Business context and reporting period
CTO (filed under its then-registered name, Consolidated-Tomoka Land Co.; ticker CTO) reported the quarter and six months ended June 30, 2019. The diversified real estate company owned 49 commercial properties across 15 states, about 5,300 acres of undeveloped Daytona Beach-area land, and the LPGA International Golf Club, which was classified as held for sale. Its strategy emphasized growing a primarily single-tenant net-lease portfolio.
Financial performance and position
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Revenue | $17.94 million, up 43% year over year | $32.20 million, down 11% |
| Net income | $10.60 million, down 25% | $17.06 million, down 32% |
| Basic EPS | $2.14, versus $2.56 | $3.32, versus $4.53 |
| Operating cash flow | $13.34 million for the half, versus $14.26 million | |
| Investing cash flow | $28.34 million provided, versus $2.24 million | |
| Financing cash flow | $2.06 million used, versus $22.84 million used |
Q2 income included $11.81 million of disposition gains; the comparable 2018 quarter included $18.38 million, including the mitigation-bank transaction. Income-property revenue rose 6% in Q2 and 11% for the half, supported by acquisitions. Six-month real-estate-operations revenue fell 33%, largely reflecting lower land-sale revenue and the prior-year mitigation-bank transaction. Interest expense rose to $3.04 million in Q2 and $5.97 million for the half, primarily due to greater credit-facility borrowings.
At June 30, total assets were $577.52 million, liabilities $380.02 million, and shareholders’ equity $197.50 million. Long-term debt was $281.07 million at face value ($278.88 million carrying value), up from $250.34 million face value at year-end. Cash and equivalents were $2.62 million; restricted cash was $59.04 million, including approximately $56.5 million earmarked for like-kind-exchange reinvestment. The $200 million revolver had $151.8 million outstanding and approximately $18.9 million available based on borrowing-base assets. The company reported compliance with debt covenants. Dividends declared and paid were $0.10 per share for the quarter and $0.20 for the half.
Changes, outlook, and risks
- The company acquired five fully leased single-tenant properties for approximately $40.6 million in the first half and sold three multi-tenant properties for approximately $79.9 million combined. It stated that sales support its shift toward single-tenant net-lease assets.
- Management’s 2019 investment guidance was $80 million to $120 million in income-producing properties. Funding sources were expected to include revolver capacity, operating cash, land and property sale proceeds, and potentially subsurface-interest sales. The filing does not provide updated guidance beyond this range.
- As of July 31, approximately 3,014 acres—57% of land holdings—were in a potential-sale pipeline valued at about $82.2 million. Closings, timing, and prices were uncertain and depended on due diligence, permits, and other approvals; buyers could have termination rights.
- A $75 million 4.5% convertible-note principal amount matures in March 2020. The company said it intends to settle conversions in cash, with any excess conversion value in shares.
- The retained mitigation-bank arrangement includes a potential company obligation to purchase credits; maximum potential future payments under the put right were approximately $27 million. The company estimated the put right’s fair value at $0.2 million. Credit sales, permit awards, and the guarantee terms merit attention.
- Wetlands restoration costs were estimated at $2.4 million, with about $208,000 remaining accrued; management said that estimate could change within a year. The golf club continued to incur losses and remained held for sale. A July 2019 lease termination for Cocina 214 provided for approximately $0.3 million of rent payment and a company purchase of tenant property and improvements for approximately $1.0 million.
- Subsequent to quarter-end, the company acquired Austin land for $16.25 million using like-kind-exchange proceeds, originated an $8.25 million loan at 11.5%, and acquired a leased Reston, Virginia property for approximately $18.6 million.
- Key stated risks include variable-rate debt exposure, dependence on real-estate markets and land transactions, tenant loss, permitting and environmental obligations, and access to capital. A 100-basis-point rate increase was estimated to affect financial position, results, and cash flows by about $1.5 million.
Important facts for investors to verify
- Whether the land-sale pipeline closes on the stated terms and schedule, and whether restricted exchange proceeds are reinvested successfully.
- Liquidity available after accounting for restricted cash, borrowing-base limits, acquisitions, and the March 2020 convertible-note maturity.
- Performance and tenant concentration in the expanded single-tenant portfolio, as well as the impact of disposed multi-tenant assets.
- Potential exposure under mitigation-bank credit obligations and the final cost of wetlands restoration.
- Progress and proceeds from the golf-club sale, and the financial effect of the Cocina 214 termination and property acquisition.