs.
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
two
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
of 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
$65,000,000
of additional bond debt authorized by TRPFFA that can be sold in the future.
In connection with the sale of bonds, there is a standby letter of credit for
$4,468,000
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
March 31, 2019
there were
no
additional improvement funds remaining from the West CFD bonds. There are
$4,180,000
in improvement funds within the East CFD bonds for reimbursement of public infrastructure costs during 2019 and future years. During 2019 the Company expects to pay approximately
$2,570,000
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 is not required to recognize an obligation at
March 31, 2019
.
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 TMSHCP, 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), or TUMSHCP Suit. The Company is presently not named as a party in the TUMSHCP Suit. 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 and that the USFWS failed to adequately consult with affected Native American tribes or their representatives with respect to the impact of the TUMSHCP and ITP on 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 the USFWS during the consultation process with Native American tribes. The Company intends to coordinate closely with the USFWS to vigorously defend this matter. The TUMSHCP Plaintiffs raised essentially the same arguments regarding the Native American consultation process and the California condor in state court litigation. In that litigation, the California Court of Appeal rejected the TUMSHCP Plaintiffs’ arguments as lacking merit. See
Center for Biological Diversity, et al.v. Kern County,
2012 WL 1417682 (Case No. F061908). That state appellate court decision was issued on April 25, 2012.
The Company believes the TUMSHCP Suit does not impede on the ability to start or complete the development of MV development.
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.
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 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, 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 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 Phelan Pinon Hills Community Services District, filed notices of appeal from the Judgment. The Appeal has been transferred from the Fourth Appellate District to the Fifth Appellate District.
Appellate briefing is scheduled to occur in 2019. Notwithstanding the appeals, 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, or collectively, Central Delta Petitioners, filed a complaint in the Sacramento County Superior Court 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, or Central Delta Action. 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, (ii) and 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, or 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 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 filed an appeal of 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.
O
n 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 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, or CFS, or collectively, the CFS Petitioners, filed a new lawsuit in Sacramento County Superior Court, or 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 August 18, 2017, the Sacramento County Superior Court held a hearing on the response to the 2014 Writ and on the CFS petition filed in this action. 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, we anticipate having a ruling from the Court of Appeal on these consolidated appeals of the CFS Action and the Central Delta Action sometime in 2019 or 2020.
Grapevine
On December 6, 2016, the Kern County Board of Supervisors unanimously granted entitlement approval for the Grapevine project (described below). On January 5, 2017, the CBD, and the 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 Company is named as real parties in interest in this action. The action alleges 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, 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. 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 - 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 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 has filed new applications to re-entitle the Grapevine project, or re-entitlement. The re-entitlement application involves processing project approvals that are substantively similar to the Grapevine project that was unanimously approved by the Kern County Board of Supervisors in December of 2016. As part of the re-entitlement, supplemental environmental analysis will be prepared to address the court’s ruling. Following a public comment and review period, the Kern County Planning Commission will hold a hearing to make a recommendation to the Kern County Board of Supervisors on the re-entitlement of the Grapevine project. Thereafter, the Kern County Board of Supervisors will hold a hearing to consider the supplemental environmental analysis and whether to act to approve the re-entitlement of the Grapevine project. We anticipate possible Kern County Board of Supervisors action occurring in late 2019. Following the Board of Supervisors’ action, further litigation could challenge the re-entitlement.
Proceedings Incidental to Business
From time to time, we are involved in other proceedings incidental to our 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, we do not believe that the ultimate resolution of these other proceedings will have a material adverse effect on our 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, or ERISA. In April 2017, the Company froze the Benefit Plan as it relates to future benefit accruals for participants. The Company expects to contribute
$165,000
to the Benefit Plan during
2019
.
Benefit Plan assets consist of equity, debt and short-term money market investment funds. The Benefit Plan’s current investment policy changed during the third quarter of 2018. The new policy is an investment strategy in which the primary focus is to minimize the volatility of the funding ratio. This objective will result in a prescribed asset mix between "return seeking" assets (e.g., stocks) and a bond portfolio (e.g., long duration bonds) according to a pre-determined customized investment strategy based on the Benefit Plan's funded status as the primary input. This path will be used as a reference point as to the mix of assets, which by design will de-emphasize the return seeking portion as funded status improves. At both
March 31, 2019
and
December 31, 2018
, the investment mix was approximately
64%
equity,
35%
debt, and
1%
money market funds. Equity investments consist of a combination of individual equity securities plus value funds, growth funds, large cap funds and international stock funds. Debt investments consist of U.S. Treasury securities and investment grade corporate debt. The weighted average discount rate used in determining the periodic pension cost is
4.2%
in
2019
and
2018
. The expected long-term rate of return on plan assets is
7.3%
and
7.5%
in
2019
and
2018
, respectively. The long-term rate of return on Benefit Plan assets is based on the historical returns within the plan and expectations for future returns.
