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| TRC > SEC Filings for TRC > Form 10-K on 15-Mar-2013 | All Recent SEC Filings |
15-Mar-2013
Annual Report
See Part I, "Forward Looking Statements" for our cautionary statement regarding forward-looking information.
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.
Our business model is designed to create value through the entitlement and
development of land for commercial/industrial and resort/residential uses while
at the same time protecting significant portions of our land for conservation
purposes. We operate our business near one of the country's largest population
centers, which is expected to continue to grow well into the future.
We currently operate in four business segments: commercial/industrial real
estate development; resort/residential real estate development; mineral
resources; and farming.
Our commercial/industrial real estate development generates revenues from
building, grazing, and land lease activities, land and building sales, and
ancillary land management activities. The primary commercial/industrial
development is TRCC and in 2013 efforts will begin to entitle the Grapevine
Development Area. The resort/residential real estate development segment is
actively involved in the land entitlement and development process internally and
through joint venture entities. Its revenues are generated through farming
activities within the Centennial joint venture. Within our resort/residential
segment, the two active developments are TMV and the Centennial master planned
community. Our mineral resources segment generates revenues from oil and gas
royalty leases, rock and aggregate mining leases, and a lease with National
Cement. The farming segment produces revenues from the sale of winegrapes,
almonds, and pistachios.
The Conservation Agreement we entered into with five of the major environmental
organizations in June 2008 calls for the possible permanent protection of up to
240,000 acres of our land through phased dedicated conservation easements on
approximately 145,000 acres of our land at the time specific development
milestones are achieved for TMV, Centennial, and the Grapevine Development Area,
33,000 acres of open space within permitted project areas, and the purchase of
conservation easements on an additional 62,000 acres of our land, which was
completed during February 2011.
For 2012 we had net income attributable to common stockholders of $4,441,000
compared to net income attributable to common stockholders of $15,894,000 for
the first twelve months of 2011. When comparing to 2011, the decrease is largely
the result of the sale of conservation easements for $15,750,000 in 2011, which
is partially offset by improved in oil royalties, farming revenues, and a lower
tax provision. Oil royalties improved $1,200,000 due primarily to a 6% increase
in production. Farming revenues grew by $1,541,000 during 2012 due largely to an
increase in pistachio revenues that was partially offset by lower winegrape
revenues.
For 2011, we had net income attributable to common stockholders of $15,894,000,
which is an increase of $11,719,000 when compared to 2010. The improvement in
net income was due to an increase in revenues of $27,585,000. The increase in
revenue were driven by the sale of conservation easements for $15,750,000, a
land sale for $4,340,000, an increase in our oil royalties over the prior year
of $5,541,000 and a $2,436,000 increase in farm revenues. Oil royalties improved
due to higher prices and production and farming revenues improved due to higher
almond and grape revenues. These revenue improvements were partially offset by
an increase in operating expenses of $11,950,000. The increase in operating
expenses was primarily due to an increase in stock compensation expense when
compared to 2010. During 2010, stock compensation expense included a $6,327,000
reversal of cost and in 2011 we recognized stock compensation expense of
$5,507,000.
During 2013, we will continue to invest funds in our joint ventures and
internally toward the achievement of entitlements for our land and for
infrastructure and building development within our active industrial
developments. The process of securing entitlements for our land is a long,
arduous process that can take several years and often involves litigation.
