Business context and reporting period
This is Consolidated-Tomoka Land Co.’s Form 10-K for the fiscal year ended December 31, 2018 (ticker CTO). The business combined income-producing commercial real estate with Daytona Beach land sales and subsurface interests. At year-end, it owned 47 income properties in 14 states, totaling approximately 2.36 million square feet, about 5,400 acres of undeveloped Florida land, and subsurface interests underlying approximately 455,000 acres. The LPGA International Golf Club was classified as held for sale.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $86.7 million | $86.3 million |
| Operating income | $63.5 million | $39.3 million |
| Continuing-operations income | $39.0 million | $41.1 million |
| Net income | $37.2 million | $41.7 million |
| Basic earnings per share | $6.76 | $7.53 |
| Cash provided by operations | $48.7 million | $57.5 million |
| Cash and cash equivalents | $2.3 million | $6.1 million |
| Restricted cash | $19.7 million | $6.5 million |
| Long-term debt, face value | $250.3 million | $200.0 million |
| Total assets / shareholders’ equity | $556.3 million / $211.8 million | $466.1 million / $184.2 million |
Income-property revenue rose 28% to $40.1 million, and segment operating income increased to $31.9 million. Annualized base rents at year-end were approximately $27.7 million for single-tenant properties and $9.5 million for multi-tenant properties. Single-tenant occupancy was 100%; multi-tenant occupancy was 90% (The Grove was approximately 70% leased). Real estate operations revenue declined 13% to $46.0 million, including $41.5 million of land-sale revenue. Commercial-loan interest revenue fell to $0.6 million; the loans were repaid and none remained at year-end.
Operating cash flow decreased year over year. Investing activities used $77.9 million, principally reflecting property acquisitions; financing activities provided $38.7 million. The company acquired 11 single-tenant properties for approximately $106.6 million. It reported interest expense of $10.4 million, up from $8.5 million, largely due to higher credit-facility borrowings. Its dividend was $0.27 per share, compared with $0.18 in 2017.
Material changes versus 2017
- Revenue was nearly flat as higher income-property revenue was offset by lower land and subsurface-related revenue.
- Operating income included $22.0 million of disposition gains in 2018, principally an $18.4 million gain on the mitigation-bank transaction and a $3.7 million gain on the sale of four self-developed office properties. These gains were not recurring operating revenue.
- Net income declined despite higher operating income. 2017 results included a $22.2 million non-cash income-tax benefit from the federal corporate tax-rate reduction and approximately $2.2 million of non-cash golf-lease termination income. 2018 also included a $1.8 million after-tax loss from discontinued golf operations.
- Debt increased by approximately $50.3 million, while property, plant and equipment net of depreciation rose to $368.8 million.
Outlook, commentary, risks and unusual items
- Management targeted $80–$120 million of income-property investments in 2019, funded through borrowing capacity, operating cash, land-sale proceeds and potential property dispositions. It anticipated continued acquisitions and recycling some multi-tenant assets into single-tenant net-lease properties.
- As of February 27, 2019, approximately 1,779 acres—about one-third of remaining land—were under contract in a pipeline with stated potential consideration of approximately $103.3 million. Closings and proceeds were uncertain: many deals depended on permitting, approvals, due diligence and other conditions, and buyers could have termination rights.
- Four multi-tenant properties and the golf assets were classified as held for sale at year-end. The golf assets had been written down by approximately $1.1 million, to an estimated $3.1 million; golf operations generated a $0.9 million operating loss in 2018. In February 2019, the company sold Whole Foods Market Centre for approximately $24.6 million and estimated an after-tax gain of $6.9 million. Proceeds funded a 1031 exchange and a $23.0 million credit-facility paydown. After the sale and paydown, reported revolver availability was approximately $46.3 million.
- At year-end, the $150 million revolving facility had $120.7 million drawn and approximately $29.3 million available, subject to borrowing-base assets. It matured in September 2021, with a possible one-year extension. The company also had $75 million of 4.50% convertible notes due March 2020 and secured mortgage debt. A 100-basis-point rate increase was estimated to affect results and cash flows by approximately $1.2 million.
- The mitigation-bank transaction left the company with a 30% interest and obligations to arrange at least $6 million of third-party credit sales by the end of 2020. The agreement includes a minimum-sales guarantee and a put right with maximum potential future payments of approximately $27 million; recorded estimated fair values were $0.1 million and $0.2 million, respectively. Federal permitting and the issuance, marketability and value of credits remained uncertain.
- Other matters include approximately $430,000 of estimated remaining wetlands-restoration liability, a $125,000 escrow-funded construction commitment, $630,000 of remaining golf surcharge commitment, and approximately $648,000 of tenant-improvement commitments at The Grove. Management said it believed liquidity was sufficient for the next 12 months and foreseeable future.
- Key risks include the timing and concentration of land transactions in Daytona Beach, permitting and environmental obligations, real-estate market conditions, tenant credit and lease rollover, interest-rate and refinancing exposure, debt covenants, and potential shareholder activism. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Separate recurring rental and operating performance from the $22.0 million disposition gains and the unusually large 2017 tax benefit and golf-lease income.
- Verify 2019 land-pipeline closings, permitting status, actual net proceeds, and whether stated contract amounts are reduced by mitigation, infrastructure or other costs.
- Assess liquidity after the Whole Foods sale, 1031 reinvestment and revolver repayment, including borrowing-base availability, covenant headroom and the March 2020 convertible-note maturity.
- Review the mitigation-bank credit permits, sales progress, minimum-sales guarantee and maximum put-right exposure.
- Track the golf-club sale process and losses, multi-tenant property dispositions and occupancy, particularly The Grove’s leasing progress.