Tejon Ranch Co.
Annual Report 2012

Plain-text annual report

t e j o n R a n c h c om pa n y 2 0 1 2 a n n u a l r e p o rt The science and tech- nology used to measure and determine specific locations certainly has changed over the years. The primary tool of the surveyor used to be the Transit. Consisting of a telescope mounted on a tripod with a compass and leveling vial, survey- ors used the transit to determine the angular relationship between fixed points. Today, they use Global Positioning Systems (GPS) to secure measurement readings from satellites within seconds. Location. Location. Locatio n. T e j o n R a n c h C o m p a n y is a diversified real estate development and agri- business company committed to responsibly using its land and resources to meet the housing, employment and lifestyle needs of Californians and to create value for its shareholders. The Company’s Vision is guided by the Ranch’s historic core values of conservation and good stewardship. 1. Tejon Ranch Commerce Center California Aqueduct N Strategically located in the center of the state, the mountains and hills of Tejon Ranch serve as the transition point from Southern California to the San Joaquin Valley. + To Our Valued S hareholders One of the first things I heard when I started my real estate career some 40 years ago was that the three most important words in real estate were location, location and location. Decades later, some may dismiss that no- tion as an old fashioned simplistic cliché, but like many “old sayings” it has stood the test of time because it is largely true. While other factors may come into play when analyz- ing the value of a piece of real estate, location is by far the most important part of the equation. And without a doubt, Tejon Ranch has location in abundance. Robert A. Stine President & Chief Executive Officer at the Gulf of Mexico and San Diego, the main inland route to the gold fields was through Tejon Ranch. The Los Angeles-Stockton Road cut through the Ranch in two directions, one down Tejon Canyon and the other through Grapevine Canyon. The route through Grape- vine Canyon eventually be- came part of the Butterfield Overland Stage Coach Line. In 1854, the Federal Government es- tablished Fort Tejon, home to the 1st Dragoons, along this critical transportation corridor. By the 1860s, the area around Fort Tejon had grown to become the third largest settlement in Southern California. Further north over the St rate gic Location Throughout the history of California, Tejon Ranch’s strategic location has en- sured that it would play a vital role in the growth of trade, transportation and commerce, as well as the development of real es- tate in the Golden State. The discovery of gold in California in 1848 brought about the largest mass migration in U.S. history. For those arriving by sea Interstate 5 winds through Grapevine Canyon. Grapevine was Rose Sta- tion, a lively watering stop for the stage coaches. In the 1870s, it boasted several general stores, a post office and a tavern. The same intrinsic factors that made Tejon Ranch an important loca- tion for trade, transporta- tion and commerce over the last two centuries are still in play today. The Los Angeles-Stockton Road through Grapevine Canyon 3. has evolved to become Interstate 5, California’s principal north- south highway. The site where the historic Rose Station once stood is now home to the Tejon Ranch Commerce Center, which serves as a center of modern day Califor- nia commerce as well as a welcome stop for the thousands of travel- ers who pass through Tejon Ranch every day. The Tejon Ranch Com- merce Center already hosts nearly 4.5 million square feet of indus- trial space with an additional 16.5 million available. It is home to major distribution facilities for IKEA and Famous Footwear, and last year we added Dollar General (606,000 square feet) and Cater- pillar (400,000 square feet) to the mix of world class com- panies located within our development. Located at the geographic center of state, and situated directly on I-5, California’s leading transportation corridor, companies located at Tejon can serve 97% of California consumers within a single day’s truck turn. That’s a huge advantage for companies looking to serve the entirety of California, and even the adjacent western states beyond. According to John Flanigan, Dollar General’s executive vice president of global supply chain, it was a key reason why they chose the Tejon Ranch Commerce Center. Here’s what he had to say when the deal was announced: “The Tejon Ranch distribution center is strategically located to serve our supply chain needs as we continue to expand westward. From its central location, our supply chain team can deliver goods to stores in northern and southern California in a day.” What’s the reason behind its success? There are a number of factors that have