CTO Realty Growth, Inc. (then Consolidated-Tomoka Land Co.) — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing covers the company under its then-legal name, Consolidated-Tomoka Land Co.; it describes a diversified real estate business with income properties, a substantial Daytona Beach land portfolio, commercial loan investments, golf operations, and agricultural and subsurface interests.
Financial results and position
- Revenue: $71.1 million, up 65% from $43.0 million in 2015. Real estate operations revenue rose to $38.1 million from $15.9 million, driven substantially by Tomoka Town Center percentage-of-completion revenue and infrastructure reimbursements. Income property revenue increased 32% to $25.1 million.
- Profit: Net income attributable to the company was $16.3 million, or $2.86 per basic share, versus $8.3 million, or $1.44 per share, in 2015. Operating income was $37.3 million, including $12.8 million of gains on asset dispositions. Interest expense was $8.8 million and income tax expense was $11.8 million; the effective tax rate was 42.2%.
- Cash flow: Operating cash flow was $14.3 million, down from $25.2 million. Investing activities used $23.4 million, including substantial property acquisitions, offset partly by property-sale proceeds and loan repayments. Financing activities provided $12.8 million. The company paid $0.12 per share in dividends and repurchased $7.4 million of stock.
- Liquidity: Year-end cash and cash equivalents were $7.8 million and restricted cash was $9.9 million, including $8.2 million held for tax-deferred reinvestment. The company reported approximately $40.7 million of available capacity under its $75 million revolving credit facility and stated it expected sufficient liquidity for operations, capital needs, and debt service over the next 12 months.
- Debt and equity: Year-end debt was $171.6 million at face value ($166.2 million carrying value); shareholders’ equity was $148.3 million and total assets were $408.6 million. Debt included $34.3 million outstanding on the revolving facility, $75 million principal of 4.50% convertible notes due 2020, and secured mortgages. The company reported compliance with debt covenants at year-end.
- Portfolio and operating indicators: At year-end, the company owned 31 income properties in 10 states, approximately 1.69 million square feet, and about 9,800 acres of land. Single-tenant occupancy was 100%; multi-tenant occupancy was 85%. Annualized rents were approximately $13.1 million for single-tenant properties and $8.8 million for multi-tenant properties.
Material changes versus 2015
- Net income nearly doubled, while revenue growth reflected land-related recognition and property portfolio changes. The $17.5 million of Town Center percentage-of-completion revenue and $4.5 million of infrastructure reimbursement revenue were significant contributors; the filing says all revenue under those Town Center sales agreements was recognized by year-end.
- The company acquired 10 income properties for approximately $86.7 million and sold 19 income properties for an aggregate price of approximately $74.3 million. The 14-property Portfolio Sale accounted for approximately $51.6 million of the sales price, including assumption of a $23.1 million mortgage, and generated an approximately $11.0 million final net gain.
- Interest expense rose to $8.8 million from $6.9 million, primarily reflecting a full year of interest and discount amortization on the 2015 convertible notes. Depreciation and amortization increased to $8.2 million from $5.2 million as the income property portfolio grew.
- Impairment charges increased to $2.2 million from $0.5 million, including approximately $1.0 million on land under contract and charges on two income property sales. The company also recognized a $576,000 loss on disposal of its remaining investment securities.
- Operating cash flow declined despite higher net income, in part because of timing and working-capital effects associated with land-sale revenue recognition and property dispositions.
Outlook, commentary, risks, and unusual items
- Outlook: Management planned approximately $50–$70 million of income-property investment in 2017 and said it was not then planning new commercial loan investments that year. Expected funding sources included credit-facility capacity, operating cash flow, land-sale proceeds, possible property or subsurface-interest sales, and other financing. Management expected the near-term real estate market, particularly homebuilding, to remain inconsistent and land transactions challenging.
- Land pipeline and subsequent sale: On February 10, 2017, the company sold approximately 1,581 acres to Minto for $27.2 million and estimated an after-tax gain of approximately $20.0 million ($2.19 per share). After the sale, it reported approximately 8,200 acres remaining and 10 other land contracts covering about 2,210 acres with stated total contract amounts of $82.9 million. Closings depend on due diligence, permits, approvals, and other conditions; the company cautioned that timing and completion were uncertain.
- Strategic review and governance: A review of strategic alternatives produced two all-stock acquisition offers, each at no more than a 5% premium to the then-current trading price. The independent committee rejected both in July 2016 as insufficient to maximize shareholder value and elected to continue the company’s business plan. Wintergreen, which the company said beneficially owned about 27% of its shares, filed a suit in February 2017 seeking access for four director nominees; the company intended to contest it and could not estimate defense costs.
- Environmental and regulatory exposure: Wetlands restoration work relating to approximately 148 acres was estimated at about $2.0 million; approximately $935,000 had been funded, leaving an estimated $1.1 million liability that could change. Additional mitigation needs for another area were not estimable. Separate environmental remediation and permitting matters also remain relevant to land sales.
- Other subsequent events: The company bought the golf-course land from the City of Daytona Beach for approximately $1.5 million in January 2017, agreed to renovate course greens, and will pay a per-round surcharge subject to minimum and maximum amounts. Termination of the former lease is expected to produce approximately $0.40 per share of non-cash earnings in the first quarter of 2017.
- Key risks: Earnings and cash flow can vary significantly with the timing of a small number of land transactions; much of the land portfolio is concentrated in Daytona Beach, Florida. Other material risks include permitting and development constraints, tenant or borrower defaults, property valuation and impairment, refinancing and covenant risk, rising interest rates, reliance on tax-deferred like-kind exchanges, golf-operation losses, and natural disasters. The golf segment reported a $397,000 operating loss in 2016.
- Unusual compensation matter: The company disclosed that 2015 equity awards to its CEO exceeded the plan’s individual award limit by 112,000 shares under the committee’s interpretation. The awards were partly surrendered and replaced; NYSE MKT notified the company it would take no action and considered the matter closed. The company recorded accelerated stock compensation expense in 2016.
Most important facts for investors to verify
- How much of 2016 earnings and operating income was recurring versus driven by asset-sale gains, land-sale activity, and percentage-of-completion recognition.
- Whether the Minto sale gain and the remaining contracted land transactions close on the stated terms and schedule, particularly those contingent on permitting and approvals.
- Current liquidity, borrowing-base availability, debt-covenant headroom, and refinancing plans for the revolving facility and debt maturities, including 2018 and 2020.
- Lease-up and tenant performance at The Grove and other multi-tenant properties, along with concentration and renewal exposure in the rent-expiration schedule.
- Final environmental and wetlands restoration costs, required mitigation credits, and any effect on land-sale closings or proceeds.
- Costs and outcome of Wintergreen’s director-nomination litigation, and any continuing effects on governance, expenses, or capital allocation.
- Progress toward management’s 2017 acquisition target and the cash returns from the golf-course land purchase and planned renovation.