CTO Realty Growth, Inc. annual report, FY2020

CTO Realty Growth, Inc. — 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.

Business context

CTO is a diversified real estate company focused on income-producing commercial properties. At year-end it owned 27 properties in 10 states—21 single-tenant and six multi-tenant—with approximately 2.5 million square feet. Other activities included management services for Alpine Income Property Trust (PINE) and the Land JV, commercial loan and master lease investments, Florida subsurface interests, mitigation credits, and interests in joint ventures.

CTO elected REIT tax treatment beginning with 2020 and completed a reorganization to a Maryland corporation in January 2021. Its stated strategy is to grow income-producing real estate, with emphasis on multi-tenant retail and office properties, and to use property-sale proceeds, 1031 exchanges, cash flow, and borrowing capacity to fund investments.

Financial and operating highlights

Metric	2020	2019
Total revenue	$56.4 million	$44.9 million
Operating income	$12.3 million	$34.2 million
Continuing-operations income	$78.5 million	$16.6 million
Net income	$78.5 million	$115.0 million
Cash provided by operating activities	$16.9 million	$16.4 million
FFO / AFFO (non-GAAP)	$27.5 million / $26.2 million	$14.2 million / $14.8 million
FFO / AFFO per diluted share	$5.84 / $5.57	$2.85 / $2.97

Income-property revenue increased 19.1% to $50.0 million, while the segment reported $38.0 million of operating income, approximately 76% of segment revenue. Management attributed the revenue increase primarily to acquisitions, partly offset by dispositions. Total revenue rose 25.5%, including higher management fees and commercial-loan income.

Net income requires context: the $83.5 million income-tax benefit largely reflected the non-cash release of deferred tax assets and liabilities following the REIT election, including $82.5 million from de-recognition of REIT-related deferred taxes. Before tax, continuing operations reported a $5.0 million loss. The year also included $9.1 million of impairment charges, an $8.2 million non-cash unrealized loss on PINE securities, $9.7 million of disposition gains, and a $1.1 million gain on debt extinguishment. FFO and AFFO are non-GAAP measures and are not substitutes for operating cash flow.

Liquidity, debt and capital

• Year-end cash and restricted cash totaled $33.8 million, comprising $4.3 million unrestricted cash and $29.5 million restricted cash. Of the restricted amount, $26.7 million was held for 1031 reinvestment.
• Long-term debt had a $280.5 million face value and $273.1 million carrying value. Debt included $164.8 million drawn on a $200.0 million credit facility, $62.5 million of 3.875% convertible notes due 2025, and $53.2 million of mortgage debt. Management reported a 47.1% leverage ratio, calculated net of cash and restricted cash related to like-kind exchanges.
• Available capacity on the credit facility was $35.2 million at year-end. A $23.2 million mortgage was due in 2021; the revolver matures in 2023, and the convertible notes mature in 2025. The company reported compliance with debt covenants.
• Interest expense was $10.8 million, down from $12.5 million. Interest-rate swaps fixed rates on $150 million of revolver borrowings; management estimated a 100-basis-point rate change would affect financial position, results, and cash flows by $1.6 million.
• Investing activities used $91.1 million, principally reflecting property acquisitions and lower disposition proceeds than in 2019. Financing activities used $26.9 million, including dividends and debt activity.

Material changes versus 2019

• CTO acquired four properties for approximately $185.1 million and sold 11 income properties plus one vacant land parcel for $86.5 million of disposition volume. Property acquisitions drove higher rental revenue, while property-sale gains fell to $9.7 million from $22.0 million.
• Operating income declined to $12.3 million from $34.2 million, in part because of lower disposition gains, higher depreciation and direct costs, and $9.1 million of impairments. Net income declined 31.7%, mainly because 2019 included $98.4 million of discontinued-operations income from prior land and golf transactions; 2020 had no discontinued operations.
• 2020 impairment charges included $7.1 million on CTO’s retained Land JV interest, reflecting revised expectations for the timing of land sales, and $1.9 million associated with commercial loans, including a credit-loss reserve.
• Operating cash flow was broadly stable at $16.9 million versus $16.4 million. Year-end total cash fell from $134.9 million to $33.8 million, in part as restricted 1031 proceeds were redeployed.
• CTO repurchased 88,565 shares for $4.1 million in 2020, versus $41.1 million of share repurchases in 2019.

Outlook, risks and unusual items

• COVID-19 and rent: CTO reported collecting 99% of contractual base rent due in Q4 2020; it also reported 99% collections for January and February 2021. Some tenants received deferrals or abatements, and $1.0 million of COVID-related deferred rent was included in straight-line rent receivables. Management cautioned that collections, tenant solvency, occupancy, and cash flows remained uncertain.
• Portfolio and strategy: Single-tenant properties were 100% occupied; multi-tenant economic/physical occupancy was 83%/82%. Management plans to focus primarily on multi-tenant retail and office acquisitions, partly reflecting its exclusivity and right-of-first-offer arrangement with PINE. No formal earnings or acquisition guidance is provided in the supplied filing text.
• REIT conversion and distributions: CTO paid a $55.8 million special distribution, consisting of $5.6 million cash and 1,198,963 shares, to distribute pre-REIT earnings and profits. Regular dividends paid during 2020 were $1.90 per share; the reported $13.88 per-share total includes the special stock-and-cash distribution. REIT qualification, required distributions, built-in-gains tax, and the accuracy of pre-REIT earnings-and-profits calculations remain important considerations.
• Land JV and mitigation obligations: CTO retained a notional 33.5% Land JV interest; the JV reported approximately $5.0 million of potential proceeds under two land-sale agreements at year-end, while CTO impaired its interest by $7.1 million. Separately, the Mitigation Bank JV agreement may require CTO to purchase credits under a minimum-sales guarantee; the company anticipated payment in the latter half of 2021, with final amount and terms not assured. It was also discussing a possible buyout of BlackRock’s JV interest.
• Other matters: CTO identified tenant and retail-sector exposure, geographic and tenant concentration (Wells Fargo generated 10.9% of 2020 revenue), debt and refinancing risk, interest-rate and LIBOR-transition risk, environmental and weather risks, and potential conflicts tied to managing PINE. A Harris Teeter property condemnation matter could proceed to trial or mediation; management did not expect legal proceedings to materially affect results. The auditor issued an unqualified opinion on the financial statements and internal controls.
• Subsequent events: In March 2021 CTO acquired a Utah multi-tenant property for $20.0 million using 1031 proceeds. It also sold two properties in early 2021 and sold 25,300 acres of subsurface interests for $1.9 million, with a stated $1.8 million gain.

Important facts for investors to verify

• Reconcile the $78.5 million net income to the $83.5 million tax benefit and assess normalized earnings, FFO, AFFO, and cash generation without one-time items.
• Review unrestricted versus restricted cash, 1031 reinvestment deadlines, facility borrowing-base capacity, debt maturities, and covenant headroom.
• Track deferred-rent repayments, subsequent rent collections, occupancy, tenant improvement commitments, and the Wells Fargo revenue concentration.
• Confirm the amount and timing of any Mitigation Bank JV guarantee payment, possible buyout, and future Land JV distributions.
• Assess REIT qualification and distribution requirements, the special distribution’s tax treatment, and potential built-in-gains or 1031-exchange exposure.