led the Tejon Ranch Commerce Center to becoming one of the fast- est growing commercial/ industrial developments in California, let alone Kern County, but its strategic location has to be chief among them. 4. Our leasing and sales efforts also benefit from our jurisdictional location. Kern County has earned a well deserved reputation for being business-friendly. This is a key advantage for us. The county’s stream- lined permit processing enabled the Caterpillar Caterpillar’s California Distribution Center at the Tejon Ranch Commerce Center opened in August 2012, only 8 months after the close of escrow. Future site of The Outlets at Tejon Ranch Caterpillar IKEA Dollar General Famous Footwear N “From its central location, our supply chain team can deliver goods to stores in northern and southern California in a day.” – John Flanigan, Executive Vice President, Dollar General + California Aqueduct N The location of the pro- posed landmark commu- nity of Centennial is the perfect canvas on which to create a new model for development, one focused on sustainability, wellness, and economic vitality. + project to progress from the sign- ing of the deal to delivery of the building in only eight months. That type of speed is unheard of in the balance of California. The Tejon Ranch Commerce Center has also become a prime retail destination. Research con- ducted in early 2011 revealed that nearly 25% of Southern Califor- nia residents already stop there on their travels north or the return trip south. As evidence of the volume of business transacted at the Commerce Center, Starbucks’ Tejon store is one of the top per- formers in the chain. That’s why we think this is the perfect location for an outlet center. To that end, we’ve part- nered with The Rockefeller Group on The Outlets at Tejon Ranch, a high-end outlet retail center being planned for the east side of the Commerce Center at the Laval Road exit. As cur- rently envisioned, phase one of the development would encompass approximately 325,000 square feet of retail space, and some 80 stores and restaurants. Phase two would add an additional 180,000 square feet. We’re making great progress in our leasing effort as major out- let brands have almost universally embraced both the market and the location. If all goes well, The Outlets at Tejon Ranch should be ready to welcome its first customers in the spring of 2014. Not only do we expect the outlet center to be an unqualified success in its own right, but we believe it will also serve as a catalyst to drive land values on adjacent retail parcels. Our planned residential com- munities, Tejon Mountain Village and Centennial, will also benefit from their strategic locations. It’s interesting to note that real estate development is not a new concept for their particular locations as they will be built in the same area that comprised the Fort Tejon settlement, once one of California’s larg- est. And the area already contains the necessary in- frastructure needed for a new community; adjacent highways, utilities, water delivery systems, fiber optic lines, etc. This past year we finished the installation of the Bear Trap Turnout, which allows us to tap into the giant pipes of the California Aqueduct 7. Artist rendering of The Outlets at Tejon Ranch, which is slated to open in Spring 2014. system that cross Tejon Ranch. This will enable us to use a portion of our State Water Project allocation for Tejon Mountain Village. In addition to having ready access to infrastructure, Centennial and Tejon Mountain Village are also conveniently located within an hours’ drive of the Los Angeles metropolitan area and its millions of people. Geo logic Location A look below the surface of the land also reveals the importance of Tejon’s location. Our oil and gas fields, located in the area where valley land collides with the moun- tains, have been active producers since the 1930s. In the last few years, we’ve seen growing inter- est in our oil fields. 2012 was another year of strong exploration activities, in- creased drilling, and record production—nearly 800,000 barrels. and minerals. We want to make it easier for you to clearly track the revenue realized from this important part of our diversified operation. Rich L oc ation Above our mineral estate in the Southern San Joaquin Valley you’ll find some of the richest, most fertile soil in the country. Our agricultural division capitalizes on this fact, using nearly 4,300 acres of land in the valley portion of the Ranch to grow permanent high value crops like wine grapes, almonds and pistachios. Over the last three years, our farming opera- tion has netted the Company over $25 million, that’s approximately $2,000 in profit per acre per year. Beautiful Location “California is certainly blessed by natural beauty and is supremely blessed on Tejon Ranch.” Those were the words of the Sierra Club’s Bill Corcoran when we announced our historic land use and conservation agreement in 2008, and truer words were never spo- ken. Our 422 square miles hold some of the most beautiful vistas in the state. Due to the growth we’re seeing in our oil and gas operations and the increasing importance of this area to our business operations, we’ve decided to create a new segment in our financial reporting dedicated solely to oil, gas Workers constructing the Bear Trap Turnout, which provides access to the California Aque- duct—the primary source of water for Tejon Mountain Village. 