Total pension and retirement expense for the Benefit Plan was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
($ in thousands)
|
2019
|
|
2018
|
Earnings (cost) components:
|
|
|
|
Interest cost
|
(97
|
)
|
|
(91
|
)
|
Expected return on plan assets
|
131
|
|
|
146
|
|
Net amortization and deferral
|
(19
|
)
|
|
(16
|
)
|
Total net periodic pension earnings
|
$
|
15
|
|
|
$
|
39
|
|
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. The Company in April 2017 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)
|
2019
|
|
2018
|
Cost components:
|
|
|
|
Interest cost
|
$
|
(76
|
)
|
|
$
|
(64
|
)
|
Net amortization and other
|
(16
|
)
|
|
(16
|
)
|
Total net periodic pension cost
|
$
|
(92
|
)
|
|
$
|
(80
|
)
|
14. REPORTING SEGMENTS AND RELATED INFORMATION
We currently operate in
five
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 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Commercial
Commercial revenue consists of land and building leases to tenants at our commercial retail and industrial developments, base and percentage rents from our PEF power plant lease, communication tower rents, and payments from easement leases. The following table summarizes revenues, expenses and operating income from this segment for periods ended:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
($ in thousands)
|
2019
|
|
2018
|
Commercial revenues
|
2,826
|
|
|
2,154
|
|
Equity in earnings of unconsolidated joint ventures
|
876
|
|
|
167
|
|
Commercial revenues and equity in earnings of unconsolidated joint ventures
|
3,702
|
|
|
2,321
|
|
Commercial expenses
|
1,792
|
|
|
1,319
|
|
Operating results from commercial and unconsolidated joint ventures
|
$
|
1,910
|
|
|
$
|
1,002
|
|
Resort Residential
The resort/residential real estate development segment is actively involved in the land entitlement and development process internally and through joint ventures. The segment incurs costs and expenses related to its development activities, but currently generates
no
revenue. The segment produced losses of
$648,000
and
$415,000
for the
three
months ended
March 31, 2019
and
2018
, respectively.
Mineral Resources
The mineral resources segment receives oil and mineral royalties from the exploration and development companies that extract or mine the natural resources from our land and receives revenue from water sales. The following table summarizes revenues, expenses and operating results from this segment for periods ended:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
($ in thousands)
|
2019
|
|
2018
|
Mineral resources revenues
|
6,132
|
|
|
9,131
|
|
Mineral resources expenses
|
$
|
3,832
|
|
|
$
|
4,231
|
|
Operating results from mineral resources
|
$
|
2,300
|
|
|
$
|
4,900
|
|
Farming
The farming segment produces revenues from the sale of almonds, pistachios, wine grapes, and hay. The following table summarizes revenues, expenses and operating results from this segment for periods ended:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
($ in thousands)
|
2019
|
|
2018
|
Farming revenues
|
815
|
|
|
1,195
|
|
Farming expenses
|
$
|
1,598
|
|
|
$
|
1,838
|
|
Operating results from farming
|
$
|
(783
|
)
|
|
$
|
(643
|
)
|
Ranch Operations
The ranch operations segment consists of game management revenues and ancillary land uses such as grazing leases. The following table summarizes revenues, expenses and operating results from this segment for periods ended:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
($ in thousands)
|
2019
|
|
2018
|
Ranch operations revenues
|
889
|
|
|
989
|
|
Ranch operations expenses
|
$
|
1,350
|
|
|
$
|
1,389
|
|
Operating results from ranch operations
|
$
|
(461
|
)
|
|
$
|
(400
|
)
|
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
March 31, 2019
was
$29,503,000
. Equity in earnings from unconsolidated joint ventures was
$876,000
for the
three
months ended
March 31, 2019
. The unconsolidated joint ventures have not been consolidated as of
March 31, 2019
, because the Company does not control the investments. The Company’s current joint ventures are as follows:
|
|
•
|
Petro Travel Plaza Holdings LLC – is an unconsolidated joint venture with TravelCenters of America that develops and manages travel plazas, gas stations, convenience stores, and fast 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 it only having
50%
of the voting rights. Our partner is the managing partner and performs all of the day-to-day operations and has significant decision making authority regarding key business components such as fuel inventory and pricing at the facility. The Company's investment in this joint venture was
$19,548,000
as of
March 31, 2019
.
