NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The summarized information of Tejon Ranch Co. and its subsidiaries (the Company or Tejon), 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. The Company has evaluated subsequent events through the date of issuance of its consolidated financial statements.
The periods ended March 31, 2023 and 2022 include the consolidation of Centennial Founders, LLC’s statement of operations within the resort/residential real estate development segment, statements of changes in equity and noncontrolling interests, and statements of cash flows. The Company’s March 31, 2023 and December 31, 2022 balance sheets 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. The Company uses segment profit or loss and equity in earnings of unconsolidated joint ventures as the primary measures 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, 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, 2022.
Financial Instruments
Certain financial instruments are carried on the consolidated balance sheet at cost or amortized cost basis, which approximates fair value due to their short-term and highly liquid nature. These instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, security deposits held for customers, accounts payable, and other accrued liabilities. The fair value of the notes payable also approximates their carrying value as the interest rates are primarily variable and approximate prevailing market interest rates for similar debt arrangements.
Restricted Cash
Restricted cash is included in Prepaid expenses and other current assets within the Consolidated Balance Sheets and primarily relate to funds held in escrow. The Company had $500,000 of restricted cash as of March 31, 2023.
Recent Accounting Pronouncements
No new Accounting Standards Update, or ASU, is applicable to our consolidated financial statements as of March 31, 2023.
2. EQUITY
Earnings Per Share (EPS)
Basic net income per share attributable to common stockholders is based upon the weighted-average number of shares of common stock outstanding during the year. Diluted net income per share attributable to common stockholders is based upon the weighted-average number of shares of common stock outstanding and the weighted-average number of shares outstanding assuming the issuance of common stock upon exercise of stock options, warrants to purchase common stock, and the vesting of restricted stock grants per ASC Topic 260, “Earnings Per Share.”
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Weighted-average number of shares outstanding: | | | | | | | |
Common stock | 26,647,565 | | | 26,431,989 | | | | | |
Common stock equivalents | 1,783 | | | 47,507 | | | | | |
Diluted shares outstanding | 26,649,348 | | | 26,479,496 | | | | | |
3. MARKETABLE SECURITIES
ASC Topic 320, “Investments – Debt and Equity Securities,” requires that an enterprise classify all debt securities as either held-to-maturity, trading or available-for-sale. The Company classifies its securities as available-for-sale and therefore is required to adjust securities to fair value at each reporting date. All costs and both realized and unrealized gains and losses on securities are determined on a specific identification basis. The following is a summary of available-for-sale securities at:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | March 31, 2023 | | December 31, 2022 |
Marketable Securities: | Fair Value Hierarchy | Cost | | Fair Value | | Cost | | Fair Value |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
U.S. Treasury and agency notes | | | | | | | | |
with unrealized losses for less than 12 months | | $ | 17,533 | | | $ | 17,472 | | | $ | 13,916 | | | $ | 13,832 | |
with unrealized losses for more than 12 months | | — | | | — | | | 500 | | | 499 | |
with unrealized gains | | 4,608 | | | 4,626 | | | 1,250 | | | 1,251 | |
Total U.S. Treasury and agency notes | Level 2 | 22,141 | | | 22,098 | | | 15,666 | | | 15,582 | |
Corporate notes | | | | | | | | |
with unrealized losses for less than 12 months | | 9,984 | | | 9,935 | | | 17,236 | | | 17,112 | |
with unrealized losses for more than 12 months | | 2,801 | | | 2,788 | | | 251 | | | 250 | |
with unrealized gains | | 499 | | | 500 | | | 499 | | | 500 | |
Total Corporate notes | Level 2 | 13,284 | | | 13,223 | | | 17,986 | | | 17,862 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | 35,425 | | | $ | 35,321 | | | $ | 33,652 | | | $ | 33,444 | |
ASC Topic 326, "Financial Instruments - Credit Losses," requires the Company to use an allowance approach when recognizing credit loss for available-for-sale debt securities, measured as the difference between the security's amortized cost basis and the amount expected to be collected over the security's lifetime. Under this approach, at each reporting date, the Company records impairment related to credit losses through earnings offset with an allowance for credit losses, or ACL. At March 31, 2023, the Company has not recorded any credit losses.
As of March 31, 2023, the fair market value of marketable securities was $104,000 below their cost basis. The Company’s gross unrealized holding gains equaled $19,000 and gross unrealized holding losses equaled $123,000. As of March 31, 2023, the adjustment to accumulated other comprehensive loss reflected a decline in market value of $104,000, including estimated taxes of $29,000.
The Company elected to exclude applicable accrued interest from both the fair value and the amortized cost basis of the available-for-sale debt securities, and separately present the accrued interest receivable balance per ASC Topic 326. The accrued interest receivables balance totaled $223,000 as of March 31, 2023 and was included within the Prepaid expenses and other current assets line item of the Consolidated Balance Sheets. The Company elected not to measure an allowance for credit losses on accrued interest receivable as an allowance on possible uncollectible accrued interest is not warranted.
U.S. Treasury and agency notes
The unrealized losses on the Company's investments in U.S. Treasury and agency notes at March 31, 2023 and December 31, 2022 were caused by relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies. The unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. As of March 31, 2023 and December 31, 2022, the Company did not intend to sell these securities and it is not more-likely-than-not that the Company would be required to sell these securities before recovery of their cost basis. Therefore, these investments did not require an ACL as of March 31, 2023 and December 31, 2022.
Corporate notes
The contractual terms of those investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the investments. The unrealized losses on corporate notes are a function of changes in investment spreads and interest rate movements and not changes in credit quality. The Company expects to recover the entire amortized cost basis of these securities. As of March 31, 2023 and December 31, 2022, the Company did not intend to sell these securities and it is not more-likely-than-not that the Company would be required to sell these securities before recovery of their cost basis. Therefore, these investments did not require an ACL as of March 31, 2023 and December 31, 2022.