8. Geghus Ridge N One of the views in Tejon Mountain Village, where future homeowners can establish their own lega- cies as they enjoy the nat- ural beauty and gracious living of one of Califor- nia’s great ranchos. + Tejon Mountain Village N The entry to Tejon Moun- tain Village will be located on Tejon Lake Drive, just to the north and west of Tejon (Castac) Lake. + difficulties inherent with entitling land in California and operating in a constraining regulatory environ- ment. However, as a Company, we are uniquely positioned to over- come these challenges. We own the land outright and are not burdened by debt service requirements. This allows us to be patient—not rush to market before the market is ready, to do things right, and focus on creating long term value. And the progress we’ve made to date on both the Tejon Ranch Commerce Center and Tejon Mountain Village, which last year was affirmed by the 5th District Court of Appeals, is noteworthy. There are very few places—and com- panies—in California that have achieved what we’ve achieved and where the future is so bright. As always, we appre- ciate your support as we endeavor to maximize the value of this extraordinary asset that’s situated in an extraordinary location. Traversing Tejon Ranch re- veals a dramatic tapestry of rugged mountains, steep canyons, oak- covered rolling hills, and broad valleys. Oaks of almost every kind can be found on the land, as can conifer forests, Joshua trees, and spectacular spring displays of wildflowers as far as the eye can see. We believe the opportunity to live within and view our beautiful landscape will be a key component of our future marketing program. Imagine… a new generation of families having the opportunity to establish their own legacies in this remarkable landscape, building ranches and homes where they can enjoy an upscale ranch lifestyle and experience the natural beauty and gracious living of one of Califor- nia’s great ranchos. When it comes to the value associated with our future residential and resort development, our spectacular landscape and beautiful location are key. Marty Whitman, chairman of the Third Av- enue Fund, one of our larg- est shareholders, once said that the best thing about Tejon Ranch was that it was in California. And on the flip side, he said one of the Ranch’s greatest challenges is that it is in California. We certainly recognize the Robert A. Stine President & Chief Executive Officer Another spectacular view from Tejon Mountain Village— looking down Grapevine Canyon into the southern San Joaquin Valley. 11. Consolidated Balance Sheets ($ in thousands) Assets Current Assets: Cash and cash equivalents Marketable securities - available-for-sale Accounts receivable Inventories Prepaid expenses and other current assets Deferred tax assets Total current assets Property and equipment - net of depreciation (includes $72,115 at December 31, 2012 and $67,442 at December 31, 2011, attributable to Centennial Founders LLC, Note 15) Investments in unconsolidated joint ventures Long-term water assets Long-term deferred tax assets Other assets Total assets Liabilities and Stockholders’ Equity Current Liabilities: Trade accounts payable Accrued liabilities and other Income taxes payable Deferred income Current portion of long-term debt Total current liabilities Long-term debt, less current portion Long-term deferred gains Other liabilities Pension liability Total liabilities Commitments and contingencies Equity: Tejon Ranch Co. Stockholders’ Equity Common stock, $.50 par value per share: Authorized shares - 30,000,000 Issued and outstanding shares - 20,085,865 at December 31, 2012 and 19,975,706 at December 31, 2011 Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total Tejon Ranch Co. Stockholders’ Equity Non-controlling interest Total equity Total liabilities and equity $ $ $ 2012 7,219 65,049 8,768 3,839 4,881 997 90,753 146,590 54,022 28,565 5,376 2,550 327,856 3,845 2,132 — 1,195 41 7,213 212 2,248 6,508 3,416 19,597 December 31 2011 $ $ $ 18,372 68,566 7,832 3,587 4,317 1,099 103,773 128,430 53,893 28,336 6,845 699 321,976 3,496 2,025 2,484 2,125 37 10,167 253 2,664 5,474 2,979 21,537 10,043 198,117 (5,118) 65,550 268,592 39,667 308,259 327,856 $ 9,988 194,273 (4,756) 61,109 260,614 39,825 300,439 321,976 $ 12. Consolidated Statements of Operations ($ in thousands, except per share amounts) Revenues: Real estate - commercial/industrial Real estate - resort/residential Mineral resources Farming Total revenues Costs and Expenses: Real estate - commercial/industrial Real estate - resort/residential Mineral resources Farming Corporate expenses Total expenses Operating income Other Income: Investment income Interest income (expense) Other income Total other income Income from operations before equity in earnings of unconsolidated joint ventures Equity in earnings of unconsolidated joint ventures, net Income before income tax expense Income tax expense Net income Net loss attributable to non-controlling interest Net income attributable to common stockholders Net income per share attributable to common stockholders, basic Net income per share attributable to common stockholders, diluted 2012 9,941 583 14,012 22,553 47,089 12,271 4,761 334 13,323 13,272 43,961 3,128 1,242 (12) 113 1,343 4,471 2,535 7,006 2,723 4,283 (158) 4,441 0.22 0.22 $ $ $ $ Consolidated Statements of Comprehensive Income (Loss) ($ in thousands) Net income Other comprehensive income (loss): Unrealized gains (losses) on available for sale securities Benefit plan adjustments SERP liability adjustments Equity in other comprehensive income of unconsolidated joint venture Other comprehensive income (loss) before taxes (Provisions) benefit for income taxes related to other comprehensive income (loss) items Other comprehensive income (loss) Comprehensive income Comprehensive loss attributable to non-controlling interests Comprehensive income attributable to common stockholders 2012 4,283 $ 182 (922) (12) 152 (600) 238 (362) 3,921 (158) 4,079 $ Year Ended December 31 2010 2011 13,746 16,134 12,206 21,012 63,098 13,221 3,942 209 12,575 12,277 42,224 20,874 1,260 — 98 1,358 22,232 916 23,148 7,367 15,781 (113) 15,894 0.80 0.80 $ $ $ $ 10,294 281 6,362 18,576 35,513 10,535 3,089 124 10,914 5,612 30,274 5,239 979 (9) 61 1,031 6,270 541 6,811 2,852 3,959 (216) 4,175 0.23 0.22 Year Ended December 31 2011 2010 3,959 15,781 $ (82) (2,574) (1,825) 217 (4,264) 1,699 (2,565) 13,216 (113) 13,329 (3) (505) 578 (108) (38) (2) (40) 3,919 (216) 4,135 $ $ $ $ $ $ $ 13. Consolidated Statements of Equity Additional Accumulated Other Paid-In Comprehensive Capital Income Loss Common Stock Shares Outstanding $ 17,019,428 — — 2,608,735 78,894 56,131 — (15,718) 19,747,470 — — 205,165 52,069 — (28,998) 19,975,706 — — Common Stock - 8,509 — — 1,306 39 28 — (8) 9,874 — — 103 26 — (15) 9,988 — — $ - $ 126,829 — — 58,454 1,960 (28) (2,944) (455) 183,816 — — 5,773 (26) 5,507 (797) 194,273 — — 13,641 179,172 — (82,654) 20,085,865 7 89 — (41) $ 10,043 363 (89) 5,832 (2,262) $ 198,117 $ (2,151) — (40) — — — — — (2,191) — (2,565) — — — — (4,756) — (362) — — — — (5,118) Total Tejon Ranch Co.’s Retained Stockholders’ Equity Earnings Non- controlling Interest Total Equity $ 41,040 4,175 — — $ 174,227 4,175 (40) 59,760 $ 40,154 (216) — — $ 214,381 3,959 (40) 59,760 — — — — 45,215 15,894 — — — — — 61,109 4,441 — 1,999 — (2,944) (463) 236,714 15,894 (2,565) 5,876 — 5,507 (812) 260,614 4,441 (362) — — — — 39,938 (113) — — — — — 39,825 (158) — 1,999 — (2,944) (463) 276,652 15,781 (2,565) 5,876 — 5,507 (812) 300,439 4,283 (362) — — — — $ 65,550 370 — 5,832 (2,303) $ 268,592 — — — — $ 39,667 370 — 5,832 (2,303) $ 308,259 ($ in thousands, except share information) Balance, December 31, 2009 Net income (loss) Other comprehensive income Rights offering, net of expenses Exercise of stock options and related tax benefit of $204 Restricted stock issuance Stock compensation Shares withheld for taxes Balance at December 31, 2010 Net income Other comprehensive income Exercise of stock options and related tax benefit of $634 Restricted stock issuance Stock compensation Shares withheld for taxes Balance at December 31, 2011 Net income Other comprehensive income Exercise of stock options and related tax benefit of $8 Restricted stock issuance Stock compensation Shares withheld for taxes Balance at December 31, 2012 14. Consolidated Statements of Cash Flows ($ in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: 2012 Year Ended December 31 2010 2011 $ 4,283 $ 15,781 $ 3,959 Depreciation and amortization Amortization of premium/discount of marketable securities Equity in earnings Non-cash retirement plan expense Gain on sale of real estate Gain on sale of easements Deferred income taxes Amortization of stock compensation expense (reversal) Excess tax benefit from stock-based compensation Distribution of earnings from unconsolidated joint ventures Changes in operating assets and liabilities: Receivables, inventories and other assets, net Current liabilities, net Net cash provided by (used in) operating activities Investing Activities Maturities and sales of marketable securities Funds invested in