|
|
|
•
|
Majestic Realty Co. – Majestic Realty Co., or Majestic, is a privately-held developer and owner of master planned business parks throughout the United States. The Company formed
three
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.
|
|
|
◦
|
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 on the Company's property at TRCC-East. We anticipate construction to be completed in 2019, and plan to deliver the space in the fourth quarter of 2019 to a tenant that has entered into a lease agreement to occupy
67%
of this rentable space. The Company's investment in this joint venture was
$100,000
as of
March 31, 2019
. See Note 17 Subsequent Events for further disclosures related TRC-MRC 3, LLC.
|
|
|
◦
|
TRC-MRC 2, LLC was formed 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
that 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 currently has an outstanding principal balance of
$24,877,000
. Since inception, we have received excess distributions resulting in a deficit balance of
$2,482,000
. In accordance with the applicable accounting guidance, we reclassified excess distributions to Other Liabilities within our Consolidated Balance Sheets. We will continue to record equity in earnings as a debit to the investment account and if it were to become positive, we 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), we will immediately recognize the liability as income.
|
|
|
◦
|
TRC-MRC 1, LLC was formed to develop and operate a
480,480
square foot industrial building at TRCC-East. The facility is currently leased to Dollar General and L’Oréal USA, the largest subsidiary of L’Oréal. Since inception, we have received excess distributions resulting in a deficit balance of
$275,000
. In accordance with the applicable accounting guidance, we reclassified excess distributions to Other Liabilities within our Consolidated Balance Sheets. We will continue to record equity in earnings as a debit to the investment account and if it were to become positive, we 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), we 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
$24,943,000
was outstanding as of
March 31, 2019
.
|
|
|
•
|
Rockefeller Joint Ventures – The Company has
three
joint ventures with Rockefeller Group Development Corporation, or Rockefeller. At
March 31, 2019
, the Company’s combined equity investment balance in these
three
joint ventures was
$9,855,000
.
|
|
|
◦
|
Two
joint ventures are for the development of buildings on approximately
91
acres of our land and are part of an agreement for the potential development of up to
500
acres of land in TRCC that are tied to Foreign Trade Zone designation. The Company owns a
50%
interest in each of the joint ventures. Currently, the Five West Parcel LLC joint venture owns and leases a
606,000
square foot building to Dollar General, which has now been extended to July 2022, and includes an option for an additional three years. For operating revenue, please see the following table. The Five West Parcel LLC joint venture currently has an outstanding term loan with a balance of
$9,038,000
that matures on May 5, 2022. The Company and Rockefeller guarantee the performance of the debt. 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, which is being held for future development. 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.
|
|
|
◦
|
The third joint venture is the TRCC/Rock Outlet Center LLC joint venture that was formed in 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. The remaining
40%
was funded through equity contributions from the
two
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 credit agreement with a financial institution for
$52,000,000
that, as of
March 31, 2019
, had an outstanding balance of
$46,341,000
. The Company and Rockefeller guarantee the performance of the debt.
|
|
|
•
|
Centennial Founders, LLC – Centennial Founders, LLC, or CFL, is a joint venture that was initially formed with TRI Pointe Homes, Lewis Investment Company, or 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 the third quarter of 2009, and the Company was determined to be the primary beneficiary. As a result, CFL was consolidated into our financial statements beginning in that quarter. Our partners retained a noncontrolling interest in the joint venture. On November 30, 2016, CFL and Lewis entered a Redemption and Withdrawal Agreement, whereby Lewis irrevocably and unconditionally withdrew as a member of CFL, and CFL redeemed Lewis' entire interest for no consideration. As a result, our noncontrolling interest balance was reduced by
$11,039,000
. On December 31, 2018, CFL and CalAtlantic entered a Redemption and Withdrawal Agreement, whereby CalAtlantic irrevocably and unconditionally withdrew as a member of CFL, and CFL redeemed CalAtlantic's entire interest for no consideration. As a result, the noncontrolling interest balance was reduced by
$13,172,000
. At
March 31, 2019
, the Company owned
92.32%
of CFL.
|
The Company’s investment balance in its unconsolidated joint ventures differs from its respective capital accounts in the respective joint ventures. The differential represents the difference between the cost basis of assets contributed by the Company and the agreed upon contribution value of the assets contributed.