The following tables summarize the maturities, at par, of marketable securities as of:
| | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
($ in thousands) | 2023 | | 2024 | | | | | | Total |
| | | | | | | | | |
U.S. Treasury and agency notes | $ | 15,870 | | | $ | 6,406 | | | | | | | $ | 22,276 | |
Corporate notes | 11,788 | | | 1,500 | | | | | | | 13,288 | |
| | | | | | | | | |
| $ | 27,658 | | | $ | 7,906 | | | | | | | $ | 35,564 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
($ in thousands) | | | 2023 | | 2024 | | | | Total |
| | | | | | | | | |
U.S. Treasury and agency notes | | | $ | 15,225 | | | $ | 500 | | | | | $ | 15,725 | |
Corporate notes | | | 17,470 | | | 500 | | | | | 17,970 | |
| | | | | | | | | |
| | | $ | 32,695 | | | $ | 1,000 | | | | | $ | 33,695 | |
The Company’s investments in corporate notes are with companies that have an investment grade rating from Standard & Poor’s as of March 31, 2023.
4. REAL ESTATE
Our accumulated real estate development costs by project consisted of the following:
| | | | | | | | | | | |
($ in thousands) | March 31, 2023 | | December 31, 2022 |
Real estate development | | | |
Mountain Village | $ | 153,686 | | | $ | 153,156 | |
Centennial | 116,071 | | | 115,221 | |
Grapevine | 39,652 | | | 39,273 | |
Tejon Ranch Commerce Center | 14,909 | | | 13,643 | |
Real estate development | $ | 324,318 | | | $ | 321,293 | |
| | | |
Real estate and improvements - held for lease | | | |
Tejon Ranch Commerce Center | $ | 20,879 | | | $ | 20,590 | |
Less accumulated depreciation | (3,737) | | | (3,650) | |
Real estate and improvements - held for lease, net | $ | 17,142 | | | $ | 16,940 | |
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 and by the Tejon-Castac Water District (TCWD) in the Kern Water Banks.
The Company has secured State Water Project, or SWP, entitlements under long-term SWP water contracts within the Tulare Lake Basin Water Storage District, or Tulare Lake Basin, and the Dudley-Ridge Water District, or Dudley-Ridge, totaling 3,444 acre-feet of SWP entitlement annually, subject to SWP allocations. These contracts extend through 2035 and have been transferred to the Antelope Valley East Kern Water Agency, or AVEK, for the Company's 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 2023 is $928 per acre-foot. The purchase cost is subject to annual cost increases based on the greater of the consumer price index or 3%.
The water purchased above will ultimately be used in the development of the Company’s land for commercial/industrial real estate development, resort/residential real estate development, and farming. Interim uses may include the sale of portions of this water to third party users on an annual basis until this water is fully allocated to Company uses, as described.
Water revenues and cost of sales were as follows for the three months ended ($ in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | March 31, 2022 |
Acre-Feet Sold | 3,050 | | | 6,970 | |
| | | |
Revenues | $ | 5,099 | | | $ | 10,157 | |
Cost of sales | 2,976 | | | 6,345 | |
Profit | $ | 2,123 | | | $ | 3,812 | |
The costs assigned to water assets held for future use were as follows ($ in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Banked water and water for future delivery | $ | 22,085 | | | $ | 23,855 | |
Transferable water | 7,708 | | | 1,455 | |
Total water held for future use at cost | $ | 29,793 | | | $ | 25,310 | |
Intangible Water Assets
The Company’s carrying amounts of its purchased water contracts were as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Costs | | Accumulated Depreciation | | Costs | | Accumulated Depreciation |
Dudley-Ridge water rights | $ | 11,581 | | | $ | (5,911) | | | $ | 11,581 | | | $ | (5,790) | |
Nickel water rights | 18,740 | | | (6,050) | | | 18,740 | | | (5,890) | |
Tulare Lake Basin water rights | 6,479 | | | (3,445) | | | 6,479 | | | (3,385) | |
| $ | 36,800 | | | $ | (15,406) | | | $ | 36,800 | | | $ | (15,065) | |
Net cost of purchased water contracts | 21,394 | | | | | 21,735 | | | |
Total cost water held for future use | 29,793 | | | | | 25,310 | | | |
Net investments in water assets | $ | 51,187 | | | | | $ | 47,045 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Water contracts with the Wheeler Ridge Maricopa Water Storage District, or WRMWSD, and 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, 2023 | | December 31, 2022 |
| | | |
Water held for future use | | | |
TCWD - Banked water owned by the Company | 53,726 | | | 52,554 | |
Company water bank | 50,349 | | | 50,349 | |
Transferable water | 9,143 | | | 2,548 | |
Total water held for future use | 113,218 | | | 105,451 | |
Purchased water contracts | | | |
Water Contracts (Dudley-Ridge, Nickel and Tulare) | 10,137 | | | 10,137 | |
WRMWSD - Contracts with the Company | 15,547 | | | 15,547 | |
TCWD - Contracts with the Company | 5,749 | | | 5,749 | |
Total purchased water contracts | 31,433 | | | 31,433 | |
Total water held for future use and purchased water contracts | 144,651 | | | 136,884 | |
Tejon Ranchcorp, or Ranchcorp, a wholly-owned subsidiary of Tejon Ranch Co., entered into a Water Supply Agreement with Pastoria Energy Facility, L.L.C., or PEF, in 2015. PEF is a current lessee of the Company in a land lease for the operation of a power plant. 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 2023 is $1,261 per acre-foot of annual water, subject to 3% annual increases over the life of the contract. The Water Supply Agreement contains other customary terms and conditions, including representations and warranties which are typical for agreements of this type. The Company's commitments to sell water can be met through current water assets.
6. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consisted of the following:
| | | | | | | | | | | |
($ in thousands) | March 31, 2023 | | December 31, 2022 |
Accrued vacation | $ | 716 | | | $ | 735 | |
Accrued paid personal leave | 338 | | | 348 | |
Accrued bonus | 562 | | | 2,280 | |
| | | |
Property tax payable | 1,403 | | | — | |
Other | 319 | | | 239 | |
| $ | 3,338 | | | $ | 3,602 | |
| | | |
|
7. LINE OF CREDIT AND LONG-TERM DEBT
Debt consisted of the following:
| | | | | | | | | | | |
($ in thousands) | March 31, 2023 | | December 31, 2022 |
Notes payable | $ | 49,719 | | | $ | 50,154 | |
| | | |
| | | |
Less: line-of-credit and current maturities of long-term debt | (1,800) | | | (1,779) | |
Less: deferred loan costs | (209) | | | (214) | |
Long-term debt, less current portion | $ | 47,710 | | | $ | 48,161 | |
On June 30, 2022, the Company entered into a variable rate term note, or New Term Note, and a new Revolving Line of Credit Note, or New RLC, with Bank of America, N.A, or collectively the New Credit Facility. The New Term Note provided a principal amount of $49,080,000 and a maturity date of June 30, 2032, which was used to pay off the existing Wells Fargo Amended Term Note. The Company evaluated the debt exchange under ASC 470 and determined that the exchange should be treated as a debt extinguishment. The amount available from the New RLC under the New Credit Facility is $40,607,000.
The New Term Note had a $48,092,000 balance as of March 31, 2023. The interest rate per annum applicable to the New Term Loan is the daily Secured Overnight Financing Rate, or SOFR, plus a margin of 1.55 percentage points. The interest rate for the term of the New Term Note has been fixed through the use of an interest rate swap at a rate of 4.62%. The New Term Note requires monthly amortization payments pursuant to a schedule set forth in the New Term Note, with the final outstanding principal amount due June 30, 2032. The New 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 New RLC had no outstanding balance as of March 31, 2023. At the Company’s option, the interest rate on this line of credit can float at a rate equal to Daily SOFR plus 1.37% or can be fixed at a rate equal to Term SOFR plus 1.37% above Term SOFR for interest periods elected by the Company. During the term of this RLC (which matures on June 30, 2027), the Company can borrow at any time and partially or wholly repay any outstanding borrowings and then re-borrow, as necessary.
The Company also has a $4,750,000 promissory note agreement whose principal and interest due monthly began October 1, 2013. The promissory note is secured by four commercial properties at TRCC-West that are leased by fast casual restaurant operators. 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, 2023 was $1,627,000.
8. OTHER LIABILITIES
Other liabilities consisted of the following:
| | | | | | | | | | | |
($ in thousands) | March 31, 2023 | | December 31, 2022 |
Pension liability (See Note 13) | $ | 22 | | | $ | 38 | |
| | | |
| | | |
Supplemental executive retirement plan liability (See Note 13) | 6,136 | | | 6,186 | |
Excess joint venture distributions and other | 9,782 | | | 4,156 | |
Total | $ | 15,940 | | | $ | 10,380 | |
| | | |
|
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 share price, or as Performance Condition Grants; and performance share grants that include threshold, target, and maximum achievement levels based on the achievement of specific performance measures, or Performance Milestone Grants. Performance Condition Grants with market-based conditions are based on the achievement of a target share price. The share price used to calculate fair value for market-based awards is determined using a Monte Carlo simulation. Failure to achieve the target share price 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 does not result in a reversal of previously recognized share-based compensation expense.
The following is a summary of the Company’s Performance Condition Grants outstanding as of the three months ended March 31, 2023:
| | | | | | |
Performance Condition Grants |
| | |
| | |
Target performance | | 36,020 | |
Maximum performance | | 112,831 | |
The following is a summary of the Company’s stock grant activity, both time and performance share grants, assuming target achievement for outstanding performance grants for the three months ended March 31, 2023:
| | | | | | | |
| March 31, 2023 | | |
Stock Grants Outstanding Beginning of Period at Target Achievement | 234,899 | | | |
New Stock Grants/Additional Shares due to Achievement in Excess of Target | 30,318 | | | |
Vested Grants | (169,621) | | | |
| | | |
Stock Grants Outstanding End of Period at Target Achievement | 95,596 | | | |
Thus far in 2023 no new stock grants have been awarded.
The following is a summary of the assumptions used to determine the fair value for the Company’s outstanding market-based Performance Condition Grants as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands except for share prices) | | | | | | | | | | | |
Grant date | | | 12/11/2020 | | 03/18/2021 | | 12/16/2021 | | 03/17/2022 | | 12/14/2022 |
Vesting end | | | 12/31/2023 | | 03/18/2024 | | 12/16/2024 | | 03/17/2025 | | 12/14/2025 |
Target share price to achieve award | | | $17.07 | | $20.02 | | $21.58 | | $20.43 | | $21.99 |
| | | | | | | | | | | |
Expected volatility | | | 29.25% | | 30.30% | | 31.29% | | 31.54% | | 32.14% |
Risk-free interest rate | | | 0.19% | | 0.33% | | 0.92% | | 2.13% | | 3.84% |
| | | | | | | | | | | |
Fair value per share at grant date | | | $15.59 | | $18.82 | | $21.48 | | $21.75 | | $26.00 |
Shares granted | | | 3,628 | | 10,905 | | 3,536 | | 13,338 | | 4,613 |
Total fair value of award | | | $57 | | $205 | | $76 | | $290 | | $120 |
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, 2023 were $1,067,000 and 18 months, respectively. The fair value of restricted stock with time-based vesting features is based upon the Company’s share price on the date of grant and is expensed over the service period. The fair value of Performance Milestone Grants that cliff vest based on the achievement of performance conditions is based on the share price of the Company’s stock on the day of grant multiplied by the number of shares probable to vest based on the estimated achievement of specific performance measures. Because the ultimate vesting of all performance grants is tied to the achievement of a performance condition, the Company estimates whether the performance condition will be met and over what period of time. Ultimately, the Company will adjust stock compensation costs according to the actual outcome of the performance condition.