During the next few years, our net income will fluctuate from year-to-year based
upon commodity prices, production within our farming segment, and the timing of
sales of land and the leasing of land within our industrial developments.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations provides a narrative discussion of our results of operations. It
contains the results of operations for each operating segment of the business
and is followed by a discussion of our financial position. It is useful to read
the business segment information in conjunction with Note 15 of the Notes to
Consolidated Financial Statements.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with
generally accepted accounting principles, or "GAAP," requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We consider an accounting estimate to be critical if: (1) the
accounting estimate requires us to make assumptions about matters that were
highly uncertain at the time the accounting estimate was made, and (2) changes
in the estimates that are likely to occur from period to period, or use of
different estimates that we reasonably could have used in the current period,
would have a material impact on our financial condition or results of
operations. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, impairment of long-lived assets, capitalization
of costs, profit recognition related to land sales, stock compensation, our
future ability to utilize deferred tax assets, and defined benefit retirement
plans. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Management has discussed the development and selection of these critical
accounting estimates with the Audit Committee of our Board of Directors and the
Audit Committee has reviewed the foregoing disclosure. In addition, there are
other items within our financial statements that require estimation, but are not
deemed critical as defined above. Changes in estimates used in these and other
items could have a material impact on our financial statements. See also Note 1
of the Notes to the Consolidated Financial Statements, which discusses
accounting policies that we have selected from acceptable alternatives.
We believe the following critical accounting policies reflect our more
significant judgments and estimates used in the preparation of the consolidated
financial statements:
Revenue Recognition - The Company's revenue is primarily derived from lease
revenue from our rental portfolio, royalty revenue from mineral leases, sales of
farm crops, and land sales. Revenue from leases with rent concessions or fixed
escalations is recognized on a straight-line basis over the initial term of the
related lease unless there is a considerable risk as to collectibility. The
financial terms of leases are contractually defined. Lease revenue is not
accrued when a tenant vacates the premises and ceases to make rent payments or
files for bankruptcy. Royalty revenues are contractually defined as to the
percentage of royalty and are tied to production and market prices. Our royalty
arrangements generally require payment on a monthly basis with the payment based
on the previous month's activity. We accrue monthly royalty revenues based upon
estimates and adjust to actual as we receive payments.
From time to time the Company sells easements over its land and the easements
are either in the form of rights of access granted for such things as utility
corridors or are in the form of conservation easements that generally require
the Company to divest its rights to commercially develop a portion of its land,
but do not result in a change in ownership of the land or restrict the Company
from continuing other revenue generating activities on the land. The sales of
conservation easements that occurred in 2011 have been accounted for in
accordance with Staff Accounting Bulletin Topic 13 - Revenue Recognition (SAB
Topic 13). SAB Topic 13 requires that the following four criteria be met before
revenue may be recognized:
• Persuasive evidence of arrangement exists;
• Delivery has occurred or services have been rendered;
• The seller's price to buyer is fixed or determinable; and
• Collectibility is reasonably assured.
Since the conservation easements do not impose any significant continuing
performance obligations on the Company, revenue from conservation easement sales
has been recognized when the four criteria of SAB Topic 13 have been met, which
generally occurs in the period the sale has closed and consideration has been
received.
In recognizing revenue from land sales, the Company follows the provisions in
Accounting Standards Codification 976, or ASC 976, "Real Estate - Retail Land"
to record these sales. ASC 976 provides specific sales recognition criteria to
determine when land sales revenue can be recorded. For example, ASC 976 requires
a land sale to be consummated with a sufficient down payment of at least 20% to
25% of the sales price depending upon the type and timeframe for development of
the property sold, and that any receivable from the sale cannot be subject to
future subordination. In addition, the seller cannot retain any material
continuing involvement in the property sold or be required to develop the
property in the future.
During 2012, we recognized deferred sales revenue of $648,000 at the time
offsite infrastructure related to the 2011 land sale to Caterpillar was
completed. In 2011, we recognized $4,340,000 of revenue related to a land sale
to Caterpillar. We fully recognized the revenues from all land sales in 2010, as
none of the requirements for deferral of revenue were present.
At the time farm crops are harvested, contracted, and delivered to buyers and
revenues can be estimated, revenues are recognized and any related inventoried
costs are expensed, which traditionally occurs during the third and fourth
quarters of each year. It is not unusual for portions of our almond or pistachio
crop to be sold in the year following the harvest. Orchard (almond and
pistachio) revenues are based upon the contract settlement price or estimated
selling price, whereas vineyard revenues are typically recognized at the
contracted selling price. Estimated prices for orchard crops are based upon the
quoted estimate of what the final market price will be by marketers and handlers
of the orchard crops. These market price estimates are updated through the crop
payment cycle as new information is received as to the final settlement price
for the crop sold. These estimates are adjusted to actual upon receipt of final
payment for the crop. This method of recognizing revenues on the sale of orchard
crops is a standard practice within the agribusiness community.
