Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 28, 2018. The registrant was Consolidated-Tomoka Land Co. (NYSE American: CTO), now known as CTO Realty Growth, Inc. It operated a diversified real estate business: 37 income properties in 12 states, approximately 8,100 acres of Daytona Beach-area land, commercial loan investments, golf operations, agriculture, and subsurface interests. Subsequent to year-end, it added three income properties, bringing the total to 40.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $91.4 million | $71.1 million |
| Operating income | $40.3 million | $37.3 million |
| Net income | $41.7 million | $16.2 million |
| Basic / diluted EPS | $7.53 / $7.48 | $2.86 / $2.85 |
| Cash from operating activities | $57.5 million | $14.3 million |
| Cash and cash equivalents | $6.6 million | $7.8 million |
| Restricted cash | $6.5 million | $9.9 million |
| Total assets | $466.1 million | $408.6 million |
| Shareholders’ equity | $184.2 million | $148.3 million |
| Long-term debt, face value | $200.0 million | $171.6 million |
| Dividends per share | $0.18 | $0.12 |
Revenue grew 29%; operating income margin was approximately 44% versus 53% in 2016, when operating income included substantial disposition gains. Net income margin was approximately 46%, but earnings were materially boosted by a noncash $22.2 million tax benefit from reducing the federal corporate tax rate from 35% to 21%. The company also recognized $2.2 million of noncash land-lease income when it purchased the land underlying its golf course.
Material changes versus the prior comparable period
- Real estate operations revenue increased to $52.5 million from $38.1 million, largely reflecting $47.0 million of 2017 land sales versus $11.9 million of land-sale revenue in 2016. Approximately 1,701 acres were sold in 2017, including a 1,581-acre sale to Minto for $27.2 million.
- Income-property revenue rose 25% to $31.4 million as acquisitions expanded the portfolio. The company acquired six properties for approximately $79.8 million; annualized lease revenue was about $18.8 million for single-tenant properties and $9.9 million for multi-tenant properties.
- Operating cash flow rose to $57.5 million from $14.3 million, partly reflecting higher earnings and noncash adjustments, as well as changes in land and deferred revenue balances. Investing activities used $79.2 million, including $94.6 million for property acquisitions and improvements; financing activities provided $20.5 million.
- Net income rose 157%, but the comparison is affected by the 2017 tax benefit and golf lease accounting gain, and by 2016 gains of $12.8 million on asset dispositions. The company recorded no impairment charges in 2017, compared with $2.2 million in 2016.
- Golf operations recorded an operating loss of approximately $0.9 million, compared with $0.4 million in 2016; one course was closed for the third quarter of 2017 for renovations.
Debt, liquidity, and capital allocation
Year-end debt at face value was $200 million: $70 million under a revolving credit facility, $55 million of mortgage debt, and $75 million of 4.50% convertible notes due March 2020. The revolver had $100 million of committed capacity and approximately $30 million of borrowing availability at year-end, subject to borrowing-base limits. In the first quarter of 2018, the commitment was expanded to $130 million. The company reported compliance with debt covenants at year-end. A 100-basis-point increase in the revolver’s interest rate was estimated to affect results and cash flows by approximately $700,000, or $0.09 per share after tax.
Management stated it expected liquidity from cash, operations, and credit-facility availability to cover operations, capital requirements, and debt service for at least the next 12 months. Restricted cash included approximately $5.6 million held for tax-deferred reinvestment and other escrow or reserve purposes. The company repurchased 135,329 shares during 2017 for approximately $7.2 million, at an average $53.27 per share.
Outlook, risks, contingencies, and unusual items
- Management targeted $80 million to $120 million of income-property investment in 2018 and said it did not then plan to invest in commercial real estate loans. Funding was expected from the revolver, operating cash flow, land-sale proceeds, possible property or subsurface-interest dispositions, and other financing.
- As of February 28, 2018, 18 potential land transactions covered approximately 6,042 acres, or 75% of the land portfolio, with stated potential proceeds of approximately $150.9 million. Closings were contemplated from 2018 through 2020; many depended on permitting, governmental approvals, due diligence, or other conditions, and some were nonbinding or included options. Management cautioned that completion, timing, and prices were uncertain and that land-market activity could remain challenging.
- Land-sale income is inherently uneven and can represent a large share of annual earnings. The company depends substantially on the Daytona Beach-area market and on Section 1031 like-kind exchanges to defer tax on gains and redeploy proceeds.
- Environmental and wetlands matters included approximately $708,000 of estimated remaining restoration liability at year-end, subject to change, and a separate environmental remediation accrual with approximately $159,000 remaining. Additional mitigation-credit costs may arise on future land transactions.
- Other commitments included approximately $858,000 remaining for the beachfront restaurant development at year-end, a $2.7 million Hilton Grand Vacations lease incentive paid in January 2018, and up to $630,000 in remaining golf-course surcharge payments after the first $70,000 payment.
- The company cited risks from tenant default or lease rollover, interest rates and debt covenants, development costs, permitting and environmental regulation, natural disasters, and the golf operation’s history of negative cash flow. Although no tenant exceeded 10% of consolidated revenue, Wells Fargo, Lowe’s, Hilton Grand Vacations, and At Home were significant by property size and/or net operating income.
- Wintergreen Advisers and related vehicles beneficially owned approximately 28% of shares. The 2017 proxy contest and related shareholder matters contributed to approximately $3.0 million of costs through year-end, including approximately $1.6 million in 2017. The company said allegations made by Wintergreen had no merit.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. A Harris Teeter property-access condemnation case remained administratively closed while road work was underway; management did not expect legal proceedings to materially affect financial condition or results.
Most important facts an investor should verify
- How much of the approximately $150.9 million land pipeline actually closed, when it closed, and the resulting realized gains and tax-deferred reinvestment.
- Reported earnings excluding the $22.2 million tax-law benefit and the noncash golf lease-termination income, and the recurring contribution of property operations.
- Current debt balances, revolver availability and covenant headroom, convertible-note settlement terms, and sensitivity to higher rates.
- Lease occupancy, tenant credit and concentration, and near-term expirations; the multi-tenant portfolio’s weighted average remaining term was 4.0 years versus 9.2 years for single-tenant properties.
- Actual costs and outcomes of environmental restoration, permitting, and other commitments, along with performance of the newly completed restaurant properties and Aspen acquisition.