TRC

Business Context and Reporting Period

Company: Tejon Ranch Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Tejon Ranch is a diversified real estate development and agribusiness company owning approximately 270,000 acres of contiguous land in California. Operations are divided into three segments: Commercial/Industrial Real Estate (land development, leasing, mineral royalties), Resort/Residential Real Estate (entitlement and pre-development of master-planned communities), and Farming (wine grapes, almonds, pistachios).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The Company returned to profitability in 2010 with net income of $3.96 million, compared to a net loss of $3.43 million in 2009. This 215% improvement was driven by higher farming revenues and a significant reduction in operating expenses.
• Revenue Growth: Total revenues increased 22% to $36.55 million. The primary driver was the Farming segment, which saw revenues rise to $18.58 million (up $5.59 million) due to increased pistachio production and higher commodity prices. Commercial/Industrial revenues also grew by $1.66 million.
• Expense Reduction: Operating expenses declined by $5.75 million to $30.27 million. A material factor was a $6.33 million reversal of stock compensation expense resulting from the modification of performance milestone grants.
• Liquidity Improvement: Cash and marketable securities increased by approximately $40.17 million to $71.01 million. This was primarily due to a successful rights offering raising ~$60 million, infrastructure reimbursements of $10.86 million, and joint venture distributions.

Guidance, Outlook, and Risks

• Outlook: Management expects net income to fluctuate in 2011 based on commodity prices and the timing of land sales. Capital investment requirements for 2011 are estimated at up to $22.2 million, including $13 million for joint ventures and $2.5 million for water assets.
• Development Status:
  • Tejon Mountain Village (TMV): Received entitlement approval in 2009, affirmed by a court ruling in November 2010. However, the ruling was appealed by the Center for Biological Diversity in February 2011. Management prefers to settle litigation before commencing development.
  • Centennial: Entitlement process continues in Los Angeles County. The Company is the sole funding partner for this joint venture following partner dilution in 2009.
• Key Risks:
  • Legal Proceedings: Ongoing litigation regarding TMV entitlements, water rights (Antelope Valley Groundwater Cases), and environmental compliance (National Cement lease, State Water Resources Control Board lawsuit).
  • Commodity Prices: Farming revenues are sensitive to global crop sizes and U.S. dollar strength. Approximately $8.19 million in accounts receivable at year-end is at risk to price fluctuations.
  • Water Availability: Long-term concern regarding State Water Project allocations; however, management believes current resources are sufficient for 2011 needs.

Investor Verification Checklist

• Stock Compensation Reversal: Verify the accounting treatment and future impact of the $6.33 million reversal of stock compensation expense related to modified performance grants.
• TMV Litigation: Monitor the status of the appeal filed by the Center for Biological Diversity regarding the Tejon Mountain Village entitlements, as this delays development revenue.
• Farming Receivables: Assess the risk to the $8.19 million in estimated crop receivables (almonds and pistachios) pending final price settlements in 2011.
• Water Rights: Review the progress of the Antelope Valley groundwater adjudication and its potential impact on the Centennial project's water supply.
• Joint Venture Funding: Confirm the Company's continued ability to fund the Centennial Founders joint venture as the sole capital contributor.