For the 2012 orchard crops, we estimated almond revenue to be $4,831,000, or
$2.00 per pound on average, and pistachio revenue to be $5,632,000, or $2.22 per
pound on average. These estimates not only impact the recorded revenues within
our farming segment but also our recorded accounts receivable at December 31,
2012. Over the last three years, final prices received on almonds have averaged
from $1.71 to $2.65 per pound. Pistachio prices over the last three years have
averaged from $1.91 to $2.75 per pound. If we were to assume that our above
estimates for 2012 orchard crop revenues were changed to the upper end or lower
end of the range we developed in the course of formulating our estimate, orchard
crop revenues would have been reduced or increased by approximately $498,000, or
2% of the total revenue estimate. Our final estimates were based on the midpoint
of a range in which the upper and lower ends of the range were $0.05 from the
midpoint. As an example, the range for almonds used for 2012 was $1.95 to $2.05
per pound. If we were to change our estimate of 2012 orchard crop revenues to
the low end of the estimated range, there would be no material impact on our
liquidity or capital resources.
Actual final crop selling prices are not determined for several months following
the close of our fiscal year due to supply and demand fluctuations within the
orchard crop markets. Adjustments for differences between original estimates and
actual revenues received are recorded during the period in which such amounts
become known. The net effect of these adjustments increased farming revenue by
$2,668,000, $1,882,000, and $1,144,000, in 2012, 2011 and 2010, respectively.
The 2012 adjustment includes $1,676,000 related to improving pistachio prices
due to an aggressive industry marketing plan that increased demand and it also
includes $992,000 from almonds due to higher prices driven by improved demand.
The adjustment for 2011 includes $1,335,000 related to pistachios due to higher
prices driven by growing demand for the product and it also includes $531,000
from almonds due to increased demand that pushed almond prices higher. The
adjustment for 2010 includes $823,000 related to pistachios due to an improving
price market resulting from low industry inventories, and $287,000 from almonds
as increased demand pushed prices higher.
Capitalization of Costs - The Company capitalizes direct construction and
development costs, including predevelopment costs, interest, property taxes,
insurance, and indirect project costs that are clearly associated with the
acquisition, development, or construction of a project. Costs currently
capitalized that in the future would be related to any abandoned development
opportunities will be written off if we determine such costs do not provide any
future benefits. Should development activity decrease, a portion of interest,
property taxes, and insurance costs would no longer be eligible for
capitalization, and would be expensed as incurred.
Allocation of Costs Related to Land Sales and Leases - When we sell or lease
land within one of our real estate developments and we have not completed all
infrastructure development related to the total project, we follow ASC 976,
"Real Estate - Retail Land," to determine the appropriate costs of sales for the
sold land and the timing of recognition of the sale. In the calculation of cost
of sales or allocations to leased land, we use estimates and forecasts to
determine total costs at completion of the development project. These estimates
of final development costs can change as conditions in the market and costs of
construction change.
In preparing these estimates, we use internal budgets, forecasts, and
engineering reports to help us estimate future costs related to infrastructure
that has not been completed. These estimates become more accurate as the
development proceeds forward, due to historical cost numbers and to the
continued refinement of the development plan. These estimates are updated
periodically throughout the year so that, at the ultimate completion of
development, all costs have been allocated. Any increases to our estimates in
future years will negatively impact net profits and liquidity due to an
increased need for funds to complete development. If, however, this estimate
decreases, net profits as well as liquidity will improve.
We believe that the estimates used related to cost of sales and allocations to
leased land is a critical accounting estimate and will become even more
significant as we continue to move forward as a real estate development company.