marketable securities Property and equipment expenditures Reimbursement proceeds Kern County - Laval Interchange Reimbursement proceeds from Communities Facilities District Proceeds from sale of real estate Proceeds from sale of easements Investment in unconsolidated joint ventures Distribution of equity from unconsolidated joint ventures Investments in long-term water assets Other Net cash provided by (used in) investing activities Financing Activities Borrowings of short-term debt Repayments of short-term debt Repayments of long-term debt Net proceeds from rights offering Proceeds from exercise of stock options Taxes on vested stock grants Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental cash flow information Accrued capital expenditures included in current liabilities Sale of assets accounted as direct finance leases Taxes paid (net of refunds) 4,954 874 (2,535) 1,047 (676) — 1,810 5,440 8 7,200 (1,761) (6,552) 14,092 19,809 (16,984) (20,669) — — — — (6,154) 1,512 (797) 10 (23,273) 1,500 (1,500) (39) — 370 (2,303) (1,972) (11,153) 18,372 7,219 2,293 913 4,021 $ $ $ $ 3,629 641 (916) 528 (4,058) (15,750) (162) 5,340 (634) — 2,570 2,515 9,484 19,143 (39,448) (13,649) — — 4,988 15,750 (4,457) — — (495) (18,168) — — (35) — 5,876 (812) 5,029 (3,655) 22,027 18,372 590 — 5,002 $ $ $ $ 2,119 198 (541) 800 (559) — (1,351) (2,944) (227) 1,440 (56) 361 3,199 15,720 (34,751) (14,196) 1,613 10,860 604 — (4,594) 4,100 (11,981) (943) (33,568) (16,400) 6,850 (33) 59,760 1,999 (463) 51,713 21,344 683 22,027 — — 875 $ $ $ $ 15. Performance Graph The following graph is a comparison of cumulative total shareowner returns for the Company, the Dow Jones Equity Market Index, and the Dow Jones Real Estate Index for the period shown. comparison of five year cumulative total returns 180.00 140.00 s r a l l o d 100.00 60.00 20.00 12.31.07 12.31.08 12.31.09 12.31.10 12.30.11 12.30.12 tejon ranch dj equity mkt dj real estate - Assumes $100 invested on December 31, 2007 - Total return assumes reinvestment of dividends - Fiscal year ending December 31 tejon ranch dj equity mkt dj real estate 2008 -39.44% -37.16% -40.07% 2009 18.11% 28.79% 30.81% 2010 -5.72% 16.65% 26.93% 2011 -11.14% 1.34% 6.05% 2012 14.71% 16.33% 18.91% The stock price performance depicted in the above graph is not necessarily indicative of future price performance. The Performance Graph will not be deemed to be incorporated by reference in any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except where the Company specifically incorporates the Performance Graph by reference. The Dow Jones Real Estate Index, for the most part, includes companies which have revenues substantially greater than those of the Company. The Company is unaware of any industry or line-of-business index that is more nearly comparable. quarter First Second Third Fourth high $31.64 $30.94 $31.08 $30.78 2012 low $24.33 $25.10 $25.25 $25.70 high $36.97 $37.70 $37.00 $27.47 2011 low $25.24 $32.31 $23.71 $22.80 As of March 5, 2013, there were 353 registered owners of record of our Common Stock. 16. Directors Executive Officers Kent G. Snyder Chairman of the Board, Tejon Ranch Company; Real Estate Attorney John L. Goolsby Private Investments and Real Estate Anthony L. Leggio President, Bolthouse Properties LLC Norman Metcalfe Real Estate and Investments George G.C. Parker Dean Witter Distinguished Professor of Finance, Stanford Business School Geoffrey L. Stack Managing Director, SARES-REGIS Group, Real Estate Development and Management Robert A. Stine President and Chief Executive Officer, Tejon Ranch Company Daniel R. Tisch Managing Member, Tower View LLC, Investment Management Michael H. Winer Portfolio Manager, Third Avenue Management LLC, Investment Management Robert A. Stine President and Chief Executive Officer Allen E. Lyda Executive Vice President, Chief Financial Officer and Assistant Secretary Dennis J. Atkinson Senior Vice President – Agriculture Joseph E. Drew Senior Vice President – Real Estate Gregory J. Tobias Vice President, General Counsel & Secretary Corporate Directory Corporate Office Stock Transfer Agent & Registrar Form 10-k Tejon Ranch Company Post Office Box 1000 4436 Lebec Road Tejon Ranch, California 93243 Telephone: (661) 248-3000 Computershare Shareowner Services LLC 480 Washington Boulevard Jersey City, NJ 07310-1900 Securities Listing Auditors Tejon Ranch Company Common Stock is listed on the New York Stock Exchange under the ticker symbol: TRC Ernst & Young LLP A copy of this report and the Company’s Annual Report to the Securities and Ex- change Commission on Form 10-k, without exhibits, will be provided without charge to any stockholder submitting a written request to the Corporate Secretary: Tejon Ranch Company Post Office Box 1000 Tejon Ranch, California 93243 w w w. t e j o n r a n c h . c o m 

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