CTO Realty Growth, Inc. (Consolidated-Tomoka Land Co.) — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report. The registrant name in the filing is Consolidated-Tomoka Land Co.
Business context
The company operated a diversified real estate business: 40 income-producing properties across 10 states (32 single-tenant and eight multi-tenant, about 1.7 million square feet), more than 10,500 acres of primarily Daytona Beach-area land, commercial real estate loans, Florida subsurface interests, and LPGA International golf operations. Its strategy was to sell land and selected properties, often using like-kind exchanges to defer taxes, and redeploy proceeds into income-producing real estate and loans.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $43.0 million | $36.1 million |
| Operating income | $20.3 million | $12.6 million |
| Income from continuing operations | $8.3 million | $6.4 million |
| Net income attributable to the company | $8.35 million | $6.38 million |
| Diluted earnings per share | $1.43 | $1.10 |
| Cash from operating activities | $25.2 million | $11.3 million |
| Cash and cash equivalents at year-end | $4.1 million | $1.9 million |
| Restricted cash at year-end | $14.1 million | $4.4 million |
| Total assets at year-end | $406.0 million | $276.6 million |
| Shareholders’ equity at year-end | $140.4 million | $128.4 million |
- Revenue increased 19.3%; management attributed growth mainly to acquired income properties and higher land-sale revenue. Operating income included a $5.5 million gain on dispositions of assets.
- Operating margin was approximately 47% in 2015 versus 35% in 2014; net margin was approximately 19% versus 18%. These figures reflect land-sale and asset-disposition activity and are not necessarily recurring.
- Operating cash flow more than doubled, partly reflecting improved results and fourth-quarter land sales. Investing activities used $84.2 million; financing activities provided $61.2 million.
- Year-end debt was $173.7 million at face value ($168.5 million carrying value, net of convertible-note discount), up from $103.9 million carrying value in 2014. Debt included $38.3 million drawn on the revolving facility, $60.4 million of secured mortgage debt, and $75 million face amount of 4.50% convertible notes due 2020.
- The $75 million note issuance generated $72.4 million net proceeds; approximately $47.5 million repaid the revolver. The $75 million credit facility matured in 2018, with $36.7 million of available borrowing capacity at year-end, subject to borrowing-base requirements. Management stated it expected liquidity to cover operations, capital needs, and debt service for at least the next 12 months.
- Commercial loan investments totaled $38.5 million face principal, with an 8.9% weighted-average interest rate and approximately 1.7 years average remaining maturity. All four loans were reported performing.
- Annual dividends rose to $0.08 per share from $0.07. The company repurchased 119,403 shares for approximately $6.5 million in 2015 and authorized a new $10 million repurchase program.
Material changes versus prior year
- Income-property revenue rose to $19.0 million from $15.0 million, supported by acquisitions, partly offset by sales of six CVS-leased properties. The company acquired four properties for approximately $76.4 million, including a Raleigh office complex leased to Wells Fargo and a Jacksonville multi-tenant office building.
- Land sales totaled approximately $22.5 million on 114 acres, versus $8.8 million on about 100 acres in 2014. The company recognized about $8.5 million of gains from 2015 land transactions, while $12.7 million of Tomoka Town Center sale proceeds remained deferred pending infrastructure work.
- Interest expense increased to $6.9 million from $2.4 million, mainly due to increased borrowings and the convertible-note issuance. General and administrative expense rose to $8.8 million from $7.0 million, including higher stock compensation and environmental-related charges.
- Golf operations remained loss-making, with a loss of approximately $350,000, modestly improved from $405,000. Oil exploration lease income declined to approximately $1.7 million from $2.9 million; oil royalties also declined.
Outlook, risks, contingencies and unusual items
- Management targeted $70 million to $85 million of 2016 investment in income-producing properties or commercial loans, funded through credit capacity, operating cash, land and property sales, and potentially a sale of subsurface interests. This is a target, not formal earnings guidance.
- Four signed land-sale agreements covered more than 1,700 acres with approximately $56 million of potential proceeds, with contemplated closings from 2016 through 2018. Closings depend substantially on buyer due diligence, entitlements, permits, and other conditions; completion is not assured. The Minto transaction for roughly 1,600 acres was expected more likely in the second half of 2016.
- The company was reviewing strategic alternatives, including a possible company sale, asset sale, or continued execution of its plan. An independent directors’ committee engaged Deutsche Bank in February 2016; there was no set timetable or assurance of a transaction.
- Tomoka Town Center infrastructure work was estimated at $10 million to $13 million, with completion expected around the end of Q3 2016. Remaining construction commitments were approximately $6.6 million under the principal construction agreement; related reimbursements and deferred revenue depend on milestones and completion.
- Environmental and wetlands matters are material uncertainties. The company accrued approximately $500,000 for one remediation matter and $187,500 for a potential penalty; it also accrued approximately $1.7 million for wetlands restoration, at the low end of an estimated $1.7 million–$1.9 million range. Further mitigation-credit costs were not estimable, and management said the $1.7 million estimate could change materially within a year.
- A shareholder owning more than 26% of the common stock made communications and public filings that could result in significant legal, accounting, or advisory costs, which were not reasonably estimable. Separately, 2015 executive awards exceeded the equity plan’s individual annual limit by 112,000 shares; the company notified NYSE MKT of a possible rule issue, and subsequent amendments and replacement awards were disclosed.
- Key risks include real estate market and land-entitlement uncertainty, tenant or borrower default, interest-rate and refinancing exposure, debt-covenant compliance, concentration of land and several operations in Florida, environmental requirements, and ongoing golf operating losses. The company reported compliance with debt covenants at year-end.
Important facts for investors to verify
- Progress and final costs for Town Center infrastructure, recognition of deferred land-sale revenue, and collection of related reimbursements.
- Whether the approximately $56 million land pipeline closes on expected terms and timing, particularly the Minto and NADG transactions.
- Final environmental and wetlands obligations, permitting outcomes, and any additional mitigation-credit requirements.
- Strategic-review developments and any resulting transaction, alongside the potential costs and governance implications of shareholder matters and the executive-award issue.
- Debt-service capacity, revolver availability under borrowing-base and covenant tests, and cash demands from planned acquisitions, repurchases, and construction commitments.
- Reliability of earnings and cash flow excluding land-sale gains, disposition gains, deferred-revenue timing, and other nonrecurring items.
The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting as of December 31, 2015.