CTO Realty Growth, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Quarterly report for the three and six months ended June 30, 2021. CTO is a diversified REIT with 20 commercial properties in 10 states, totaling 2.7 million square feet, alongside management services, commercial loan and master lease investments, Florida subsurface interests, land and mitigation-bank joint ventures, and an investment in Alpine Income Property Trust (PINE). The company completed its REIT conversion and reincorporation in Maryland in January 2021.
Financial results and key metrics
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 | Comparable 2020 period |
|---|---|---|---|
| Total revenue | $14.3 million | $29.0 million | $13.0 million and $25.8 million |
| Net income (loss) | $(3.7) million; $(0.63) per share | $4.1 million; $0.69 per share | $12.6 million and $0.349 million; $2.71 and $0.07 per share |
| FFO | $4.9 million; $0.83 per diluted share | $10.2 million; $1.73 per diluted share | $2.5 million and $11.8 million; $0.54 and $2.52 per diluted share |
| AFFO | $6.3 million; $1.07 per diluted share | $12.0 million; $2.03 per diluted share | $0.4 million and $9.6 million; $0.10 and $2.06 per diluted share |
| Cash from operating activities | Not stated separately for the quarter | $18.3 million | $9.7 million for the first half of 2020 |
All financial amounts are in U.S. dollars; statements are unaudited. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Revenue and operating performance: Q2 revenue increased 9.8% year over year; first-half revenue increased 12.2%. Income-property revenue was $11.6 million for Q2 and $23.0 million for the first half. Real estate operations revenue rose substantially, primarily reflecting subsurface-rights sales; first-half sales of approximately 34,500 acres generated $2.6 million. First-half commercial loan and master lease interest income fell to $1.4 million from $1.9 million.
- Unusual earnings items: Q2 and first-half results include a $16.5 million impairment of the company’s retained Land JV interest. The six-month period also included $5.4 million of gains on asset dispositions and an $8.2 million noncash unrealized gain on PINE securities. Q2 included $4.7 million of disposition gains and $3.4 million of noncash unrealized PINE gains. A $4.0 million income-tax benefit was recorded in Q2; the six-month tax benefit was $4.4 million.
- Cash flow and liquidity: First-half operating cash flow was $18.3 million; investing activities used $80.5 million and financing activities provided $47.0 million. At June 30, cash and cash equivalents were $4.7 million, with a further $13.9 million of restricted cash, most of it held for reinvestment through a like-kind exchange. The company reported $25.7 million of available borrowing capacity on its $210 million revolving facility, subject to borrowing-base assets.
- Debt: Face-value debt was $311.0 million at June 30, versus $280.5 million at December 31, 2020; balance-sheet carrying value was $304.9 million. Debt included $184.3 million drawn on the revolver, a $65.0 million 2026 term loan, and $61.7 million of 3.875% convertible notes due 2025. The revolver matures in May 2023 and bears variable-rate interest; swaps hedge portions of borrowings. The company reported compliance with debt covenants.
- Margins and balance sheet: The filing does not provide a single consolidated operating-margin measure. Total assets were $689.9 million and stockholders’ equity was $344.9 million at June 30, 2021.
Material changes versus the prior comparable period
- Q2 net loss contrasts with Q2 2020 net income, principally reflecting the Land JV impairment and lower noncash PINE investment gains; first-half net income improved from $0.3 million to $4.1 million.
- First-half income-property revenue increased 2.4%, supported by acquisitions, while property operating income declined as direct costs rose. Three multi-tenant properties were acquired for $111.0 million in aggregate during the first half.
- The company sold one multi-tenant and nine single-tenant properties during the first half for $65.5 million, recording $5.4 million of gains. Six properties were sold to PINE in June for $44.5 million; the buyer assumed a $30.0 million mortgage.
- First-half operating cash flow increased from $9.7 million to $18.3 million. Cash dividends declared and paid rose to $2.00 per common share for the first half, from $0.50 in 2020.
Outlook, commentary, risks and contingencies
- Management’s 2021 investment guidance is $175 million to $225 million for income-producing properties. The company expects to fund acquisitions with operating cash, cash on hand, property-sale proceeds, potential subsurface-interest sales and borrowings. Management stated it expects sufficient liquidity for operations, capital needs and debt service over the next 12 months.
- The Land JV contracted to sell substantially all of its remaining approximately 1,600 acres to Timberline for $67.0 million. CTO estimated its pre-tax proceeds at $25.6 million and recorded the impairment to reduce the carrying value to that estimate. Closing was expected before year-end, subject to customary due diligence and closing conditions.
- After quarter-end, the company’s 3 million-share Series A preferred offering closed July 6, generating $72.4 million net proceeds; the filing says proceeds were used to pay down the Credit Facility. The preferred shares carry a 6.375% cumulative dividend.
- The Mitigation Bank JV did not meet its $6.0 million minimum third-party sales requirement by the end of 2020. CTO anticipated a related guarantee payment to BlackRock in the second half of 2021 and was also discussing a possible buyout of BlackRock’s JV interest; timing and terms were uncertain. The agreement also includes put rights relating to mitigation credits.
- COVID-19 effects remained uncertain, including possible renewed restrictions, tenant impacts and changes in property values and financing costs. Deferred tenant rent repayments were continuing, in some cases, into 2023.
- CTO filed suit seeking release of $0.8 million held in escrow following a dispute with Buc-ee’s over wetlands permits. Management did not expect routine legal proceedings to materially affect results. The filing reported no material changes to risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether the Timberline land sale closes on expected terms and whether CTO receives the estimated $25.6 million before tax.
- The ultimate amount and timing of any Mitigation Bank minimum-sales guarantee payment, and the status and cost of a potential JV buyout or put-right obligations.
- How the preferred-offering proceeds reduce revolver borrowings, and the resulting debt, interest expense, available capacity and covenant headroom.
- Whether acquisition guidance is achieved and whether property acquisitions, dispositions and tenant improvements deliver expected cash flows; remaining committed property expenditures were $9.3 million.
- Underlying recurring performance apart from the Land JV impairment, property-sale gains and noncash PINE valuation changes; also review FFO/AFFO reconciliations and dividend coverage.
- Progress in collecting COVID-related deferred rents, the Buc-ee’s escrow litigation, and the implications of the REIT election for distributions and tax exposure.