Under the Non-Employee Director Stock Incentive Plan, or NDSI Plan, each non-employee director receives a portion of his or her annual compensation in stock. The stock is granted at the end of each quarter based on the quarter-end stock price.
The following table summarizes stock compensation costs for the Company's 1998 Stock Incentive Plan, or the Employee Plan, and NDSI Plan for the following periods:
| | | | | | | | | | | |
($ in thousands) | Three Months Ended March 31, |
Employee Plan: | 2023 | | 2022 |
Expensed | $ | 468 | | | $ | 1,067 | |
Capitalized | 153 | | | 170 | |
| 621 | | | 1,237 | |
NDSI Plan - Expensed | 153 | | | 152 | |
Total Stock Compensation Costs | $ | 774 | | | $ | 1,389 | |
10. INTEREST RATE SWAP
On June 30, 2022, the Company entered into a variable rate term note, or New Term Note, with Bank of America, N.A. On the same day, the Company entered into a new interest rate swap agreement to reduce its exposure to fluctuations in the floating interest rate tied to SOFR under the New Term Note. Per ASC 815, an entity may apply the shortcut method to hedging relationships that meet all of the conditions under ASC 815. The Company performed an initial assessment of the hedging relationship and determined it is appropriate to apply the shortcut method as all conditions were met. The new interest rate swap qualified as an effective cash flow hedge under the guidance of ASC 815. Applying the shortcut method allows the Company to assume that it has a perfectly effective hedging relationship, therefore there is no need for the Company to perform any quantitative assessments of whether the hedge is highly effective.
As of March 31, 2023, the fair value of the interest rate swap agreement was greater than its cost basis and as such the mark-to-market adjustment is recorded within Other Assets on the Consolidated Balance Sheets. The Company had the following outstanding interest rate swap agreement designated as an interest rate cash flow hedge as of March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 |
Effective Date | | Maturity Date | | Fair Value Hierarchy | | Weighted Average Interest Pay Rate | | Fair Value | | Notional Amount |
June 30, 2022 | | June 28, 2032 | | Level 2 | | 4.62% | | $629 | | $48,092 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 |
Effective Date | | Maturity Date | | Fair Value Hierarchy | | Weighted Average Interest Pay Rate | | Fair Value | | Notional Amount |
June 30, 2022 | | June 28, 2032 | | Level 2 | | 4.62% | | $1,430 | | $48,462 |
11. INCOME TAXES
The Company’s provision for income taxes as of March 31, 2023 has been calculated by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items). For the three months ended March 31, 2023, the Company’s income tax expense was $1,013,000 compared to $3,046,000 for the three months ended March 31, 2022. Effective tax rates were 36% and 41% for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the Company had income tax payables of $482,000. The Company classifies interest and penalties incurred on tax payments as income tax expense.
For the three months ended March 31, 2023, the Company’s effective tax rate was above statutory tax rates as a result of permanent differences related to Section 162(m) limitations. The Section 162(m) compensation deduction limitations occurred as a result of changes in tax law arising from the 2017 Tax Cuts and Jobs Act.
12. COMMITMENTS AND CONTINGENCIES
Water Contracts
The Company has secured water contracts that are encumbered by the Company's land. These water contracts require minimum annual payments, for which $13,480,000 is expected to be paid in 2023. These estimated water contract payments consist of SWP contracts with WRMWSD, TCWD, Tulare Lake Basin, Dudley-Ridge, and the Nickel water contract. The SWP contracts run through 2035 and the Nickel water contract runs through 2044, with an option to extend an additional 35 years. Contractual obligations for future water payments were $269,079,000 as of March 31, 2023.
Contracts
The Company exited a consulting contract during the second quarter of 2014 related to the Grapevine Development, or Grapevine project, and is obligated to pay an earned incentive fee at the time of its successful receipt of litigated project entitlements and at a value measurement date five-years after litigated entitlements have been achieved for Grapevine. The final amount of the incentive fee will not be finalized until the future payment dates. The Company believes as of March 31, 2023, the net savings resulting from exiting the contract during this future time period will more than offset the incentive payment costs.
Community Facilities Districts
The Tejon Ranch Public Facilities Financing Authority, or TRPFFA, is a joint powers authority formed by Kern County and TCWD to finance public infrastructure within the Company’s Kern County developments. For the development of the Tejon Ranch Commerce Center, or TRCC, TRPFFA has created 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 $19,540,000 of outstanding 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 $72,055,000 of outstanding 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 $44,035,000 of additional bond debt authorized by TRPFFA that can be sold in the future.
In connection with the sale of the bonds, there is a standby letter of credit for $4,393,000 related to the issuance of East CFD bonds. The standby letter of credit is in place to provide additional credit enhancement and cover approximately two years 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 $60,000.
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. As of March 31, 2023, there were no additional improvement funds remaining from the West CFD bonds. There are $9,763,557 of additional improvement funds remaining within the East CFD bonds for reimbursement of public infrastructure costs during future years. During fiscal 2023, the Company expects to pay approximately $2,816,000 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 assessed value of the property at the time of sale or on its assessed value at the time it is leased to a third-party. Accordingly, the Company was not required to recognize an obligation on March 31, 2023.
