CTO Realty Growth, Inc. (then Consolidated-Tomoka Land Co.) — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing. The company operated as a diversified real estate business, with income properties in seven states, more than 11,000 acres of Florida land, golf operations, and agricultural and subsurface interests.
Financial performance
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $17.33 million | $14.06 million |
| Operating income (loss) | $1.66 million | $(8.12) million |
| Continuing operations income (loss), after tax | $560,000 | $(5.24) million |
| Net income (loss) | $599,000 | $(4.71) million |
| Diluted earnings (loss) per share | $0.10 | $(0.82) |
| Operating cash flow | $3.50 million | $(2.20) million |
| Cash at year-end | $1.30 million | $6,000 |
| Debt at year-end | $29.13 million | $15.27 million |
| Total assets / shareholders’ equity | $184.70 million / $114.22 million | $170.27 million / $113.16 million |
Calculated operating and net margins were approximately 9.6% and 3.5%, respectively. The company paid $0.04 per share in dividends, unchanged from 2011.
- Revenue mix: Income properties generated $9.56 million, real estate operations $3.10 million, golf $4.51 million, and other income $165,000. Income-property segment operating income was $8.88 million; real estate operations produced $2.39 million; golf lost $888,000.
- Liquidity and debt: Year-end borrowings were under a $62 million unsecured revolving facility, maturing February 2015, with no scheduled principal due before maturity. Available capacity was $32.87 million at December 31. The variable rate was 1.966% at year-end; management estimated a 100-basis-point rate increase would affect results and cash flows by about $291,000.
- Cash flows and investment: Investing activities used $15.36 million, including substantial property acquisitions; financing activities provided $13.15 million. The company acquired eight income properties for approximately $25.9 million in 2012 and sold two for approximately $7.8 million.
- Portfolio indicators: The acquired single-tenant portfolio’s year-end occupancy was 94%, versus 91% in 2011; average effective rent was $17.48 per square foot, versus $16.40. Annualized lease revenue was approximately $10.6 million, with a 10.6-year average remaining lease term.
Changes versus 2011 and notable items
- Revenue rose 23.2%, mainly from higher income-property rent and a $2.6 million increase in real estate operations revenue. The latter included land-sale proceeds, approximately $730,000 from final resolution of the Dunn Avenue road-cost agreement, and subsurface lease income.
- The return to profitability reflected improved operating results and the absence of 2011 impairment charges of $6.62 million before tax, including approximately $4.01 million for golf assets and $2.61 million for land. The 2012 comparison also includes a $245,726 debt-extinguishment loss and a $723,058 legal reserve.
- General and administrative expense increased to $6.62 million from $5.44 million, including the legal reserve, a $167,320 executive separation payment, and higher stock compensation ($1.05 million versus $254,000).
- Golf operating losses narrowed to $888,000 from $1.33 million, despite revenue declining 3.3%; lower costs following the change to ClubCorp management drove the improvement. A lease amendment kept base rent at $250,000 rather than allowing it to rise to $500,000 and will result in about $3 million of previously accrued rent being recognized as income over the remaining 10-year lease term.
- At year-end the company had $111.16 million of minimum future rental receipts under non-cancelable operating leases. This is contractual scheduled rent, not a forecast of collected revenue.
Outlook, risks, and contingencies
- Management targeted approximately $35 million to $45 million of additional income-property investments in 2013, funded through credit capacity, operating cash flow, asset dispositions, land transactions, and other financing. By March 1, 2013, it reported approximately $27.6 million of post-year-end acquisitions. Management stated it expected sufficient liquidity for the next 12 months and the foreseeable future.
- Management said land transactions remained challenging and did not expect significant near-term improvement in real estate conditions. Daytona Beach and Florida economic weakness, land-sale timing, development approvals, and land-use or environmental restrictions could affect results.
- Tenant concentration is material: CVS and Walgreens represented 15.5% and 12.8% of 2012 consolidated revenue, respectively. Their financial distress, lease termination, or non-renewal could materially affect cash flow. The Harris Teeter property also faced a dispute over proposed highway access changes and the tenant’s asserted lease-termination rights.
- The St. Johns River Water Management District settlement remained contingent on agreement over a management fee and permit issuance; the company had accrued $723,058 and submitted its permit application in January 2013. A separate appeal concerning the company’s approximately $3.8 million lien claim remained pending; the judgment plus interest exceeded $4.4 million at year-end.
- Other principal risks include variable interest rates, credit-facility covenants and the 2015 maturity, the continuing golf operating deficit, real estate impairment risk, geographic concentration in Florida, natural disasters, and pension funding. The defined-benefit plan was frozen to future accruals; its year-end deficit was $1.32 million, and the estimated 2013 contribution was $350,000–$400,000.
- The company reported effective disclosure controls and internal control over financial reporting; Grant Thornton issued unqualified audit opinions on the 2012 financial statements and internal controls.
Investor verification priorities
- Reconcile the 2012 profit improvement to recurring operating performance versus the absence of prior-year impairments and the 2012 real estate and lease-related items.
- Verify current borrowing, remaining credit availability, covenant headroom, and refinancing plans, including post-year-end mortgage financings and facility changes.
- Track CVS and Walgreens concentration, the Harris Teeter access and lease dispute, and the status and cost of the water-management permit settlement.
- Assess whether golf losses continue to narrow and whether the rent-amendment income benefit is noncash and recognized over the stated period.
- Test the 2013 acquisition target against actual funding, execution, tenant concentration, and like-kind-exchange tax requirements; management cautioned that proposed land and retailer arrangements might not become binding transactions.