The estimates used are very susceptible to change from period to period, due to
the fact that they require management to make assumptions about
costs of construction, absorption of product, and timing of project completion,
and changes to these estimates could have a material impact on the recognition
of profits from the sale of land within our developments.
Impairment of Long-Lived Assets - We evaluate our property and equipment and
development projects for impairment when events or changes in circumstances
indicate that the carrying value of assets contained in our financial statements
may not be recoverable. The impairment calculation compares the carrying value
of the asset to the asset's estimated future cash flows (undiscounted). If the
estimated future cash flows are less than the carrying value of the asset, we
calculate an impairment loss. The impairment loss calculation compares the
carrying value of the asset to the asset's estimated fair value, which may be
based on estimated future cash flows (discounted). We recognize an impairment
loss equal to the amount by which the asset's carrying value exceeds the asset's
estimated fair value. If we recognize an impairment loss, the adjusted carrying
amount of the asset will be its new cost basis. For a depreciable long-lived
asset, the new cost basis will be depreciated (amortized) over the remaining
useful life of that asset. Restoration of a previously recognized impairment
loss is prohibited.
We currently operate in four segments, commercial/industrial real estate
development, resort/residential real estate development, mineral resources, and
farming. At this time, there are no assets within any of our segments that we
believe are in danger of being impaired due to market conditions.
We believe that the accounting estimate related to asset impairment is a
critical accounting estimate because it is very susceptible to change from
period to period; it requires management to make assumptions about future
prices, production, and costs, and the potential impact of a loss from
impairment could be material to our earnings. Management's assumptions regarding
future cash flows from real estate developments and farming operations have
fluctuated in the past due to changes in prices, absorption, production and
costs and are expected to continue to do so in the future as market conditions
change.
In estimating future prices, absorption, production, and costs, we use our
internal forecasts and business plans. We develop our forecasts based on recent
sales data, historical absorption and production data, input from marketing
consultants, as well as discussions with commercial real estate brokers and
potential purchasers of our farming products.
If actual results are not consistent with our assumptions and judgments used in
estimating future cash flows and asset fair values, we may be exposed to
impairment losses that could be material to our results of operations.
Defined Benefit Retirement Plans - The plan obligations and related assets of
our defined benefit retirement plan are presented in Note 14 of the Notes to
Consolidated Financial Statements. Plan assets, which consist primarily of
marketable equity and debt instruments, are valued using level one and level two
indicators, which are quoted prices in active markets and quoted prices for
similar types of assets in active markets for the investments. Pension benefit
obligations and the related effects on operations are calculated using actuarial
models. The estimation of our pension obligations, costs and liabilities
requires that we make use of estimates of present value of the projected future
payments to all participants, taking into consideration the likelihood of
potential future events such as salary increases and demographic experience.
These assumptions may have an effect on the amount and timing of future
contributions.
The assumptions used in developing the required estimates include the following
key factors:
• Discount rates;
• Salary growth;
• Retirement rates;
• Expected contributions;
• Inflation;
• Expected return on plan assets; and
• Mortality rates
The discount rate enables us to state expected future cash flows at a present value on the measurement date. In determining the discount rate, the Company utilizes the yield on high-quality, fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are based upon historical experience and anticipated future management actions. To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. At December 31, 2012, the weighted-average actuarial assumption of the Company's defined benefit plan consisted of a discount rate of 4.0%, a long-term rate of return on plan assets of 7.5%, and assumed salary increases of 3.5%. The effects of actual results differing from our assumptions and the effects of changing assumptions are recognized as a component of other comprehensive income, net of tax. Amounts recognized in accumulated other comprehensive income are adjusted as they are subsequently recognized as components of net periodic benefit cost. If we were to assume a 50 basis point change in the discount rate used, our projected benefit obligation would change approximately $900,000.
Stock-Based Compensation - We apply the recognition and measurement principles
of ASC 718, "Compensation - Stock Compensation" in accounting for long-term
stock-based incentive plans. Our stock-based compensation plans have
historically included both stock options and stock grants. We have not issued
any stock options to employees or directors since January 2003, and our 2012
financial statements do not reflect any compensation expenses for stock options.