Centennial
On April 30, 2019, the Los Angeles County Board of Supervisors granted final entitlement approval for the Centennial project. On May 15, 2019, Climate Resolve filed an action in Los Angeles Superior Court (the Climate Resolve Action), pursuant to the California Environmental Quality Act, or CEQA, and the California Planning and Zoning Law, against the County of Los Angeles and the Los Angeles County Board of Supervisors (collectively, LA County) concerning LA County’s granting of approvals for the Centennial project, including certification of the final environmental impact report and related findings (Centennial EIR); approval of associated general plan amendments; adoption of associated zoning; adoption of the Centennial Specific Plan; approval of a subdivision map for financing purposes; and adoption of a development agreement, among other approvals (collectively, the Centennial Approvals). Separately, on May 28, 2019, the Center for Biological Diversity (CBD) and the California Native Plant Society (CNPS) filed an action in Los Angeles County Superior Court (the CBD/CNPS Action) against LA County; like the Climate Resolve Action, the CBD/CNPS Action also challenges the Centennial Approvals. The Company, its wholly owned subsidiary Tejon Ranchcorp, and Centennial Founders, LLC are named as real parties-in-interest in both the Climate Resolve Action and the CBD/CNPS Action.
The Climate Resolve Action and the CBD/CNPS Action collectively allege that LA County failed to properly follow the procedures and requirements of CEQA and the California Planning and Zoning Law. The Climate Resolve Action and the CBD/CNPS Action have been deemed “related” and have been consolidated for adjudication before the judge presiding over the Climate Resolve Action. The Climate Resolve Action and CBD/CNPS Action seek to invalidate the Centennial Approvals and require LA County to revise the environmental documentation related to the Centennial project. The court held three consolidated hearings for the CBD/CNPS Action and Climate Resolve Action on September 30, 2020, November 13, 2020, and January 8, 2021.
On April 5, 2021 the court issued its decision denying the petition for writ of mandate by CBD/CNPS and granting the petition for writ of mandate filed by Climate Resolve. In granting Climate Resolve’s petition, the court found three specific areas where the EIR for the project was lacking. The court ruled that California’s Cap-and-Trade Program cannot be used as a compliance pathway for mitigating greenhouse gas (GHG) impacts for the project and therefore further ruled that additional analysis will be required related to all feasible mitigation of GHG impacts. The court also found that the EIR must provide additional analysis and explanation of how wildland fire risk on lands outside of the project site, posed by on-site ignition sources, is mitigated to less than significant. On April 19, 2021 CBD filed a motion for reconsideration with the court on the denial of their petition for writ of mandate to be granted prevailing party status in the Climate Resolve Action (“Motion for Reconsideration”). The hearing on the Motion for Reconsideration originally scheduled for August 13, 2021, was rescheduled to December 1, 2021.
On November 30, 2021, the Company together with Ranchcorp and Centennial, entered into a Settlement Agreement with Climate Resolve. Pursuant to the Settlement Agreement, the Company has agreed: (1) to make Centennial a net zero GHG emissions project through various on-site and off-site measures, including but not limited to installing electric vehicle chargers and establishing and funding incentive programs for the purchase of electric vehicles; (2) to fund certain on-site and off-site fire protection and prevention measures; and (3) to provide annual public reports and create an organization to monitor progress towards these commitments. The foregoing is only a summary of the material terms of the Settlement Agreement and does not purport to be a complete description of the rights and obligations of the parties thereunder and is qualified in its entirety by reference to the Settlement Agreement. In exchange, Climate Resolve filed a request for dismissal of the Climate Resolve Action with prejudice from the Los Angeles County Superior Court. On December 3, 2021, the Los Angeles Superior Court granted and entered Climate Resolve’s dismissal with prejudice concluding the Climate Resolve Action. On December 1, 2021, the Los Angeles Superior Court continued CBD/CNPS Motion for Reconsideration to January 14, 2022, directing CBD/CNPS to evaluate the Settlement Agreement reached in the Climate Resolve Action to address issues surrounding remedies should CBD be granted prevailing party status in the Climate Resolve Action, and to evaluate the potential to settle or otherwise address CBD’s objections to the Centennial project. To that end, the Company met and conferred twice on January 4, 2022 and January 20, 2022. On January 14, 2022, the Los Angeles County Superior Court heard CBD/CNPS Motion for Reconsideration and issued its decision granting CBD/CNPS prevailing party status in the Climate Resolve Action.
The Los Angeles County Superior Court, or the Court, set a tentative hearing date of February 25, 2022 concerning the entry of final judgment and awarding of appropriate remedies. Upon mutual request of the parties and approval by the Court, the February 25, 2022 hearing date was extended to September 7, 2022. On September 7, 2022, the Parties appeared before the Court concerning the entry of final judgment and the setting of appropriate remedies. The Court upon hearing oral argument ordered the parties to continue to meet and confer for an additional 30 days and continued the September 7th hearing to October 7, 2022. On October 3, 2022, the Court issued an order on the Court’s own continuance to further continue the October 7, 2022 hearing to October 21, 2022. Upon mutual request of the Parties and approval by the Court, the Parties extended the October 21, 2022 hearing date to October 26, 2022. At the October 26th hearing, the Court agreed to: (a) hear the Company’s Motion for Reconsideration as to the successful challenges Climate Resolve prevailed upon within the Climate Resolve Action and ordered the Parties to appear on December 14, 2022 to hear the Company’s Motion for Reconsideration and (b) rule on the entry of final judgment and setting of remedies at a February 17, 2023 hearing date.
At the December 14, 2022 hearing, the Court denied the Company’s Motion for Reconsideration (finding that the Company’s motion failed to support the statutory elements necessary to prevail on such motion). At the February 17, 2023 hearing, the Court took into submission the Parties’ legal briefs and oral arguments. On March 22, 2023, the Court decided in favor of CBD/CNPS when the Judge signed CBD/CNPS’s proposed form of judgment, which included a full rescission of the Centennial project approvals previously issued by Los Angeles County. The Company is considering options to reinstate the project approvals, such as working with Los Angeles County to complete the additional environmental analysis required by the Court’s ruling.
As the Company’s options to reinstate the project approvals remain pending, the monetary value of any adverse decision, if any, cannot be estimated at this time.
