CTO Realty Growth, Inc. (filed as Consolidated-Tomoka Land Co.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet figures are as of March 31, 2017. The filing identifies the registrant as Consolidated-Tomoka Land Co. The interim financial statements are unaudited.
Business context
The company operated 33 commercial properties across 10 states, with more than 1.8 million square feet of leasable space, approximately 8,200 acres of undeveloped land in Daytona Beach, Florida, three commercial loan investments, and the LPGA International golf operation. Its strategy is to sell land and redeploy proceeds, often through like-kind exchanges, into income-producing real estate.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Total revenue | $38.7 million | $18.4 million; up 111% |
| Operating income | $22.8 million | $6.4 million |
| Net income attributable to company | $12.7 million; $2.28 basic and $2.27 diluted per share | $1.4 million; $0.25 per share |
| Operating margin | Approximately 59% | Approximately 35% |
| Cash from operating activities | $29.5 million | Cash used of $1.2 million |
| Cash from investing activities | Cash used of $19.6 million | Cash provided of $2.4 million |
| Cash from financing activities | Cash used of $13.2 million | Cash provided of $2.1 million |
| Cash and restricted cash | $4.4 million cash; $5.9 million restricted cash | Cash decreased $3.4 million during the quarter |
| Total assets / shareholders’ equity | $414.9 million / $158.0 million | At December 31, 2016: $408.6 million / $148.3 million |
| Long-term debt | $156.8 million carrying value; $161.8 million face value | Face value declined from approximately $171.6 million at year-end |
Revenue growth was primarily driven by $28.7 million of land-sale revenue, including a 1,581-acre sale to Minto Communities for approximately $27.2 million. The company reported a $20.1 million gain on the quarter’s land sales. Income-property revenue rose 10% to $7.1 million, while commercial-loan interest income fell 39% to $0.5 million, largely because a loan repaid in 2016 no longer generated interest. No impairment charges were recorded in Q1 2017.
Net income also included a $2.2 million noncash gain from terminating the golf-course land lease after purchasing the land; management reported an after-tax benefit of $0.24 per share. Cash from operations benefited from the large land sale and noncash adjustments, so it should not be read as recurring earnings. The company acquired two income properties for approximately $19.1 million and purchased the golf-course land for approximately $1.5 million. It declared and paid a $0.04-per-share dividend and repurchased 56,243 shares for approximately $2.9 million.
Changes, outlook, and risks
- Portfolio and capital allocation: Q1 income-property acquisitions were a single-tenant property in Sarasota and a grocery-anchored center in Fort Worth. Management targeted $30.9 million to $50.9 million of income-property investments for the remainder of 2017, funded through cash, operations, borrowing capacity, and asset-sale proceeds. This is an investment target, not earnings guidance.
- Land pipeline: As of May 8, 2017, eight definitive agreements covered approximately 2,122 acres and $80.0 million of stated contract value. Closings were anticipated from 2017 through 2019, but many depended on permits or other conditions; the filing cautions that timing, completion, and final prices are uncertain.
- Liquidity and debt: The $75 million revolving facility had $24.5 million drawn and approximately $50.5 million of availability at quarter-end, subject to borrowing-base assets. It matures August 2018, with a possible one-year extension. The company said it expected sufficient liquidity for the next 12 months and was compliant with debt covenants. A 100-basis-point rate increase would affect results and cash flows by approximately $245,000 on the revolver balance; a separate $25 million mortgage rate was fixed at 3.17% through a swap.
- Contingencies: Approximately $1.0 million remained for wetlands restoration, and management said the estimate could change within a year with a potentially material effect on balance sheets and future cash flows. Additional mitigation needs were not yet estimable. Wintergreen-related investigation, strategic-review, and proxy-contest costs totaled approximately $2.4 million through March 31, including $936,000 in Q1; further costs could be significant. The Wintergreen complaint was dismissed on April 4 after a settlement allowing its nominees to stand at the annual meeting. A separate highway-access matter involving a Harris Teeter property remained administratively closed pending road work.
- Other operating items: The oil exploration lease could end after September 22, 2017, with no assurance of renewal. The company expected to renovate golf-course greens before Q4 2017; estimates differ within the filing, ranging from approximately $200,000–$300,000 in a note to $300,000–$400,000 in MD&A. The filing also cites approximately $800,000 of planned office build-out costs.
- Subsequent events: After quarter-end, the company reported additional land sales and income-property acquisitions, including a $6.3 million Boston-area Jo-Ann Stores property and approximately $14.7 million of Tampa-area retail properties. It also expected two beachfront restaurant developments to begin tenant operations in Q1 2018.
Key facts for investors to verify
- How much of Q1 earnings and operating cash flow is attributable to episodic land sales, and how sustainable are recurring rental and loan revenues?
- Whether the $80.0 million land-sale pipeline closes as expected, given permitting, wetlands, and other termination conditions.
- Liquidity after acquisitions, buybacks, dividends, and required restoration or development spending; also monitor the 2018 revolver maturity and covenant headroom.
- The final cost and timing of wetlands restoration and any additional mitigation credits, as well as the golf greens and office build-out estimates.
- Whether commercial loan borrowers repay or exercise extensions: the $24.0 million portfolio had an average remaining maturity of about 0.6 years, despite available extensions.
- Confirm the differing greens-renovation cost estimates in the filing and the precise proxy-contest legal-cost disclosure, which is reported inconsistently in different sections.