CTO Realty Growth, Inc. quarterly report, Q3 FY2011

CTO Realty Growth, Inc. (then Consolidated-Tomoka Land Co.) — 2011 Q3 Form 10-Q

Reporting period: Three and nine months ended September 30, 2011. The filing was signed November 9, 2011. The company’s principal activities were Florida land sales and development, income properties, and golf operations.

Financial results and position

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Segment revenues	$3.483 million	$3.416 million	$11.368 million	$9.804 million
Loss before income taxes	$6.939 million	$0.283 million	$6.881 million	$1.088 million
Net loss	$4.218 million	$0.177 million	$4.158 million	$0.692 million
Basic and diluted loss per share	$0.74	$0.03	$0.73	$0.12
Operating cash flow	Not stated for quarter	Not stated for quarter	$1.707 million	$1.748 million

Balance sheet at September 30: Total assets were $167.594 million, down from $177.759 million at December 31, 2010. Total liabilities were $53.916 million and shareholders’ equity was $113.678 million.
Cash and investments: Cash was $166,015 and investment securities were $476,692, versus $337,617 and $4.940 million, respectively, at year-end 2010. The remaining securities were liquidated in October; proceeds were used to reduce the credit line.
Debt: Notes payable totaled $11.811 million: $6.141 million drawn on a $25 million revolving line and a $5.670 million term loan. The filing’s debt table shows $5.670 million due within one year; MD&A says the term loan is due in July 2012. The company reported covenant compliance. A $269,973 interest-rate-swap liability was recorded.
Cash flows and investment: Investing activities provided $1.671 million, including investment-security proceeds; financing activities used $3.550 million. Capital expenditures were $3.062 million for the nine months. Management projected approximately $2.3 million of capital spending for the remainder of 2011.
Dividends: $0.02 per share was paid during the first nine months. On October 26, the board declared a further semi-annual dividend of $0.02 per share.

Material changes and operating performance

Net losses widened substantially, primarily due to $6.619 million of impairment charges: $4.012 million for golf assets and $2.606 million for 317 acres of land. The impairments were recorded in Q3 and drove most of the year-to-date deterioration.
No land sales closed in the first nine months of 2011. Real estate segment revenue was $206,000, mainly from oil royalties and modest hay sales. The comparable 2010 nine-month figure was negative $983,000, reflecting a prior-period accounting correction.
Income properties remained profitable: nine-month revenue was $7.248 million and segment income was $5.279 million, down 2% from 2010 as expenses rose 5%. Q3 income-property results were broadly in line with the prior year.
Golf losses, including impairment, were $5.234 million for the nine months. Excluding the impairment, management said the operating loss improved 12% year over year; nine-month rounds rose 10%, partly offset by a 5% decline in average green fee. Q3 rounds fell 11% and average green fee fell 12%.
General and administrative expenses increased 15% year over year for the nine months, to $3.795 million, partly reflecting compensation, professional fees, and changes in stock-option accruals.
Operating cash flow was slightly below the prior-year period despite the larger net loss, which included substantial noncash impairment and deferred-tax items. The company reported a nine-month EBDDT loss of $5.256 million, versus income of $2.332 million in 2010; EBDDT is a non-GAAP measure and is not a substitute for cash flow.

Outlook, commentary, risks, and unusual items

Management did not expect significant improvement in economic or real-estate conditions during 2011–2012, though it anticipated possible selective land-sale opportunities. It cited the unpredictable timing of land transactions and the continuing weak residential market.
Management stated it expected sufficient liquidity for operations, capital requirements, and debt service over the next 12 months and the foreseeable future. The company was redeploying investment-sale and like-kind-exchange proceeds toward stabilized income-producing assets, particularly in larger metropolitan markets.
The $4.012 million golf impairment reflected continuing operating losses, weak local housing and economic conditions, the master developer’s departure, and a management decision that the golf assets were not a future core holding. The $2.606 million land impairment wrote off the entire cost basis of parcels management elected to abandon due to carrying costs and depressed market conditions.
A Lakeland income property formerly occupied by Barnes & Noble was under contract for $2.9 million, with closing expected in Q1 2012; its net book value was $2.620 million. The company also reported new leases and tenant-improvement commitments at its flex-office properties.
The defined-benefit pension plan was to be frozen to new accruals effective December 31, 2011. The board also approved freezing deferred-compensation plans to new participants and deferrals effective January 1, 2012.
Contingencies included a shareholder records-inspection appeal and a water-management permitting dispute involving agricultural operations. The latter remained in abeyance after a change in Florida law; management did not expect it to materially affect financial condition or net income, though outcome was uncertain.
Key risks cited include prolonged weakness in Florida real estate, tenant loss, land-use and environmental regulation, weather, access to capital, development execution, and volatility from the timing of land sales. The company’s real estate exposure is concentrated in Florida.

Investor verification points

Confirm the timing, price, and proceeds from the contracted Lakeland property sale and the October liquidation of remaining investment securities.
Review the term-loan maturity and repayment plan, given the filing’s July 2012 MD&A reference and its table showing principal due within the year ending September 2012.
Track golf performance, the company’s plan for the golf assets, and whether further impairment or operating losses occur.
Verify progress and potential exposure in the water-management dispute and the shareholder appeal.
Assess whether planned capital spending, tenant improvements, and the declared dividend remain supportable given low reported cash and the company’s liquidity assumptions.
Consider the absence of land-sale closings and management’s expectation of continued weak market conditions when evaluating future earnings variability.