Unaudited condensed statement of operations for the
three
months ended
March 31, 2019
and condensed balance sheet information of the Company’s unconsolidated joint ventures as of
March 31, 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Joint Venture
|
|
TRC
|
($ in thousands)
|
Revenues
|
|
Earnings(Loss)
|
|
Equity in Earnings(Loss)
|
Petro Travel Plaza Holdings, LLC
|
$
|
25,406
|
|
|
$
|
24,677
|
|
|
$
|
1,870
|
|
|
$
|
887
|
|
|
$
|
1,122
|
|
|
$
|
532
|
|
Five West Parcel, LLC
|
684
|
|
|
697
|
|
|
171
|
|
|
191
|
|
|
86
|
|
|
96
|
|
18-19 West, LLC
|
3
|
|
|
3
|
|
|
(28
|
)
|
|
(27
|
)
|
|
(14
|
)
|
|
(13
|
)
|
TRCC/Rock Outlet Center, LLC
1
|
1,898
|
|
|
1,475
|
|
|
(785
|
)
|
|
(1,095
|
)
|
|
(393
|
)
|
|
(548
|
)
|
TRC-MRC 1, LLC
|
736
|
|
|
—
|
|
|
(5
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
TRC-MRC 2, LLC
2
|
984
|
|
|
978
|
|
|
154
|
|
|
202
|
|
|
77
|
|
|
101
|
|
Total
|
$
|
29,711
|
|
|
$
|
27,830
|
|
|
$
|
1,377
|
|
|
$
|
157
|
|
|
$
|
876
|
|
|
$
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centennial Founders, LLC
|
$
|
122
|
|
|
$
|
87
|
|
|
$
|
64
|
|
|
$
|
(18
|
)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Revenues for TRCC/Rock Outlet Center are presented net of non-cash tenant allowance amortization of $0.5 million and $0.4 million as of March 31, 2019 and 2018, respectively.
|
(2) Earnings for TRC-MRC 2, LLC include non-cash amortization of purchase accounting adjustments related to in-place leases of $0.2 million as of both of March 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Joint Venture
|
TRC
|
|
Joint Venture
|
TRC
|
($ in thousands)
|
Assets
|
Debt
|
Equity
|
Equity
|
|
Assets
|
Debt
|
Equity
|
Equity
|
Petro Travel Plaza Holdings, LLC
|
$
|
70,441
|
|
$
|
(15,284
|
)
|
$
|
53,247
|
|
$
|
19,548
|
|
|
$
|
69,096
|
|
$
|
(15,283
|
)
|
$
|
51,377
|
|
$
|
18,426
|
|
Five West Parcel, LLC
|
15,125
|
|
(9,038
|
)
|
5,922
|
|
2,777
|
|
|
15,157
|
|
(9,173
|
)
|
5,751
|
|
2,691
|
|
18-19 West, LLC
|
4,632
|
|
—
|
|
4,626
|
|
1,769
|
|
|
4,654
|
|
—
|
|
4,654
|
|
1,783
|
|
TRCC/Rock Outlet Center, LLC
|
74,062
|
|
(46,341
|
)
|
26,746
|
|
5,309
|
|
|
75,194
|
|
(46,826
|
)
|
27,531
|
|
5,702
|
|
TRC-MRC 1, LLC
|
29,629
|
|
(24,943
|
)
|
3,998
|
|
—
|
|
|
29,692
|
|
(25,030
|
)
|
4,018
|
|
—
|
|
TRC-MRC 2, LLC
|
20,358
|
|
(24,877
|
)
|
(6,281
|
)
|
—
|
|
|
20,362
|
|
(25,014
|
)
|
(5,763
|
)
|
—
|
|
TRC-MRC 3, LLC
|
$
|
3,866
|
|
$
|
—
|
|
$
|
200
|
|
$
|
100
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Total
|
$
|
218,113
|
|
$
|
(120,483
|
)
|
$
|
88,458
|
|
$
|
29,503
|
|
|
$
|
214,155
|
|
$
|
(121,326
|
)
|
$
|
87,568
|
|
$
|
28,602
|
|
|
|
|
|
|
|
|
|
|
|
Centennial Founders, LLC
|
$
|
94,397
|
|
$
|
—
|
|
$
|
94,002
|
|
***
|
|
|
$
|
93,840
|
|
$
|
—
|
|
$
|
93,188
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
*** 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. The Company has a water service contract with TCWD that entitles us to receive 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, we transact with TCWD in the ordinary course of business.
17. SUBSEQUENT EVENTS
On April 1, 2019, the Company contributed land valued at
$5,800,000
to TRC-MRC 3, LLC in accordance with the
Limited Liability Company Agreement o
f this joint venture and recorded our investment in this joint venture at the aforementioned fair value. The land contribution meets the criteria of a land sale under ASC Topic 606, "Revenue from Contracts with Customers" as such, we recognized profit of
$1,700,000
and deferred
$1,700,000
of profit in accordance with ASC Topic 323, "Investment - Equity Method and Joint Ventures" on the date the land was contributed.