CTO Realty Growth, Inc. (Consolidated-Tomoka Land Co.) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 6, 2020. The filing reports the registrant as Consolidated-Tomoka Land Co. (NYSE American: CTO).
Business context
CTO ended 2019 with 34 commercial properties in 11 states, totaling approximately 1.8 million square feet: 29 single-tenant and five multi-tenant properties. Its continuing operations comprise income properties, management services, commercial loan investments, and real estate operations. During the fourth quarter, it sold a controlling interest in its approximately 5,300-acre Daytona Beach land portfolio, transferred or sold 20 income properties to newly public Alpine Income Property Trust (PINE), and sold its golf operations. The land and golf operations are presented as discontinued operations.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $44.9 million | $43.7 million |
| Income from continuing operations | $16.6 million | $15.0 million |
| Income from discontinued operations, net of tax | $98.4 million | $22.2 million |
| Net income | $115.0 million | $37.2 million |
| Basic earnings per share | $23.03 | $6.76 |
| Cash provided by operating activities | $16.4 million | $47.8 million |
| Total assets | $703.3 million | $556.3 million |
| Shareholders’ equity | $285.4 million | $211.8 million |
| Dividends paid per share | $0.44 | $0.27 |
- Continuing income-property revenue was $42.0 million, up 5%; segment operating income was $35.0 million versus $31.9 million. Multi-tenant occupancy declined to 82% from 86% in 2018; single-tenant occupancy remained 100%.
- Commercial loan investment revenue rose to $1.8 million from $0.6 million. At year-end the portfolio had $34.6 million carrying value, an approximately 11.3% weighted-average interest rate, and approximately 0.5 years of remaining duration.
- Operating income was $34.2 million, including $22.0 million of gains on asset dispositions. Interest expense increased to $12.5 million from $10.4 million. The filing does not provide a single adjusted or recurring profit measure.
- Cash and cash equivalents were $6.5 million; restricted cash was $128.4 million, including $125.7 million held for 1031 exchanges. Total cash including restricted cash was $134.9 million. The company reported approximately $40.2 million of available capacity under its $200 million revolving facility, subject to borrowing-base availability.
- Face-value debt was $288.7 million: $159.8 million under the credit facility, $53.9 million of mortgage debt, and $75.0 million of convertible notes. The company reported compliance with debt covenants at year-end. A 100-basis-point rate increase was estimated to affect results and cash flows by approximately $1.6 million, principally due to variable-rate credit-facility borrowings.
Material changes versus 2018
- Net income more than tripled, primarily because discontinued operations included approximately $127.5 million of pretax gain on the Land JV transaction: $78.6 million on the controlling-interest sale and a $48.9 million non-cash gain on the retained interest. The reported discontinued-operations result was $98.4 million after tax.
- Continuing-operations income increased 11%, while total revenue increased 3%. Operating cash flow fell by $31.4 million to $16.4 million, primarily reflecting lower land-sale cash proceeds before the Land JV transaction.
- CTO acquired 11 income properties for approximately $164.7 million and sold or contributed 20 single-tenant properties to PINE. It also completed four other income-property dispositions, generating approximately $82.6 million of proceeds and $20.8 million of gains.
- 2019 investing cash flow was positive $103.1 million, compared with $77.9 million used in 2018, reflecting property and joint-venture sale proceeds. Financing cash flow was negative $5.8 million, including $41.1 million of share repurchases.
- The annual dividend increased to $0.44 per share from $0.27. The company repurchased 691,102 shares for approximately $41.1 million.
Outlook, risks, contingencies, and unusual items
- Management’s stated strategy is to grow income-producing real estate, with emphasis on multi-tenant retail and office properties, while also considering commercial loans, development, and other real-estate-related investments. The filing says management believed available resources would fund operations, capital needs, maintenance, and debt service for at least 12 months.
- The company reported a Land JV sales pipeline, as of March 6, 2020, of 10 agreements representing approximately $97 million of potential proceeds; approximately $22 million of sales had been completed since the JV’s October 2019 formation. These are potential transactions, not guaranteed proceeds.
- After year-end, CTO acquired Crossroads Towne Center for approximately $61.8 million and Perimeter Place for approximately $75.4 million. On February 3, 2020, it exchanged $57.4 million of 2020 notes and issued additional notes, leaving $75 million of 3.875% convertible notes due 2025; approximately $11.7 million of remaining 2020 notes were intended to be repaid at maturity.
- PINE pays CTO a base management fee of 1.5% annually of defined total equity, with potential incentive fees. The management agreement has a five-year initial term, and CTO’s exclusivity and right-of-first-offer arrangements limit its ability to pursue certain single-tenant net-lease investments. The filing identifies potential conflicts of interest because some CTO officers and directors also serve PINE.
- Tenant and sector concentration are notable: Wells Fargo represented approximately 12.5% of 2019 consolidated revenue; its Raleigh property represented 26% of portfolio square footage. More than 20% of base rent came from financial-services tenants. Retail exposure carries risks from tenant performance, e-commerce, and economic conditions.
- The Mitigation Bank agreement includes a minimum-sales guarantee and put rights; the maximum potential future payments under the put rights were estimated at approximately $27 million. BlackRock exercised the right for 25 credits in December 2019, which CTO purchased for approximately $1.9 million. The remaining federal permit was anticipated before the end of 2020, but issuance and credit value are not assured.
- A wetlands-restoration accrual had approximately $121,000 remaining at year-end and could change within one year. A Harris Teeter access-related condemnation matter remained administratively closed; trial or mediation was not expected to be scheduled until requested, likely in 2021.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective. The filing identifies real-estate valuation, tenant credit, illiquidity, debt and interest-rate exposure, environmental matters, natural disasters, and the use of 1031 tax deferral as risks.
Important facts for investors to verify
- How much of 2019 earnings and equity value depends on the one-time Land JV gain, including the non-cash retained-interest valuation, rather than recurring operations.
- The restrictions, timing, and actual deployment of the $125.7 million of 1031 exchange escrow, and the resulting leverage and returns from post-year-end acquisitions.
- Current borrowing-base availability, covenant headroom, variable-rate exposure, and completion of the 2020-to-2025 convertible-note refinancing and repayment.
- Whether the Land JV’s announced agreements close, the realizable value and timing of CTO’s 33.5% retained interest, and any effect of sales on management fees.
- Wells Fargo lease exposure, multi-tenant occupancy and leasing trends, and the performance and credit quality of major retail and financial-services tenants.
- The status of mitigation-bank permits and obligations, wetlands restoration, and the Harris Teeter matter; assess any resulting cash commitments against unrestricted liquidity.