CTO Realty Growth, Inc. (filed as Consolidated-Tomoka Land Co.) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The filing identifies the registrant as Consolidated-Tomoka Land Co. (CTLC). It operated a diversified real estate business, including income properties, Florida land, a commercial mortgage loan, golf, agriculture and subsurface interests. At quarter-end, it owned 37 single-tenant income properties across nine states, with more than 759,000 square feet, and over 10,000 acres in Florida.
Financial highlights
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $6.37 million | $3.56 million | $16.18 million | $12.40 million |
| Operating income (loss) | $2.47 million | $(0.98) million | $3.41 million | $0.63 million |
| Net income (loss) | $1.24 million | $(0.56) million | $1.83 million | $0.54 million |
| Diluted net income (loss) per share | $0.22 | $(0.10) | $0.32 | $0.09 |
Operating margin was approximately 38.8% in Q3 2013 versus negative 27.6% a year earlier, and 21.0% for the nine-month period versus 5.1%. The filing does not present a consolidated cash-flow margin. Nine-month operating cash flow was $8.38 million, compared with $3.56 million; investing cash outflow was $46.99 million, compared with $2.08 million; and financing cash inflow was $38.05 million, compared with $0.89 million.
At September 30, 2013, cash was $0.74 million and restricted cash was $0.32 million, versus cash of $1.30 million at year-end 2012. Total assets were $228.72 million and shareholders’ equity was $117.27 million. Long-term debt was $66.73 million, up from $29.13 million at December 31, 2012. The company reported $29.7 million of borrowing capacity under its $66 million revolving facility, subject to borrowing-base requirements; it was in compliance with debt covenants.
Changes and drivers
- Revenue increased 79% in Q3 and approximately 31% year to date. Income-property revenue rose with acquisitions; nine properties were acquired during the first nine months for approximately $39.5 million. Income-property revenue reached $9.62 million for the nine-month period, up from $6.39 million.
- Q3 included $644,000 of commercial mortgage loan interest income, largely reflecting accretion of the purchase discount, and approximately $1.0 million of revenue recognized from an oil exploration lease amendment. The loan, acquired in August for approximately $17.65 million, had a $19.56 million original face amount, a LIBOR-plus-4.50% coupon and a March 2014 maturity.
- Year-to-date net income improved despite higher depreciation and interest expense. Interest expense rose to $1.32 million from $0.48 million, primarily as borrowings funded property acquisitions and the mortgage investment. General and administrative expense declined to $4.22 million from $5.07 million, partly because 2012 included a legal reserve and a retiring executive’s payment.
- Golf operations remained loss-making but improved: the nine-month operating loss narrowed to approximately $396,000 from $767,000, with management citing membership growth and stronger food and beverage revenue. Real estate operations’ year-to-date revenue declined to $2.01 million from $2.42 million; 2012 had included land-sale and Dunn Avenue obligation revenue.
- Investing outflows included approximately $39.7 million for income-property acquisitions and $17.7 million for the mortgage loan, partly offset by approximately $10.6 million in property-sale proceeds. Three properties were sold during the period.
Outlook, risks and unusual items
- Management expected to continue acquiring income-producing properties and potentially loans, using available credit capacity, operating cash, asset-sale proceeds and additional financing. It said it expected sufficient liquidity for operations, capital needs, pension contributions and debt service over the next twelve months; this is management’s assessment, not formal earnings guidance.
- Management cautioned that land-sale activity is unpredictable and did not expect significant near-term improvement in real estate conditions. Two land parcels were under contract, with closings anticipated in Q4 2013. Construction began on two flex-office buildings; completion was expected in Q2 2014, with anticipated total construction costs of approximately $3.0 million.
- Interest-rate exposure includes $36.3 million of variable-rate revolving debt and approximately $30.4 million of fixed-rate debt. The company estimated a 100-basis-point rate change would affect financial position, results and cash flows by approximately $363,000.
- A $616,000 land impairment was recorded in Q2 after a sale contract prompted a recoverability review; the contract was later terminated, and management said the adjusted carrying value approximated fair value. The company received $4.293 million under an oil exploration lease amendment, recognizing $1.0 million immediately and deferring the remaining $3.293 million over twelve months.
- After quarter-end, the board approved steps to terminate the frozen pension plan; management expected a $1.0 million contribution before year-end, but gave no assurance on completion or timing. An October 14 agreement to sell a Walgreens-leased Orlando property was not expected to result in a loss.
- Litigation includes a North Carolina highway-access dispute affecting a Harris Teeter-leased property; trial was continued to April 2014, with mediation planned. In a separate lien dispute, an appeals court ruled for the company on October 29, 2013; the judgment exceeded $4.6 million including interest, but a rehearing remained possible and the company had not accrued the interest. The filing also identifies borrower default, collateral-value, foreclosure-delay, tenant, market and capital-availability risks.
Important facts for investors to verify
- Whether the short-term Atlanta hotel mortgage loan is repaid at its March 2014 maturity and whether the borrower and collateral remain sound.
- Actual acquisition, disposition and development spending, lease occupancy and rent collections, and whether projected land transactions close.
- Debt availability under borrowing-base limits, covenant headroom, refinancing plans and sensitivity to LIBOR changes.
- The timing and cost of pension-plan termination, including the expected contribution, and resolution of the legal matters and unaccrued lien interest.
- The sustainability of earnings growth after separating recurring property income from lease-payment timing, discount accretion, gains and other unusual items.