Proceedings Incidental to Business
From time to time, the Company is involved in other proceedings incidental to its business, including actions relating to employee claims, real estate disputes, contractor disputes and grievance hearings before labor regulatory agencies.
The outcome of these other proceedings is not predictable. However, based on current circumstances, the Company does not believe that the ultimate resolution of these other proceedings will have a material adverse effect on the Company’s financial position, results of operations or cash flows, either individually or in the aggregate.
13. RETIREMENT PLANS
The Company sponsors a defined benefit retirement plan, or Benefit Plan, that covers eligible employees hired prior to February 1, 2007. The benefits are based on years of service and the employee’s five-year final average salary. Contributions are intended to provide for benefits attributable to service both to date and expected to be provided in the future. The Company funds the plan in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). In April 2017, the Company froze the Benefit Plan as it relates to future benefit accruals for participants. The Company expects to contribute $165,000 to the Benefit Plan in 2023.
Benefit Plan assets consist of equity, debt and short-term money market investment funds. The Benefit Plan’s current investment policy changed during the third quarter of 2018. The policy's strategy seeks to minimize the volatility of the funding ratio. This objective will result in a prescribed asset mix between "return seeking" assets (e.g., stocks) and a bond portfolio (e.g., long duration bonds) according to a pre-determined customized investment strategy based on the Benefit Plan's funded status as the primary input. This path will be used as a reference point as to the mix of assets, which by design will de-emphasize the return seeking portion as the funded status improves. At March 31, 2023 and December 31, 2022, the investment mix was approximately 21% equity, 78% debt, and 1% money market funds. Equity investments consist of a combination of individual equity securities plus value funds, growth funds, large cap funds and international stock funds. The weighted-average discount rate used in determining the periodic pension cost is 5.00% in 2023 and in 2022. The expected long-term rate of return on plan assets is 5.00% for both fiscal 2023 and 2022. The long-term rate of return on Benefit Plan assets is based on the historical returns within the plan and expectations for future returns.
Total pension and retirement earnings for the Benefit Plan was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
($ in thousands) | 2023 | | 2022 |
(Cost)/earnings components: | | | |
| | | |
Interest cost | $ | (104) | | | $ | (78) | |
Expected return on plan assets | 105 | | | 138 | |
Net amortization and deferral | (17) | | | (12) | |
Total net periodic pension (cost)/earnings | $ | (16) | | | $ | 48 | |
The Company has a Supplemental Executive Retirement Plan, or SERP, to restore to executives designated by the Compensation Committee of the Board of Directors the full benefits under the pension plan that would otherwise be restricted by certain limitations now imposed under the Internal Revenue Code. The SERP is currently unfunded. In April 2017, the Company froze the SERP as it relates to the accrual of additional benefits.
The pension and retirement expense for the SERP was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
($ in thousands) | 2023 | | 2022 |
Cost components: | | | |
Interest cost | $ | (73) | | | $ | (46) | |
Net amortization and other | (10) | | | (29) | |
Total net periodic pension cost | $ | (83) | | | $ | (75) | |
14. REPORTING SEGMENTS AND RELATED INFORMATION
The Company currently operates 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 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Real estate - Commercial/Industrial
Commercial/Industrial real estate development segment revenues consist of land sale revenues, leases of land and/or building space to tenants at the Company's commercial retail and industrial developments, base and percentage rents from the PEF power plant lease, communication tower rents, land sales, and payments from easement leases. Refer to Note 15 (Investment in Unconsolidated and Consolidated Joint Ventures) for discussion of unconsolidated joint ventures.
The following table summarizes revenues, expenses and operating income from this segment for the periods ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
($ in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Commercial/industrial revenues | $ | 2,676 | | | $ | 7,349 | | | | | |
Equity in earnings of unconsolidated joint ventures | 1,517 | | | 1,213 | | | | | |
Commercial/industrial revenues and equity in earnings of unconsolidated joint ventures | 4,193 | | | 8,562 | | | | | |
Commercial/industrial expenses | 1,695 | | | 2,736 | | | | | |
Operating results from commercial/industrial and unconsolidated joint ventures | $ | 2,498 | | | $ | 5,826 | | | | | |
Real Estate - Resort/Residential
The Resort/Residential real estate development segment is actively involved in pursuing land entitlement and development processes both internally and through joint ventures. The segment incurs costs and expenses related to land management activities on land held for future development, but currently generates no revenue. The segment generated losses of $388,000 and $423,000 for the three months ended March 31, 2023 and 2022, respectively.
Mineral Resources
The Mineral Resources segment revenues include water sales and oil and mineral royalties from exploration and development companies that extract or mine natural resources from the Company's land. The following table summarizes revenues, expenses and operating results from this segment for the periods ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
($ in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Mineral resources revenues | $ | 6,912 | | | $ | 11,968 | | | | | |
Mineral resources expenses | 4,066 | | | 7,157 | | | | | |
Operating results from mineral resources | $ | 2,846 | | | $ | 4,811 | | | | | |
Farming
The Farming segment revenues include the sale of almonds, pistachios, wine grapes, and hay. The following table summarizes revenues, expenses and operating results from this segment for the periods ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
($ in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Farming revenues | $ | 1,185 | | | $ | 655 | | | | | |
Farming expenses | 2,013 | | | 1,762 | | | | | |
Operating results from farming | $ | (828) | | | $ | (1,107) | | | | | |
Ranch Operations
The Ranch Operations segment consists of game management revenues and ancillary land uses such as grazing leases and on-location filming. The following table summarizes revenues, expenses and operating results from this segment for the periods ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
($ in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
Ranch operations revenues | $ | 1,492 | | | $ | 1,048 | | | | | |
Ranch operations expenses | 1,330 | | | 1,315 | | | | | |
Operating results from ranch operations | $ | 162 | | | $ | (267) | | | | | |
|
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, 2023 was $36,291,000. Equity in earnings from unconsolidated joint ventures was $1,517,000 for the three months ended March 31, 2023. The unconsolidated joint ventures have not been consolidated as of March 31, 2023, because the Company does not control the investments. The Company’s current joint ventures are as follows:
•Petro Travel Plaza Holdings LLC – Petro Travel Plaza Holdings LLC, or Petro, 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 having only 50% of the voting rights. The Company's partner is the managing partner and performs all of the day-to-day operations and has significant decision-making authority over key business components such as fuel inventory and pricing at the facilities. The Company's investment in this joint venture was $25,004,000 as of March 31, 2023.
