Business context and reporting period
Consolidated-Tomoka Land Co. (now identified in the request as CTO Realty Growth, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. It operated 36 income-producing commercial properties across 13 states, with about 2.1 million square feet, alongside Daytona Beach land holdings, golf operations, and subsurface interests. The company had no commercial loan investments at quarter-end.
Key financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $18.43 million | $12.38 million | $57.11 million | $73.93 million |
| Operating income | $2.78 million | $3.76 million | $41.27 million | $34.65 million |
| Net income | $0.30 million | $0.97 million | $25.37 million | $17.39 million |
| Basic EPS | $0.05 | $0.18 | $4.60 | $3.13 |
| Interest expense | $2.35 million | $2.07 million | $7.44 million | $6.28 million |
- For the nine months, operating cash flow was $22.62 million versus $49.08 million. Investing activities provided $3.06 million, compared with $52.63 million used in 2017; financing activities used $24.95 million versus $1.11 million.
- At September 30, cash and cash equivalents were $5.32 million, restricted cash was $8.48 million, total assets were $476.16 million, and shareholders’ equity was $206.01 million.
- Long-term debt carrying value was $177.36 million; face-value debt was $180.47 million, down from $200.0 million at December 31, 2017. The company reported compliance with debt covenants.
- The $150 million revolving facility had $50.75 million drawn and about $99 million available at quarter-end. After approximately $70 million of October acquisitions were funded from the facility, the October 26 balance was about $120.7 million, with approximately $29 million available.
- Quarterly dividends declared and paid were $0.07 per share, compared with $0.05 a year earlier.
Material changes versus the prior comparable period
- Q3 revenue rose 49%, mainly from land sales and higher income-property revenue, but net income fell 69%. Real estate operations revenue increased $5.09 million year over year, while income-property revenue rose 18% to $9.36 million.
- Nine-month revenue declined 23%, chiefly because land-sale revenue was lower than in 2017. Net income nevertheless increased 46%, largely reflecting $22.04 million of gains on asset dispositions in 2018; nine-month 2017 included $2.23 million of other gains and land-lease income.
- Income-property revenue increased 26% for the nine months, reflecting acquisitions, lease-up at The Grove at Winter Park, and commencement of beachfront restaurant leases. Commercial-loan interest income declined as loans were sold or repaid; the portfolio was fully repaid by September 30.
- Operating cash flow decreased by $26.46 million year over year. Management attributed the change in part to the timing and classification of disposition gains and lower land-sale proceeds.
- The effective tax rate for the first nine months fell to 25.1% from 38.7%, primarily due to the federal corporate tax-rate reduction under the 2017 Tax Cuts and Jobs Act.
Outlook, commentary, risks and unusual items
- Management’s strategy is to monetize land and redeploy proceeds, including through like-kind exchanges, into income-producing real estate, with a focus on single-tenant net-lease properties. Through October 26, acquisitions totaled about $102.8 million, above the midpoint of the company’s stated $100 million full-year 2018 acquisition guidance; management said it could make up to an additional $20 million of investments during the rest of 2018.
- Subsequent to quarter-end, the company acquired a Fidelity-leased Albuquerque office property and eight ground-leased Jacksonville retail parcels for an aggregate purchase price of about $76.3 million. Management said these acquisitions were expected to add approximately $5.8 million of annualized base rent.
- As of October 26, a pipeline of 16 potential land transactions represented about 3,503 acres and $154.1 million in stated consideration. These transactions were subject to due diligence, permits and other conditions; the filing cautions that timing, completion and final prices are not assured.
- The 70% sale of the Mitigation Bank generated an approximately $18.4 million gain, including a gain on the retained 30% interest. The company has obligations related to credit sales, including a minimum-sales guarantee; BlackRock also holds put rights that could result in maximum future payments of about $27 million. The company estimated the put right’s fair value at about $0.2 million.
- The company recorded a $1.12 million golf-asset impairment in Q3, after reviewing strategic alternatives; the assets were written down to approximately $3.1 million. Golf operations continued to report operating losses.
- Management stated it expected sufficient liquidity for operations, capital needs and debt service. Risks include variable-rate borrowing, dependence on land-sale execution and approvals, tenant and real-estate-market conditions, and environmental or land-use requirements. A 100-basis-point interest-rate increase was estimated to affect financial position, results and cash flows by about $1.2 million, based on the disclosed exposure.
- Other items to monitor include an estimated $453,000 remaining wetlands-restoration liability, which management said could change materially within a year, and the Harris Teeter access-related condemnation matter, for which proceedings were administratively closed pending later scheduling. The filing also reports $939,000 of shareholder-related and proxy-related costs in the first nine months.
Important facts for investors to verify
- How much of the $154.1 million land-sale pipeline closes, and whether required permits, mitigation credits or other obligations change the economics.
- Whether the mitigation-credit bank obtains the remaining federal permit and meets its sales targets, including potential exposure under BlackRock’s put rights.
- Post-acquisition debt levels, remaining revolver capacity, interest-rate sensitivity and the company’s ability to address the $75 million convertible notes due in 2020.
- Whether income-property rent growth and the October acquisitions translate into sustained cash generation, given lower operating cash flow in the reported nine-month period.
- Developments in the golf-operations strategic review, environmental restoration liability and Harris Teeter access matter.