CTO Realty Growth, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. This quarterly report covers the three and nine months ended September 30, 2020. CTO owned 30 commercial properties across 11 states, comprising 24 single-tenant and six multi-tenant properties with about 2.5 million square feet. Its other activities include management services, commercial loan and master lease investments, mineral interests, and mitigation credits. Results are reported on a C-corporation basis; the company planned to elect REIT status for 2020 and pursue a merger into a Maryland corporation, subject to shareholder approval.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $14.6 million | $11.3 million | $40.4 million | $33.0 million |
| Operating income | $1.5 million | $5.5 million | $12.5 million | $30.1 million |
| Net income (loss) | $(1.5) million | $1.5 million | $(1.2) million | $18.6 million |
| Basic and diluted EPS | $(0.33) | $0.31 | $(0.25) | $3.67 |
| Operating cash flow | Not provided by quarter | $11.9 million | $16.7 million |
At September 30, total assets were $685.4 million, total liabilities $404.4 million, and shareholders’ equity $281.0 million. Long-term debt had a $276.9 million carrying value and $284.7 million face value. Debt included $168.8 million drawn on a $200 million revolving facility, with $31.2 million available borrowing capacity, and a $23.4 million mortgage due in April 2021. The company reported compliance with debt covenants.
Cash and cash equivalents were $6.4 million; restricted cash was $2.4 million. For the nine months, investing activities used $125.6 million, including property acquisitions, while financing activities used $12.4 million. The company said it expected to have sufficient liquidity for operations, capital needs, and debt service over the next 12 months, relying on cash, operating cash flow, and available credit.
Material changes versus prior comparable periods
- Revenue rose 29% in Q3 and 23% for the nine-month period, primarily reflecting property acquisitions and new management fees, partly offset by property sales.
- Income-property revenue increased, but direct costs and depreciation also rose as the portfolio expanded. Q3 operating income fell to $1.5 million from $5.5 million.
- Net results turned to losses. Comparisons were affected by lower gains on property dispositions ($7.4 million for the 2020 nine-month period versus $20.9 million in 2019), a $7.1 million noncash loss on the PINE investment, and mitigation-credit costs. The 2019 nine-month results also included discontinued operations.
- Interest expense declined to $8.4 million from $9.2 million for the nine months. The company exchanged maturing 2020 convertible notes for 2025 notes and repurchased $12.5 million principal amount of the 2025 notes, recognizing a $1.1 million debt-extinguishment gain.
- The company acquired four properties for approximately $185.1 million and disposed of eight income properties for $51.6 million in the nine months. It also sold four commercial loan and master lease investments during Q2.
Outlook, commentary, risks, and unusual items
- COVID-19 and rent collection: CTO collected 91% of contractual base rent due in Q3; as of November 6, it had collected about 93% of October rent. Agreements covered some deferrals or abatements, but tenants responsible for about 6% of Q3 contractual base rent remained unresolved. Management cautioned that deferred rent may be difficult to collect and vacancies could rise.
- REIT conversion and distribution: The company expected a one-time special distribution of approximately $52–$56 million, largely in stock (expected mix: 90% stock and 10% cash), to distribute pre-REIT earnings and profits. It expected declaration in Q4 and payment in December 2020. The merger required shareholder approval at a November 9, 2020 special meeting. Failure to complete the conversion or qualify as a REIT could have significant tax and distribution consequences.
- Capital allocation: Management described a strategy of reinvesting disposition proceeds, often through Section 1031 exchanges, and using available credit to grow income-producing property investments. No specific earnings or revenue guidance was provided.
- Interest-rate exposure: Swaps fixed rates on $150 million of the revolving-credit balance. The filing estimated that a 100-basis-point rate change could affect financial position, results, and cash flows by approximately $1.7 million.
- Other unusual items and contingencies: The company recorded approximately $1.9 million of loan-portfolio impairment and CECL charges, including a reserve of about $252,000. It also disclosed a mitigation-bank put right with an initial maximum potential payment of about $27 million; BlackRock exercised the right for additional credits in October 2020. A wetlands restoration matter had about $27,000 of estimated liability remaining, with final regulatory acceptance pending.
- Subsequent events: October and November dispositions and a loan repayment were disclosed. The company also reported an October intercompany note of $7 million to fund estimated taxes and operating expenses.
Investor verification checklist
- Track rent collections, unresolved tenant balances, and repayment of deferred rents, including subsequent-period updates.
- Confirm shareholder approval and completion of the merger, REIT election, lender consents, and special distribution; verify the final distribution amount, form, timing, and tax treatment.
- Assess refinancing or repayment plans for the $23.4 million mortgage due in April 2021, revolving-facility availability, borrowing-base conditions, and covenant headroom.
- Review the PINE investment’s market value and the effect of any further price changes on reported earnings and equity.
- Monitor mitigation-credit put-right obligations, credit sales and costs, and regulatory resolution of the wetlands restoration matter.
- Separate recurring property and management performance from disposition gains, investment fair-value changes, impairment charges, and other nonrecurring items.