•Majestic Realty Co. – Majestic Realty Co., or Majestic, is a privately-held developer and owner of master planned business parks in the United States. The Company has five active 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.
•On March 29, 2022, TRC-MRC 5 LLC was formed to pursue the development, construction, lease-up, and management of an approximately 446,400 square foot industrial building located within TRCC-East. The construction is financed by a $49,226,000 construction loan that had an outstanding balance of $1,419,000 as of March 31, 2023. The construction loan is individually and collectively guaranteed by the Company and Majestic. In December 2022, the Company contributed land with fair value of $8,501,000 to TRC-MRC5, LLC. The total cost of the land was $2,477,000. The Company recognized profit of $3,012,000 and deferred profit of $3,012,000 after applying the five-step revenue recognition model in accordance with ASC Topic 606 - Revenue From Contracts With Customers and ASC Topic 323, Investments - Equity Method and Joint Ventures. The project is currently under construction and is expected to be completed by the winter of 2023/2024. The joint venture has leased 100% of the rentable space.
•On March 25, 2021, TRC-MRC 4 LLC was formed to pursue the development, construction, lease-up, and management of a 629,274 square foot industrial building located within TRCC-East. The construction was completed in the fourth quarter of 2022, and the Company has leased 100% of the rentable space. The joint venture refinanced its construction loan in March 2023 with a promissory note. The note matures on March 1, 2033, and had an outstanding balance of $62,400,000 as of March 31, 2023. In 2021, the Company contributed land with a fair value of $8,464,000 to TRC-MRC 4, LLC. The total cost of the land was $2,895,000. The Company recognized profit of $2,785,000 and deferred profit of $2,785,000. Since its inception, the Company has received excess distributions resulting in a deficit balance in its investment of $5,760,000.
•In November 2018, TRC-MRC 3, LLC was formed to pursue the development, construction, leasing, and management of a 579,040 square foot industrial building located within TRCC-East. TRC-MRC 3, LLC qualified as a VIE from inception, but the Company is not the primary beneficiary; therefore, it does not consolidate TRC-MRC 3, LLC in its financial statements. The building is 100% leased as of March 31, 2023. In March 2019, the joint venture entered into a promissory note with a financial institution to finance the construction of the building. The note matures on May 1, 2030 and had an outstanding principal balance of $34,281,000 as of March 31, 2023. On April 1, 2019, the Company contributed land with a fair value of $5,854,000 to TRC-MRC 3, LLC in accordance with the limited liability agreement. The Company's investment in this joint venture was $209,000 as of March 31, 2023.
•In August 2016, the Company partnered with Majestic to form TRC-MRC 2, LLC to acquire, lease, and maintain a fully occupied warehouse at TRCC-West. The partnership acquired the 651,909 square foot building for $24,773,000, which was largely financed through a promissory note guaranteed by both partners. The promissory note was refinanced on June 1, 2018 with a $25,240,000 promissory note. The note matures on July 1, 2028 and has an outstanding principal balance of $22,447,000 as of March 31, 2023. The building is 100% leased as of March 31, 2023. Since its inception, the Company has received excess distributions resulting in a deficit balance in its investment of $2,062,000. In accordance with the applicable accounting guidance, the Company reclassified excess distributions to Other Liabilities within the Consolidated Balance Sheets. The Company expects to continue to record equity in earnings as a debit to the investment account and if it were to become positive, the Company would reclassify the liability to an asset. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), the Company will immediately recognize the liability as income.
•In September 2016, TRC-MRC 1, LLC was formed to develop and operate an approximately 480,480 square foot industrial building at TRCC-East. The building is 100% leased as of March 31, 2023. Since its inception, the Company has received excess distributions resulting in a deficit balance in its investment of $1,954,000. In accordance with the applicable accounting guidance, the Company reclassified excess distributions to Other Liabilities within the Consolidated Balance Sheets. The Company expects to continue to record equity in earnings as a debit to the investment account and if it were to become positive, the Company will reclassify the liability to an asset. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), the Company will immediately recognize the liability as income. The joint venture refinanced its construction loan in December 2018 with a mortgage loan. The original balance of the mortgage loan was $25,030,000, of which $22,629,000 was outstanding as of March 31, 2023.
•In February 2022, we formed TRC-MRC Multi I, LLC, to pursue the development, construction, lease-up, and management of approximately 495 multi-family rental units located within TRCC-East. As of March 31, 2023, the Company controlled the joint venture and has consolidated its assets within the Consolidated Balance Sheet. On January 26, 2023, the Company and Majestic entered into a Membership Interest Purchase Agreement, formalizing the purchase of Majestic's interest in this joint venture for $175,000. The entity was dissolved shortly thereafter. The project is currently undergoing final design and engineering of Phase I of the project.
•Rockefeller Joint Ventures – The Company has one joint venture with Rockefeller Group Development Corporation, or Rockefeller. At March 31, 2023, the Company’s equity investment balance in these one joint ventures was $6,835,000.
