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10-Q: TEJON RANCH CO

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements, including without limitation statements regarding strategic alliances, the almond, pistachio and grape industries, the future plantings of permanent crops, future yields, prices and water availability for our crops and real estate operations, future prices, production and demand for oil and other minerals, future development of our property, future revenue and income of our jointly-owned travel plaza and other joint venture operations, potential losses to the Tejon Ranch Co. and its subsidiaries (the Company, Tejon, we, us, and our), as a result of pending environmental proceedings, the adequacy of future cash flows to fund our operations, market value risks associated with investment and risk management activities and with respect to inventory, accounts receivable and our own outstanding indebtedness, ongoing negotiations, the uncertainties regarding the expected impact of COVID-19 on the Company and global economic conditions, and other future events and conditions. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "will," "should," "would," "likely," and similar expressions such as "in the process." In addition, any statements that refer to projections of our future financial performance, our anticipated growth, and trends in our business and other characterizations of future events or circumstances are forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to assumptions and involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance, or achievement implied by such forward-looking statements. These risks, uncertainties and important factors include, but are not limited to, the impacts of COVID-19 and the actions taken by governments, businesses, and individuals in response to it, weather, market and economic forces, availability of financing for land development activities, competition and success in obtaining various governmental approvals and entitlements for land development activities. No assurance can be given that the actual future results will not differ materially from the forward-looking statements that we make for a number of reasons, including those described above and in the section entitled "Risk Factors" in this report, our most recent Annual Report on Form 10-K, and our Quarterly Report for the period ending March 31, 2020. OVERVIEW We are a diversified real estate development and agribusiness company committed to responsibly using our land and resources to meet the housing, employment, and lifestyle needs of Californians and to create value for our shareholders. In support of these objectives, we have been investing in land planning and entitlement activities for new industrial and residential land developments and in infrastructure improvements within our active industrial development. Our prime asset is approximately 270,000 acres of contiguous, largely undeveloped land that, at its most southerly border, is 60 miles north of Los Angeles and, at its most northerly border, is 15 miles east of Bakersfield. Business Objectives and Strategies Our primary business objective is to maximize long-term shareholder value through the monetization of our land-based assets. A key element of our strategy is to entitle and then develop large-scale mixed use master planned residential and commercial/industrial real estate development projects to serve the growing populations of Southern and Central California. Our mixed use master planned residential developments have been approved to collectively include up to 34,783 housing units, and more than 35 million square feet of commercial space. We have obtained entitlements on Mountain Village at Tejon Ranch (MV) and are pursuing final tract maps. Over the next few years, we will be defending our entitlements against litigation for our Grapevine at Tejon Ranch, or Grapevine, and Centennial at Tejon Ranch, or Centennial, projects. We are currently engaged in construction, commercial sales and leasing at our fully operational commercial/industrial center Tejon Ranch Commerce Center, or TRCC. All of these efforts are supported by diverse revenue streams generated from other operations, including commercial/industrial real estate, farming, mineral resources, ranch operations, and our various joint ventures. Our Business We currently operate in five reporting segments: commercial/industrial real estate development; resort/residential real estate development; mineral resources; farming; and ranch operations. Activities within the commercial/industrial real estate development segment include: planning and permitting of land for development; construction of infrastructure; construction of pre-leased buildings; construction of buildings to be leased or sold; and the sale of land to third parties for their own development. The commercial/industrial real estate development segment also includes activities related to communications leases and landscape maintenance fees.