All of our stock options are fully vested and all related expenses were
recognized in prior year financial statements per GAAP. See Note 8 of the Notes
to Consolidated Financial Statements, Stock Compensation - Options, for
additional information regarding stock options.
We also make stock awards to employees based upon time-based criteria and
through the achievement of performance-related objectives. Performance-related
objectives are either stratified into threshold, target, and maximum goals or
based on the achievement of a milestone event. These stock awards are currently
being expensed over the expected vesting period based on each performance
criterion. We make estimates as to the number of shares that will actually be
granted based upon estimated ranges of success in meeting the defined
performance measures. If our estimates of performance shares vesting were to
change by 25%, stock compensation expense would increase or decrease by
$1,272,000 depending on whether the change in estimate increased or decreased
shares vesting.
See Note 9 of the Notes to Consolidated Financial Statements, Stock Compensation
- Restricted Stock and Performance, for total 2012 stock compensation expense
related to stock grants.
Fair Value Measurements - The Financial Accounting Standards Board's (FASB)
authoritative guidance for fair value measurements of certain financial
instruments defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. Fair value is defined as
the exchange (exit) price that would be received for an asset or paid to
transfer a liability in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the
measurement date. This guidance establishes a three-level hierarchy for fair
value measurements based upon the inputs to the valuation of an asset or
liability. Observable inputs are those which can be easily seen by market
participants while unobservable inputs are generally developed internally,
utilizing management's estimates and assumptions:
• Level 1 - Valuation is based on quoted prices in active markets for
identical assets and liabilities.
• Level 2 - Valuation is determined from quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.
• Level 3 - Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on our own estimates about the assumptions that market participants would use to value the asset or liability.
When available, we use quoted market prices in active markets to determine fair
value. We consider the principal market and nonperformance risk associated with
our counterparties when determining the fair value measurement. Fair value
measurements are used for marketable securities, investments within the pension
plan and hedging instruments.
New Accounting Standards
For discussion of recent accounting pronouncements, see Note 1 of the
Consolidated Financial Statements, Summary of Significant Accounting Policies.
Results of Operations by Segment
We evaluate the performance of our operating segments separately to monitor the
different factors affecting financial results. Each segment is subject to review
and evaluation as we monitor current market conditions, market opportunities,
and available resources. The performance of each segment is discussed below:
Real Estate - Commercial/Industrial
During 2012, our commercial/industrial segment profits fell $2,855,000 compared
to 2011 primarily as a result of a decrease in revenues that was partially
offset by lower 2012 expenses. Commercial/industrial segment revenues declined
$3,805,000 during 2012 compared to 2011 primarily due to a $3,702,000 decrease
in land sales revenue due to a land sale to Caterpillar that occurred in
December of 2011. There was also a $1,000,000 decrease in hunting revenues
during 2012 compared to 2011, resulting from the closure of our hunting program
for the first eight months of 2012. The hunting program was closed for the first
eight months of the year in order to update operational and ranch access
programs and update hunting programs being offered. On the positive side,
revenues from our power plant lease with Calpine improved $362,000 due to the
growth in 2012 of percentage rent we receive based on a spark spread arrangement
that is tied to the price of electricity and natural gas, compared to 2011.
Revenues from a grazing lease increased $245,000 during the year due to an
annual lease adjustment, which is tied to the price of cattle.
When compared to 2011, commercial/industrial expenses decreased $950,000 primarily due to a $743,000 decrease in legal and professional fees related to sales transaction costs and costs related to an employee lawsuit. Cost capitalized to construction projects increased $421,000 and sales commissions decreased $364,000 related to the Caterpillar land sale in 2011. Repairs and maintenance expenses declined $221,000 in 2012, mainly due to a reduction in costs associated with a park-n-ride facility owned by Kern County that supports bus services to TRCC. These decreases were partially offset by a $506,000 . . .
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