Business context and reporting period
Consolidated-Tomoka Land Co. (the registrant identified in this 2014 filing; the request metadata refers to CTO Realty Growth, Inc.) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The diversified real estate operator owned 36 single-tenant income properties with more than 872,000 square feet, over 10,500 acres of land, five self-developed flex-office properties, commercial loan investments, and the LPGA International golf operation.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $6.26 million, versus $4.84 million in 2013 | $13.36 million, versus $9.69 million in 2013 |
| Operating income | $1.68 million, versus $0.22 million | $4.58 million, versus $0.83 million |
| Net income | $0.72 million ($0.13/share), versus $0.25 million ($0.04/share) | $2.22 million ($0.39/share), versus $0.59 million ($0.10/share) |
| Operating cash flow | Not separately reported for the quarter | $0.84 million, versus $1.77 million |
For the six-month period, investing cash flow was negative $14.34 million and financing cash flow was positive $12.50 million; cash decreased by $1.00 million to $3.93 million. At June 30, total assets were $240.58 million, long-term debt $76.23 million, and shareholders’ equity $122.45 million. Cash plus restricted cash was approximately $4.77 million; restricted cash was $0.84 million and not freely available. The company reported $20.2 million of borrowing capacity under its $66 million revolving facility, subject to borrowing-base requirements. It was in compliance with debt covenants.
Six-month revenue growth reflected higher income-property rents, $1.20 million of commercial-loan income, and increased real estate operations revenue. Income-property revenue was $6.96 million; real estate operations revenue was $2.28 million; golf revenue was $2.85 million. Golf operating results were slightly positive for the half year but a loss of about $80,000 in the second quarter. No company-wide margin guidance or explicit margin target is provided.
Material changes versus the prior comparable period
- Revenue increased 29.4% for the quarter and 37.8% for the half year. Net income rose in both comparisons; 2013 results included discontinued-operation income of $0.40 million for the quarter and $0.56 million for the half year, including property-sale gains.
- Income-property revenue increased with portfolio expansion. The company acquired one property for approximately $14.7 million in the first half of 2014, compared with seven properties costing approximately $27.8 million in the first half of 2013.
- Commercial loan investments generated $1.20 million of first-half revenue, versus none in the 2013 comparison. This included approximately $0.84 million from the payoff of a prior hotel mortgage, including discount accretion and an exit fee.
- Real estate operations benefited from oil-exploration lease income recognized from a $3.293 million payment received in 2013, a $0.347 million gain on a land sale, and fill-dirt revenue. The company completed two flex-office buildings during the quarter.
- Interest expense rose to $0.99 million for the half year from $0.81 million, primarily reflecting borrowings to fund acquisitions and loan investments. General and administrative expense was $3.06 million, slightly above the prior-year $3.01 million; second-quarter expense included a $110,000 environmental-monitoring accrual.
- Operating cash flow declined year over year, which management attributed mainly to timing and noncash items, including recognition of the previously received oil-lease payment and discount accretion on a commercial loan.
Outlook, risks, contingencies and unusual items
- Management targeted an additional $15 million to $25 million of income-property or commercial-real-estate loan investments during the remainder of 2014, funded through facility capacity, other financing, operating cash, and property or land dispositions. It expected to continue acquiring income-producing assets and using tax-deferred like-kind exchange transactions where available.
- Management stated it believed liquidity would be sufficient for operations, capital needs, and debt service over the next 12 months and foreseeable future. On August 1, 2014, after quarter-end, the credit facility commitment was increased to $75 million, its maturity extended to August 1, 2018 (with a one-year extension option), and its interest spread reduced to LIBOR plus 135–200 basis points.
- Also after quarter-end, the company acquired a 52,665-square-foot American Signature Furniture property in Daytona Beach for approximately $5.3 million.
- The oil-exploration lease’s current guaranteed term was due to expire in September 2014; renewal and any future payments were uncertain. Management cautioned that land transactions are irregular and the local and broader real estate markets could remain challenging.
- Interest-rate exposure is material: approximately $45.8 million of debt was variable-rate, and management estimated a 100-basis-point rate change would affect financial position, results, and cash flows by approximately $458,000.
- Commitments included up to $693,000 for road improvements, approximately $551,000 of remaining tenant improvements, and an estimated $1.3 million of remaining site-preparation costs for a proposed 76-acre land sale. The land sale was not assured; management expected to incur the costs regardless. A further $3.2 million remained available to fund the Glendale Container Store construction loan.
- The company accrued approximately $110,000 for monitoring a previously remediated parcel. It reported no first-half 2014 long-lived-asset impairments and no required commercial-loan impairment allowance. A separate condemnation/access matter involving a Harris Teeter property remained administratively closed pending a redesigned road project expected in 2016; management did not expect legal proceedings to materially affect results.
- The golf lease amendment reduced rent obligations; approximately $2.3 million of previously deferred rent no longer payable remained to be recognized into income through September 2022. Results are interim and not necessarily indicative of full-year performance.
Important facts for investors to verify
- Reconcile the $2,223,315 first-half net income in the primary statements with the $2,223,815 figure in Note 10.
- Check the MD&A’s inconsistent descriptions of the 12-month debt change; the balance sheet shows debt increased from $63.23 million at December 31, 2013 to $76.23 million at June 30, 2014.
- Track whether the oil lease was extended after its September 2014 term and the resulting effect on land and subsurface revenue.
- Confirm completion and reimbursement timing for the 76-acre development work, and whether the associated land sale closed.
- Assess the credit quality, collateral, subordination, and repayment or extension status of the hotel mezzanine loan, Glendale construction loan, and Sarasota B-note.
- Monitor utilization and covenant headroom under the amended credit facility, variable-rate exposure, and the planned pace of additional investments.