CTO Realty Growth, Inc. (Consolidated-Tomoka Land Co.) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. The company operated 52 commercial properties across 17 states, with approximately 2.3 million square feet of leasable space, commercial loan investments, golf operations held for sale, and about 5,300 acres of Daytona Beach land. Several significant transactions closed after quarter-end.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $11.75 million | $17.41 million | $43.95 million | $53.46 million |
| Income from continuing operations | $1.75 million | $1.49 million | $19.14 million | $26.91 million |
| Net income | $1.49 million | $0.30 million | $18.55 million | $25.37 million |
| Basic EPS | $0.31 | $0.05 | $3.67 | $4.60 |
| Operating cash flow | Not separately provided | Not separately provided | $16.74 million | $22.62 million |
- For the nine months, income-property revenue increased 11% to $31.36 million, while real estate operations revenue fell 52% to $11.68 million, primarily reflecting lower land-sale activity. Total revenue declined 18% and net income declined 27% year over year.
- Q3 revenue decreased 33%, chiefly because real estate operations revenue fell from $8.01 million to $0.63 million. Q3 net income rose from the prior-year quarter, which included a $1.1 million golf-asset impairment; 2019 also included a $2.1 million gain on the Wawa outparcel sale.
- Cash used in investing activities was $27.31 million for the nine months, including $75.31 million for property and lease-asset acquisitions and $32.26 million for commercial loan investments, partly offset by $80.32 million of disposition proceeds. Financing activities provided $0.16 million.
- At September 30, total assets were $583.46 million, long-term debt carrying value was $282.09 million (face value $283.90 million), and shareholders’ equity was $199.00 million. Debt face value increased approximately $33.6 million from year-end 2018.
- Cash and cash equivalents were $5.41 million and restricted cash was $6.21 million. The revolving credit facility had $154.85 million outstanding and approximately $36.9 million of available borrowing capacity, based on borrowing-base assets. The company reported no clear headline operating-margin measure.
- Interest expense was $9.22 million for the nine months, versus $7.44 million in 2018. A 100-basis-point change in the variable rate was estimated to affect financial position, results, and cash flows by approximately $1.5 million. A swap fixed the $24.1 million Wells Fargo mortgage rate at 3.17%.
Material changes and transactions
- The company acquired nine single-tenant properties for approximately $90.0 million during the nine months and sold three multi-tenant properties and one single-tenant outparcel. Management described this as a continued shift toward single-tenant net-lease properties.
- For the nine months, gains on asset dispositions were $20.87 million, compared with $22.04 million in 2018. The 2018 comparison included the Mitigation Bank transaction and self-developed property sales; 2019 gains included sales of multi-tenant properties and the Wawa outparcel.
- Share repurchases totaled 532,477 shares for approximately $31.1 million, including a $18.4 million block purchase in April. No shares were repurchased in Q3. The buyback contributed to a credit-facility covenant shortfall.
- After quarter-end, on October 16, the company sold a controlling interest in its land-holding entity for approximately $97 million and retained a notional 33.5% interest. On October 18, it sold the Golf Club for approximately $3.45 million, including a $2.07 million seller-financed first mortgage loan.
- On October 23, the company announced plans to transfer or sell 20 single-tenant properties to Alpine Income Property Trust in connection with a planned IPO. The proposed transaction included approximately $125.9 million cash proceeds for 15 properties, five properties contributed for approximately 1.2 million operating-partnership units, and a planned $7.5 million private placement investment. CTO expected to own approximately 17.5% of Alpine and to act as external manager. These were plans, not completed transactions as of the filing.
Outlook, risks, contingencies, and unusual items
- Management’s 2019 investment guidance for income-producing properties was $80 million to $120 million. It said the company had reached the low end and anticipated additional investments, funded through credit availability, operations, land or property sales, and other financing.
- Management stated it expected sufficient liquidity for operations, capital needs, and debt service over the next twelve months, citing cash, operating cash flow, like-kind exchange funds, and credit availability.
- The company was below the 1.5x buyback-related fixed-charge coverage covenant at September 30, primarily due to repurchases and anticipated land sales that had not yet closed. Lenders waived the covenant effective at quarter-end. Management expected the land venture closing to support compliance through year-end.
- $75 million of 4.50% convertible notes mature in March 2020. The company said it intended to settle conversion in cash, with any excess conversion value in shares. The credit facility matures in May 2023 and had variable-rate exposure.
- A wetlands restoration obligation had an estimated remaining accrual of approximately $166,000; the company warned the amount could change within one year and could materially affect the balance sheet and future cash flows. It also disclosed an unresolved highway-condemnation matter involving a Harris Teeter property, with proceedings potentially resuming in 2020.
- The oil exploration lease had reached the end of lease year eight, and the lessee had a short extension to decide whether to renew; renewal and terms were uncertain. The Mitigation Bank arrangements also included a minimum-sales guarantee and a put right, with maximum potential future payments of approximately $27 million.
- Key stated risks include real estate and economic conditions, timing of land transactions, tenant loss, capital availability, environmental and land-use rules, execution of acquisition or development plans, and interest-rate exposure. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Verify the final accounting, cash proceeds, retained interest, and any later distributions from the $97 million land venture transaction.
- Track the proposed Alpine IPO and property transfers, including valuation, proceeds, dilution, CTO’s retained ownership, and management-fee arrangements.
- Confirm covenant compliance after the waiver and land venture closing, and assess liquidity and refinancing or settlement plans for the $75 million notes due March 2020.
- Review the performance, collateral, maturities, and collection status of the commercial loans, including the buyer-financed Golf Club loan.
- Monitor the wetlands restoration estimate, Harris Teeter condemnation matter, oil-lease renewal, and potential Mitigation Bank obligations.
- Compare recurring rental income and operating cash flow with reported net income, which was affected by asset-sale gains and changes in land-sale activity.