At the heart of the commercial/industrial real estate development segment is TRCC, a 20 million square foot commercial/industrial development on Interstate 5 just north of the Los Angeles basin. Nearly six million square feet of industrial, commercial and retail space has already been developed, including distribution centers for IKEA, Caterpillar, Famous Footwear, L'Oreal, and Dollar General. TRCC sits on both sides of Interstate 5, giving distributors immediate access to the west coast's principal north-south goods movement corridor. We are also involved in multiple joint ventures with several partners that help us expand our commercial/industrial business activities within TRCC:

Three joint ventures with Rockefeller Development Group, or Rockefeller:







                     Five West Parcel LLC owned a 606,000 square foot building in
                     TRCC-West that was fully leased. In 2019, Five West Parcel sold the
                     building and land to a third party;
                     18-19 West LLC owns 63.5 acres of land for future development within
                     TRCC-West. In 2019, our 18-19 West LLC joint venture entered into a
                     land purchase option with the same third-party who purchased the
                     Five West building and land, to purchase lots 18 and 19 at a price
                     of $13.8 million through the option period ending May 21, 2021. If
                     the option is extended to November 21, 2021, the price increases to
                     $15.2 million. The land option expires in the fourth quarter of
                     2021; and
                     TRCC/Rock Outlet Center LLC operates the Outlets at Tejon, a net
                     leasable 326,000 square foot shopping experience in TRCC-East;
               Three joint ventures with Majestic Realty Co., or Majestic, to develop,
               manage, and operate industrial buildings within TRCC:
                     TRC-MRC 1, LLC was formed to develop and operate a 480,480 square
                     foot industrial building in TRCC-East, which was completed during
                     2017 and is fully leased;
                     TRC-MRC 2, LLC owns a 651,909 square foot building in TRCC-West that
                     is fully leased; and
                     TRC-MRC 3, LLC was formed to pursue the development, construction,
                     leasing and management of a 579,040 square foot industrial building
                     in TRCC-East. The construction of the building was completed in the
                     fourth quarter of 2019 and is fully leased.
        


The resort/residential real estate development segment is actively involved in the land entitlement and development process internally and through a joint venture. Our active developments within this segment are MV, Centennial, and Grapevine.

The Centennial development is a mixed-use master planned community development encompassing 12,323 acres of our land within Los Angeles County. Upon completion of Centennial, it is estimated that the community will include approximately 19,333 homes and 10.1 million square feet of commercial development. Centennial has entitlements approved in December 2018, and received legislative approvals in April 2019 from the Los Angeles County Board of Supervisors.

Grapevine is an 8,010-acre potential development area located on the San Joaquin Valley floor area of our lands, adjacent to TRCC. Upon completion of Grapevine, the community will include 12,000 homes, 5.1 million square feet for commercial development, and more than 3,367 acres of open space and parks. On December 10, 2019, the Kern County Board of Supervisors adopted the supplemental re-circulated environmental impact report prepared in response to a court ruling and reapproved the development of Grapevine unanimously.

Please refer to our Annual Report on Form 10-K for the year ended December 31, 2019, for a more detailed description of our active developments within the resort/residential real estate development segment.

Lastly, the ranch operations segment consists of game management revenues and ancillary land uses such as grazing leases and filming. The COVID-19 Pandemic







        Results of Operations by Segment
        We evaluate the performance of our reporting segments separately to monitor the
        different factors affecting financial results. Each reporting segment is subject
        to review and evaluation as we monitor current market conditions, market
        opportunities, and available resources. The performance of each reporting
        segment is discussed below:
        Real Estate - Commercial/Industrial:
                                         Three Months Ended June 30,                   Change
        ($ in thousands)                    2020               2019              $                %
        Commercial/industrial
        revenues
        Pastoria Energy Facility      $           931     $        934     $         (3 )             -  %
        TRCC Leasing                              418              416                2               -  %
        TRCC management fees and
        reimbursements                            140              359             (219 )           (61 )%
        Commercial leases                         127              152              (25 )           (16 )%
        Communication leases                      245              226               19               8  %
        Landscaping and other                     253              195               58              30  %
        Land sale                                   -            4,313           (4,313 )          (100 )%
        Total commercial/industrial
        revenues                      $         2,114     $      6,595     $     (4,481 )           (68 )%
        Total commercial/industrial
        expenses                      $         1,747     $      4,593     $     (2,846 )           (62 )%
        Operating income from
        commercial/industrial         $           367     $      2,002     $     (1,635 )           (82 )%
        


Commercial/industrial real estate development segment revenues were $2,114,000 for the three months ended June 30, 2020, a decrease of $4,481,000, or 68%, from $6,595,000 for the three months ended June 30, 2019. Unlike in 2019, we did not have land sale revenues and construction management fees opportunities associated with our TRC-MRC 3 joint venture in 2020, which primarily drove the decline.

