CTO Realty Growth, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial results are unaudited.
Business context
CTO is a diversified real estate operator. At quarter-end it owned 31 commercial properties in 12 states, comprising 25 single-tenant and six multi-tenant properties with approximately 2.2 million square feet. Its other activities included management services, commercial loan investments, Florida subsurface interests and mitigation credits. The company also held an approximately 23.5% interest in Alpine Income Property Trust (PINE).
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $13.0m | $10.7m | $25.8m | $21.6m |
| Income from continuing operations | $12.6m | $8.7m | $0.35m | $14.0m |
| Net income | $12.6m | $10.6m | $0.35m | $17.1m |
| Basic and diluted EPS | $2.71 | $2.14 | $0.07 | $3.32 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $9.7m | $13.3m |
| Interest expense | $2.45m | $3.04m | $5.91m | $5.97m |
- Revenue increased year over year, led by acquisitions and new management-fee and loan-income streams. Q2 income from continuing operations included an approximately $8.1m non-cash gain on CTO’s PINE investment; for the first half, that investment generated an approximately $5.6m non-cash loss.
- Q2 income also reflected $7.1m of gains on asset dispositions and a $0.5m gain on extinguishment of debt. First-half results included a $1.9m commercial-loan impairment and a $1.1m debt-extinguishment gain. First-half 2019 included $3.1m of after-tax discontinued-operations income; there were no discontinued operations in 2020.
- At June 30, total assets were $688.9m, total liabilities $405.2m and shareholders’ equity $283.7m. Long-term debt was $270.8m carrying value, or $278.8m at face value. The company reported compliance with debt covenants.
- Cash and cash equivalents were $10.7m; restricted cash was $29.7m, including approximately $27.5m held for reinvestment through like-kind exchanges. The $200m revolving facility had $162.8m drawn and approximately $37.2m of available capacity, subject to borrowing-base conditions.
- Operating cash flow was $9.7m for the first half. Investing activities used $87.9m, primarily reflecting property acquisitions; financing activities used $16.2m. Total cash, including restricted cash, declined to $40.4m from $134.9m at the start of the year.
- Dividends declared and paid were $0.25 per share in Q2 and $0.50 per share for the first half, versus $0.10 and $0.20, respectively, in 2019.
Material changes versus comparable periods
- Q2 revenue rose 22% and net income increased by $2.0m year over year. The quarter’s earnings included the PINE share-price gain, while lower disposition gains partly offset the improvement.
- First-half revenue rose 19%, but net income fell from $17.1m to $0.35m. Key factors included the PINE valuation loss, commercial-loan impairment and lower gains on property sales, as well as the absence of prior-year discontinued-operations income.
- CTO acquired two multi-tenant properties for approximately $137.2m: Crossroads Towne Center in Chandler, Arizona, and Perimeter Place in Atlanta, Georgia. It sold four single-tenant properties and one multi-tenant property during the first half for aggregate proceeds of approximately $39.3m and reported gains of approximately $7.4m.
- The company refinanced its maturing 2020 convertible notes into 3.875% convertible notes due 2025, then repurchased approximately $12.5m principal amount of the 2025 notes at a discount during the first half.
Outlook, risks and unusual items
- COVID-19 affected tenant rent payments. CTO received approximately 81% of contractual base rent due in Q2; approximately 9% was deferred, 4% abated and 6% remained unresolved. Deferred payments were generally expected to begin repayment in Q3, in some cases continuing through 2021.
- As of August 7, the company had received approximately 87% of July contractual base rent; approximately 6% was deferred, 1% abated and 6% remained unresolved. Management expected collections to remain below contractual and historical levels, with potential adverse effects on cash flow, vacancies and tenant credit.
- Management said it expected sufficient liquidity for operations, capital needs and debt service over the next 12 months, relying on cash, operating cash flow and available revolver capacity. Borrowing capacity could fall if borrowing-base tenants become more than 60 days past due.
- Management’s 2020 investment guidance was $160m–$210m for income-producing properties. Planned funding sources included cash, like-kind-exchange proceeds, property dispositions and borrowings if available. No earnings or cash-flow guidance was provided.
- After quarter-end, the Land JV reported five July land sales totaling approximately $41.8m. CTO also reported two property sales after quarter-end and a July purchase of mitigation credits for approximately $1.48m under BlackRock’s put right.
- Other items to monitor include the mitigation-credit put right, with a stated maximum potential future payment of approximately $27m; environmental restoration obligations, with about $57,000 accrued; and the Harris Teeter access/condemnation matter, for which trial or mediation was not expected to be scheduled before a party requested it, likely in 2021.
Key facts for investors to verify
- Subsequent rent collections, tenant deferral and abatement performance, and recoverability of deferred rents.
- Usable liquidity after accounting for restricted cash, borrowing-base changes and the terms of the revolving facility.
- Whether acquisitions, dispositions and like-kind exchanges meet management’s investment plans and tax objectives.
- The sustainability of reported earnings apart from PINE’s non-cash fair-value movements and property-sale or debt-repurchase gains.
- Commercial loan and mitigation-credit exposure, including the remaining put-right obligation and related valuation assumptions.