•TRCC/Rock Outlet Center LLC was formed in 2013 to develop, own, and manage a net leasable 326,000 square foot outlet center on land at TRCC-East. The Company controls 50% of the voting interests of TRCC/Rock Outlet Center LLC; thus, it does not control the joint venture by voting interest alone. The Company is the named managing member. The managing member’s responsibilities relate to the routine day-to-day activities of TRCC/Rock Outlet Center LLC. However, all operating decisions, including the setting and monitoring of the budget, leasing, marketing, financing, and selection of the contractor for any construction, are jointly made by both members of the joint venture. Therefore, the Company concluded that both members have significant participating rights that are sufficient to overcome the presumption of the Company controlling the joint venture through it being named the managing member. As a result, the investment in TRCC/Rock Outlet Center LLC is being accounted for under the equity method. On September 7, 2021, the TRCC/Rock Outlet Center LLC joint venture successfully extended the maturity date of its term note with a financial institution from September 5, 2021 to May 31, 2024. In connection with the loan extension, the joint venture also reduced the outstanding amount by $4,600,000. As of March 31, 2023, the outstanding balance of the term note was $27,432,000. The Company and Rockefeller guarantee the performance of the debt.
•Centennial Founders, LLC – Centennial Founders, LLC, or CFL, is a joint venture with TRI Pointe Homes to pursue the entitlement and development of land that the Company owns in Los Angeles County. As of March 31, 2023, the Company owned 93.32% of CFL.
The Company’s investment balance in its unconsolidated joint ventures differs from its respective capital accounts in the respective joint ventures. The difference represents the difference between the cost basis of assets contributed by the Company and the agreed upon fair value of the assets contributed.
Unaudited condensed statement of operations for the three months ended March 31, 2023 and condensed balance sheet information of the Company’s unconsolidated joint ventures as of March 31, 2023 and December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| Joint Venture | | TRC |
($ in thousands) | Revenues | | Earnings (Loss) | | Equity in Earnings (Loss) |
Petro Travel Plaza Holdings, LLC | $ | 34,812 | | | $ | 38,328 | | | $ | 2,270 | | | $ | 1,934 | | | $ | 1,362 | | | $ | 1,161 | |
TRCC/Rock Outlet Center, LLC1 | 1,431 | | | 1,564 | | | (887) | | | (414) | | | (443) | | | (207) | |
TRC-MRC 1, LLC | 961 | | | 839 | | | 96 | | | 19 | | | 48 | | | 9 | |
TRC-MRC 2, LLC | 1,390 | | | 1,025 | | | 667 | | | 344 | | | 334 | | | 172 | |
TRC-MRC 3, LLC | 1,051 | | | 1,018 | | | 196 | | | 158 | | | 98 | | | 79 | |
TRC-MRC 4, LLC | 1,776 | | | — | | | 251 | | | (1) | | | 125 | | | (1) | |
TRC-MRC 5, LLC | — | | | — | | | (14,000) | | | — | | | (7,000) | | | — | |
Total | $ | 41,421 | | | $ | 42,774 | | | $ | 2,579 | | | $ | 2,040 | | | $ | 1,517 | | | $ | 1,213 | |
| | | | | | | | | | | |
Centennial Founders, LLC | $ | 175 | | | $ | 121 | | | $ | 109 | | | $ | 97 | | | Consolidated |
| | | | | | | | | | | |
(1) Revenues for TRCC/Rock Outlet Center are presented net of non-cash tenant allowance amortization of $0.3 million and $0.3 million for the three months ended March 31, 2023 and March 31, 2022, respectively. |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Joint Venture | TRC | | Joint Venture | TRC |
($ in thousands) | Assets | Debt | Equity (Deficit) | Equity | | Assets | Debt | Equity (Deficit) | Equity |
Petro Travel Plaza Holdings, LLC | $ | 82,290 | | $ | (13,128) | | $ | 62,339 | | $ | 25,004 | | | $ | 84,225 | | $ | (13,318) | | $ | 63,069 | | $ | 25,441 | |
TRCC/Rock Outlet Center, LLC | 58,286 | | (27,432) | | (29,797) | | 6,835 | | | 59,196 | | (27,707) | | 30,684 | | 7,279 | |
TRC-MRC 1, LLC | 23,631 | | (22,629) | | 638 | | — | | | 24,085 | | (22,787) | | 1,042 | | — | |
TRC-MRC 2, LLC | 19,048 | | (22,447) | | (3,589) | | — | | | 18,398 | | (22,612) | | (3,939) | | — | |
TRC-MRC 3, LLC | 36,350 | | (34,281) | | 1,861 | | 209 | | | 36,608 | | (34,494) | | 2,690 | | 386 | |
TRC-MRC 4, LLC | 52,858 | | (62,400) | | (12,859) | | — | | | 50,497 | | (40,130) | | 8,974 | | 4,485 | |
TRC-MRC 5, LLC | 10,741 | | (1,419) | | 8,586 | | 4,243 | | | 8,602 | | — | | — | | 4,300 | |
Total | $ | 283,204 | | $ | (183,736) | | $ | 27,179 | | $ | 36,291 | | | $ | 281,611 | | $ | (161,048) | | $ | 102,520 | | $ | 41,891 | |
| | | | | | | | | |
Centennial Founders, LLC | $ | 103,532 | | $ | — | | $ | 103,347 | | *** | | $ | 102,984 | | $ | — | | $ | 102,689 | | *** |
| | | | | | | | | |
*** 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, residential, and industrial development. The Company is the largest landowner and taxpayer within TCWD. The Company has a water service contract with TCWD that entitles it 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, the Company transacts with TCWD in the ordinary course of business.
The Company has water contracts with WRMWSD for SWP water deliveries to its agricultural and municipal/industrial operations in the San Joaquin Valley. The terms of these contracts extend to 2035. Under the contracts, the Company is entitled to annual water for 5,496 acres of land, or 15,547 acre-feet of water, subject to SWP allocations. The Company's Executive Vice President and Chief Operating Officer/Chief Financial Officer is one of nine directors at WRMWSD. As of March 31, 2023, the Company paid $2,363,000 for these water contracts and related costs.