Commercial/industrial real estate development segment expenses were $1,747,000 for the three months ended June 30, 2020, a decrease of $2,846,000, or 62%, from $4,593,000 for the three months ended June 30, 2019. The decrease is primarily attributed to not recognizing the cost of sales associated with the 2019 land sale discussed above.







                                         Six Months Ended June 30,                   Change
        ($ in thousands)                   2020              2019              $                %
        Commercial revenues
        Pastoria Energy Facility      $       1,996     $      2,399     $       (403 )           (17 )%
        TRCC Leasing                            824              868              (44 )            (5 )%
        TRCC management fees and
        reimbursements                          376              594             (218 )           (37 )%
        Commercial leases                       284              319              (35 )           (11 )%
        Communication leases                    470              472               (2 )             -  %
        Landscaping and other                   484              456               28               6  %
        Land sale                                 -            4,313           (4,313 )          (100 )%
        Total commercial revenues     $       4,434     $      9,421     $     (4,987 )           (53 )%
        Total commercial expenses     $       3,678     $      6,385     $     (2,707 )           (42 )%
        Operating income from
        commercial/industrial         $         756     $      3,036     $     (2,280 )           (75 )%
        


Commercial/industrial real estate development segment revenues were $4,434,000 for the first six months of 2020, a decrease of $4,987,000, or 53%, from $9,421,000 for the first six months of 2019. A lack of land sales and construction management fees drove a majority of this decrease as discussed in the segment's quarterly operating results. Another factor contributing to the decline is the Company's 2019 recognition of a true-up related to 2018 spark spread revenues from the Pastoria Energy Facility that was greater than their original estimates. This true-up did not reoccur in 2020.

Commercial/industrial real estate development segment expenses were $3,678,000 during the first six months of 2020, a decrease of $2,707,000, or 42%, from $6,385,000 during the first six months of 2019. The decrease is attributed to not recognizing land cost of sales associated with the land sale transaction discussed previously.

The logistics operators currently located within TRCC have demonstrated success in serving all of California and the western region of the United States, and we are building from their success in our marketing efforts. We will continue to focus our marketing strategy for TRCC-East and TRCC-West on the significant labor and logistical benefits of our site, the pro-business approach of Kern County, and the demonstrated success of the current tenants and owners within our development. Our strategy fits within the logistics model that many companies are using, which favors large, centralized distribution facilities which have been strategically located to maximize the balance of inbound and outbound efficiencies, rather than a number of decentralized smaller distribution centers. The world class logistics operators located within TRCC have demonstrated success through utilization of this model. With access to markets of over 40 million people for next-day delivery service, they are also demonstrating success with e-commerce fulfillment.

As described earlier, in March 2020, in response to the COVID-19 pandemic, California issued the Stay at Home Order which shut down all non-essential businesses and services. Most of our operations in this segment have been deemed an "essential" business. Commercial retail tenants at TRCC and the Outlets at Tejon joint venture have had difficulty making timely rent payments due to reduced traffic at TRCC and the Outlets at Tejon resulting from California guidelines and social distancing practices.







                                                                                                                 Deferred Rent
                                                                                                Deferred Rent        to be
        ($ in thousands, except for  Impacted     Contractual Rent     Deferred Rent due to    to be Collected    Collected in
        impacted tenants)            Tenants          Billing1               COVID-19              in 2020            2021
        TRCC Leasing                       5     $         312         $               44      $           5     $         39
        Other Commercial Leases            3               125                         18                  7               11
                                           8     $         437         $               62      $          12     $         50
        


. . .

Aug 05, 2020

COMTEX_368935986/2041/2020-08-05T16:55:13

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