CTO Realty Growth, Inc. (then Consolidated-Tomoka Land Co.) — Q2 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2018, compared with the same 2017 periods. The diversified real estate company reported 36 commercial properties across 13 states, approximately 2.1 million square feet of leasable space, and roughly 5,500 acres of undeveloped land in Daytona Beach, Florida. Other operations included commercial lending and the LPGA International Golf Club.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $13.83 million | $22.84 million | $38.68 million | $61.55 million |
| Operating income | $21.50 million | $8.04 million | $38.49 million | $30.89 million |
| Net income | $14.16 million | $3.68 million | $25.08 million | $16.43 million |
| Basic earnings per share | $2.56 | $0.67 | $4.53 | $2.95 |
- Revenue and drivers: Q2 income-property revenue rose 29% to $9.78 million, reflecting acquisitions, leasing progress at The Grove at Winter Park, and the new beachfront restaurants. Real estate operations revenue fell to $2.48 million from $13.26 million as land-sale activity was lower than in 2017. For the first half, income-property revenue grew 30% to $18.99 million, while real estate operations revenue declined 61% to $16.46 million.
- Profit and margins: Earnings increased despite lower revenue largely because Q2 included an $18.4 million gain on the Mitigation Bank transaction. First-half disposition gains totaled approximately $22.1 million, including the Mitigation Bank gain and a $3.7 million gain on the sale of four office properties. Reported profit therefore includes material nonrecurring gains; it should not be read as a comparable improvement in recurring operating performance. Golf operations recorded operating losses of approximately $242,000 in Q2 and $270,000 in the first half. The filing does not provide a normalized recurring margin.
- Cash flow: First-half operating cash flow was $14.26 million, down from $45.30 million, primarily reflecting lower land-sale receipts. Investing activities provided $2.24 million, compared with $46.62 million used in 2017; 2018 proceeds included property dispositions and repayment of a commercial loan. Financing activities used $22.84 million, principally reflecting net debt repayments. Cash and restricted cash totaled $6.73 million at June 30, 2018.
- Debt and liquidity: Face-value debt was $180.63 million ($177.13 million carrying value), down from $200.0 million at December 31, 2017. Cash and cash equivalents were $4.31 million, with $2.42 million restricted. The $150 million revolving facility had $50.75 million outstanding and approximately $99.1 million available borrowing capacity, subject to borrowing-base limits. The company reported compliance with debt covenants and stated it expected sufficient liquidity for operations, capital needs, and debt service over the next 12 months.
- Other metrics: The declared and paid dividend was $0.06 per share in Q2 and $0.12 per share for the first half, versus $0.04 and $0.08, respectively, in 2017. The effective tax rate for the first half was 24.9%, versus 38.5%, primarily reflecting the federal corporate tax-rate reduction.
Material changes, outlook, and risks
- The company acquired a single-tenant property in Aspen, Colorado, for $28.0 million (approximately $29.0 million including acquisition costs); it was fully leased with a 20-year remaining lease term. It also completed two beachfront restaurant developments and sold four self-developed Daytona Beach office properties for approximately $11.4 million.
- The Sarasota B-Note, with approximately $9.0 million principal, matured and was repaid in June; proceeds were used to reduce the credit facility. The remaining commercial loan investment was a $3.0 million first mortgage loan, maturing in August 2018. Management expected commercial-loan interest income to continue declining.
- Management targeted $53.5 million to $93.5 million of income-property investments during the remainder of 2018 and said it was not planning commercial real estate loan investments for that period. Potential funding sources included the credit facility, operating cash, land-sale proceeds, property dispositions, and possible subsurface-interest sales.
- As of August 1, 2018, 17 potential land transactions covering approximately 4,286 acres, or 78% of land holdings, were in the pipeline, with stated potential proceeds of approximately $179.2 million. These were not assured: many depended on permits, governmental approvals, due diligence, and other conditions, and buyers could have termination rights.
- The Mitigation Bank transaction left the company with a 30% interest and obligations tied to mitigation-credit sales. BlackRock may require purchases under put rights; maximum potential future payments were estimated at approximately $27 million. Federal permitting and credit issuance, marketability, and value remained uncertain. A separate minimum-sales guarantee also applies.
- Environmental and restoration matters included an estimated remaining wetlands-restoration liability of approximately $464,000, which management said could change within a year and materially affect the balance sheet and future cash flows. Other commitments include a $630,000 remaining golf-course surcharge and approximately $693,000 of remaining road-improvement reimbursements.
- Variable-rate credit-facility debt creates interest-rate exposure: the company estimated a 100-basis-point rate increase would affect financial position, results, and cash flows by approximately $507,000. A $24.9 million mortgage rate was hedged at 3.17% through an interest-rate swap. The $75 million 4.5% convertible notes mature in March 2020.
- Management cited real-estate-market conditions, the timing of land transactions, permitting and environmental requirements, tenant losses, severe weather, competition, capital availability, and execution of acquisition and development plans as risks. A shareholder disclosure suit was dismissed after an immaterial legal-fee settlement; the Harris Teeter access/condemnation matter remained administratively closed pending road work.
Important facts for investors to verify
- Whether the land-sale pipeline closes on expected terms and timing, particularly transactions requiring permits or other approvals.
- Whether the Mitigation Bank secures federal permits and sells credits; track any resulting put-right or minimum-sales-guarantee exposure.
- Recurring rental growth, occupancy and lease performance, separately from disposition gains and land-sale volatility.
- Liquidity after planned acquisitions, restricted cash needs, floating-rate borrowing costs, and the 2020 convertible-note maturity.
- Final costs and timing for wetlands restoration and other contractual or environmental commitments.