Business Context and Reporting Period
Consolidated-Tomoka Land Co. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The diversified real estate operator owned 37 commercial properties across 10 states, approximately 10,500 acres of land, three commercial loan investments and LPGA International golf operations. The interim results are not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $12.9 million | $7.6 million | $31.2 million | $14.9 million |
| Operating income | $4.7 million | $2.2 million | $11.1 million | $3.7 million |
| Net income attributable to company | $1.6 million | $0.2 million | $3.0 million | $0.6 million |
| Diluted EPS | $0.28 | $0.04 | $0.52 | $0.10 |
- Operating margin was approximately 36.8% in Q2 and 35.6% for the first half; net margin was approximately 12.2% and 9.6%, respectively.
- First-half operating cash flow was negative $2.2 million, versus positive $2.4 million a year earlier. Investing activities provided $40.0 million and financing activities used $17.1 million. Cash and equivalents ended at $24.7 million, excluding $10.6 million of restricted cash.
- June 30 total assets were $387.1 million, total liabilities $244.2 million and shareholders’ equity $142.9 million.
- Debt had a $160.4 million face value and $153.9 million carrying value. The revolving credit facility had no balance; reported available capacity was approximately $42.3 million, subject to borrowing-base requirements.
- The commercial loan portfolio totaled $24.0 million, with a weighted average interest rate of 8.7%. No loan impairment allowance was recorded.
Material Changes Versus Prior Period
- Revenue growth was largely transaction-driven: first-half real estate operations revenue rose to $14.3 million from $2.2 million, primarily from percentage-of-completion recognition on Tomoka Town Center land sales. The company recognized $12.8 million of related revenue and $10.1 million of related gains in the first half.
- Income-property revenue increased 49% to $12.5 million for the first half, reflecting properties acquired in 2015, partly offset by dispositions. Golf revenue and operating results declined.
- First-half general and administrative expense doubled to $6.7 million, including accelerated stock-compensation expense and higher costs related to shareholder matters. Impairment charges rose to $2.2 million from $0.5 million; depreciation and amortization and interest expense also increased.
- The company sold four income properties for $18.8 million of proceeds, paid off a $14.5 million Puerto Rico commercial loan at a discount, and sold its remaining investment securities at a loss of approximately $576,000.
- Long-term debt at face value fell approximately $13.3 million from year-end, reflecting net credit-facility repayments partly offset by a new $25 million mortgage.
Outlook, Risks and Unusual Items
- Management targeted $67.5 million to $82.5 million of income-property investments for the remainder of 2016, with funding expected from cash, credit availability and asset-sale proceeds. It expected to have sufficient liquidity for the next 12 months, but that outlook depends in part on transactions and borrowing capacity.
- A $51.6 million sale of 14 income properties, including buyer assumption of a $23.1 million mortgage, was expected to close in Q3 2016; the filing estimated an after-tax gain of $11.4 million if completed. The $24 million subsurface-interest sale was expected before year-end, with an estimated after-tax gain of $22.6 million if completed. Both remained subject to customary conditions.
- Ten land-sale agreements covered approximately 4,100 acres and potential proceeds of $103 million. Timing, permits, buyer diligence and closing conditions make completion and proceeds uncertain. Management expected the Minto transaction to close in late 2016, subject to an Army Corps of Engineers permit.
- The company was in default at June 30 on a credit-facility borrowing-base covenant after property dispositions reduced qualifying value below the required $75 million. Lenders waived the breach through the earlier of compliance or December 31, 2016. Management expected planned acquisitions to restore compliance, but warned that failure to do so could harm liquidity or lead to termination of the facility.
- A wetlands restoration obligation was revised to approximately $2.0 million; about $590,000 had been funded, leaving an estimated $1.4 million liability that could change materially. Additional mitigation-credit needs were not estimable. The company also reported approximately $1.3 million of costs through June 30 investigating a shareholder’s allegations; management said none had been found to have merit, but further costs could be significant.
- Other notable items: approximately $2.0 million of Q2 impairments; $1.6 million of first-half accelerated stock-compensation expense following surrender of restricted shares; and a 52.1% first-half effective tax rate, affected by nondeductible compensation expense.
- Subsequent to quarter-end, the board moved to quarterly dividends and declared $0.04 per share for Q3, an annualized $0.16 versus the prior $0.08. The company also continued its $10 million repurchase program. A strategic review concluded, although discussions with interested parties about certain assets could continue without a formal process or assured outcome.
Most Important Facts for Investors to Verify
- Whether the credit-facility borrowing-base covenant was brought back into compliance before the waiver expired, and the resulting actual borrowing availability.
- Whether the 14-property portfolio sale, subsurface sale and other land transactions closed on expected terms, and how proceeds were reinvested.
- Whether Town Center infrastructure work was completed on schedule and within cost estimates, and how remaining deferred revenue and reimbursements were realized.
- The final cost and timing of wetlands restoration, any required mitigation credits, and any further shareholder-related expenses.
- Whether operating cash flow, property-level income and recurring earnings support the increased dividend and planned acquisitions without relying on asset sales.