CTO Realty Growth, Inc. (then Consolidated-Tomoka Land Co.) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing is under the company’s then-current name, Consolidated-Tomoka Land Co. Amounts below are in U.S. dollars.
Business context
The company operated 36 commercial properties across 11 states, with over 1.9 million square feet of gross leasable space, about 8,100 acres of undeveloped Daytona Beach-area land, commercial loan investments, golf operations, and subsurface interests. Its strategy was to sell land and redeploy proceeds—often through tax-deferred like-kind exchanges—into income-producing properties.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $12.38 million | $12.21 million | $73.93 million | $43.44 million |
| Operating income | $3.76 million | $15.88 million | $34.65 million | $27.01 million |
| Net income attributable to company | $0.97 million | $8.16 million | $17.39 million | $11.16 million |
| Basic earnings per share | $0.18 | $1.44 | $3.13 | $1.96 |
| Dividends declared and paid per share | $0.05 | $0.04 | $0.13 | $0.08 |
- Revenue mix and property performance: Q3 income-property revenue rose 32% to $7.93 million, mainly from acquisitions. Nine-month real estate operations revenue was $45.66 million, including $39.56 million from land sales; income-property revenue rose 22% to $22.57 million.
- Cash flow: Nine-month operating cash flow was $49.08 million, compared with cash used of $4.21 million in 2016. Investing activities used $49.80 million, primarily reflecting property acquisitions; financing activities used $1.11 million. Cash declined $1.84 million to $5.94 million. Restricted cash was $7.03 million, including approximately $5.5 million held for like-kind-exchange reinvestment.
- Assets and debt: Total assets were $436.71 million at September 30, 2017. Long-term debt was $173.65 million carrying value and $178.30 million face value. Debt included $75 million of 4.5% convertible notes due 2020 and $41 million outstanding on the revolver. Revolver capacity was $100 million, with about $59 million available at quarter-end, subject to borrowing-base limits. The company reported compliance with debt covenants.
- Liquidity: Management said cash on hand, operating cash flow, like-kind-exchange proceeds, and available revolver capacity were sufficient for operating, capital, and debt-service requirements over the next 12 months and foreseeable future.
Material changes versus the prior comparable period
- Q3 net income fell 88% year over year, chiefly because Q3 2016 included an approximately $11.5 million gain on the sale of 14 income properties. Q3 2017 had no income-property dispositions.
- Nine-month revenue rose 70% and net income rose 56%, driven largely by 2017 land sales, including the sale of approximately 1,581 acres to Minto for $27.2 million. The comparison also reflects $16.5 million of Tomoka Town Center percentage-of-completion revenue in 2016 and income-property sale gains in 2016.
- 2017 nine-month earnings included a $2.23 million noncash benefit from terminating the golf-course land lease, reported as land lease termination income. Management identified $0.24 per share after tax from this item.
- The company acquired five income properties for about $40.7 million including capitalized acquisition costs. At quarter-end it owned 36 properties; income-property revenue growth also reflected late-2016 acquisitions.
- Q3 golf revenue declined 20%; one of the two courses was closed throughout the quarter for greens renovation.
Outlook, risks, and unusual items
- Management expected to continue pursuing income-property acquisitions, but following the October 27 acquisition described below did not anticipate further income-property investments through December 31, 2017.
- After quarter-end, the company sold two hotel-backed commercial loans with $15.0 million aggregate principal for about $15.1 million and used the proceeds to reduce revolver borrowings. It also acquired a 212,000-square-foot, fully leased Wells Fargo property in Oregon for about $39.8 million. Following that acquisition, revolver borrowings were about $60.5 million and availability about $39.5 million as of October 30.
- A land-sale pipeline described as 12 potential transactions represented about 5,834 acres and $146.1 million of stated potential value. Many transactions remained subject to due diligence, regulatory approvals, permits, and other conditions; the company cautioned that closings, timing, and final terms were uncertain.
- Approximately $840,000 remained accrued for wetlands restoration. Management said the liability could change within a year and materially affect the balance sheet and future cash flows. Other land transactions may also require mitigation credits or additional costs.
- The company estimated that a 100-basis-point increase in rates would affect results and cash flows by about $410,000 annually on the $41 million revolver balance at September 30. A $25 million variable-rate mortgage was hedged at 3.17% through 2021.
- Other risks include uncertain timing of land sales, permitting and environmental requirements, real-estate market conditions, tenant loss, and availability of capital. A long-running road-access condemnation matter involving a Harris Teeter property remained administratively closed; the tenant had indicated it would not terminate its lease if the redesigned project proceeded as planned.
- The company had incurred about $3.0 million through September 30 in costs related to Wintergreen-related investigations, strategic alternatives, and a proxy contest. The proxy contest concluded with shareholders re-electing all seven company nominees; the related complaint was dismissed.
- Beachfront restaurant construction was underway, with estimated total development cost of $6.9 million and about $4.8 million remaining at quarter-end. Management expected the two restaurants to open in January 2018.
Important facts for investors to verify
- How much of 2017 earnings and operating cash flow reflects land-sale timing, tax deferrals, and noncash or other one-time items rather than recurring property income.
- Whether the land pipeline closes as planned, particularly transactions dependent on permits, and the costs of required mitigation and wetlands restoration.
- Post-quarter-end financing and acquisition effects on debt, revolver availability, interest expense, and covenant headroom.
- Leasing, occupancy, and rent collection across the acquired and existing properties, and the operating impact of the golf-course renovation and restaurant development.
- The timing and final cost of the remaining restoration obligation and other contractual commitments.