Business context and reporting period
Consolidated-Tomoka Land Co. (the registrant named in this filing) reported unaudited results for the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. It operated income-producing real estate, commercial real estate loans, land and subsurface interests, golf, and agricultural activities. At quarter-end, it owned 37 single-tenant properties with more than 924,000 square feet of leasable space and a land portfolio exceeding 10,500 acres.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $14.1 million | $6.3 million | $27.4 million | $16.0 million |
| Operating income | $6.0 million | $2.4 million | $10.6 million | $3.2 million |
| Net income | $3.5 million | $1.2 million | $5.7 million | $1.8 million |
| Diluted earnings per share | $0.60 | $0.22 | $0.99 | $0.32 |
| Operating cash flow | Not separately stated | Not separately stated | $9.9 million | $8.4 million |
- Margins and costs: Operating income was 42.8% of revenue in Q3 2014 and 38.7% for the first nine months, based on reported figures. Direct costs and corporate expenses rose with the expanded business; nine-month G&A increased to $4.6 million from $4.2 million. Interest expense was $1.6 million for the nine months, up from $1.3 million.
- Cash flow and investment: Investing activities used $30.8 million, including $27.4 million for commercial loans and $20.8 million for property and equipment, partly offset by $19.5 million of loan principal collections. Financing activities provided $18.1 million. Cash and equivalents were $2.2 million at September 30, down from $4.9 million at year-end; restricted cash was $1.4 million.
- Debt and liquidity: Long-term debt was $81.2 million, versus $63.2 million at December 31, 2013. This included $20.8 million outstanding on the revolving facility and $60.4 million of fixed-rate mortgage debt. The company reported $54.2 million of available facility capacity, subject to borrowing-base requirements, and compliance with debt covenants. Total assets were $252.3 million and shareholders’ equity was $127.0 million.
- Dividends and repurchases: The company declared and paid $0.03 per share during the first nine months. It repurchased 25,836 shares for approximately $928,000.
Material changes versus the prior period
- Revenue increased 122.8% in Q3 and 71.4% for the nine months. The principal driver was real estate operations: Q3 included approximately $7.2 million of revenue and a $3.9 million gain from a 75.6-acre land sale. Nine-month real estate revenue also included a February land sale.
- Income-property revenue rose 17.2% in Q3 and 14.6% year to date, reflecting acquisitions. Two income properties were acquired during the first nine months for approximately $20.0 million, compared with nine properties costing $39.5 million in the prior-year period.
- The commercial loan portfolio grew to four investments with a reported carrying value of $27.4 million. Interest income was lower in Q3 than in 2013, when it included discount accretion from a prior Atlanta mortgage loan; nine-month loan income increased year over year.
- Nine-month 2014 results included a $421,000 impairment charge for an income property held for sale. 2013 results included a $616,000 land impairment and $634,602 of income from discontinued operations, including property-sale gains.
Outlook, commentary, risks and unusual items
- Management expected to continue pursuing income-property acquisitions and commercial real estate lending during the remainder of 2014. It said funding could come from available credit, other financing, operating cash flow, and property or land dispositions. No quantified earnings or revenue guidance was provided.
- Management believed liquidity was adequate for operations, capital needs, and debt service over the next 12 months and foreseeable future, citing operating cash flow and available credit capacity.
- Management cautioned that land-transaction timing and results are unpredictable and that real estate markets, particularly homebuilding, could remain inconsistent. Forward-looking risks include economic and real estate conditions, acquisition execution, tenant loss, regulation, weather, competition, and capital availability.
- The land sale’s potential additional $1.1 million in county payments depends on milestones, including occupancy and job creation; receipt is not assured. A further $324,000 of gain from the sale was to be recognized as road improvements were completed. Oil exploration lease revenue is being recognized over its term, which then ran through September 2015; renewal and future terms were uncertain.
- The company had a $2.8 million remaining funding commitment under its Glendale, Arizona construction loan. It also reported road-improvement and tenant-improvement commitments, including a maximum remaining RaceTrac-related commitment of $693,000.
- After quarter-end, on October 7, 2014, the company acquired a 59,000-square-foot Whole Foods-anchored retail center in Sarasota for approximately $19.1 million; it was reported as approximately 98% occupied.
- The company reported that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter. Management did not expect disclosed legal proceedings to have a material financial effect.
Important facts for investors to verify
- Whether the land-sale county payments and deferred gain milestones are achieved, and the timing and completion costs of related road improvements.
- Performance, collateral coverage, senior-debt position, and repayment or extension terms of the four commercial loans, especially the subordinate and floating-rate investments.
- Lease-up and earnings contribution of the newer flex-office properties, including Williamson Business Park, which was approximately 25% occupied at quarter-end.
- Debt availability under borrowing-base limits, covenant headroom, and the effect of higher rates; management estimated that a 100-basis-point rate change would affect financial position, results, and cash flows by approximately $208,000.
- Closing and final economics of the property held for sale, the post-quarter Whole Foods acquisition, and the remaining construction and contractual commitments.