CTO Realty Growth, Inc. annual report, FY2011

Consolidated-Tomoka Land Co. — FY 2011 Form 10-K

Period and company: Fiscal year ended December 31, 2011; this is an annual report, not a standalone fourth-quarter report. The filing identifies the registrant as Consolidated-Tomoka Land Co.; the request metadata names CTO Realty Growth, Inc.

Business context

The company combined Florida land, agricultural and mineral-rights operations with a portfolio of net-leased properties and golf operations. It owned about 11,000 acres near Daytona Beach, interests in roughly 490,000 subsurface acres, and 25 acquired income properties plus two self-developed properties. Its strategy was to reinvest qualifying land-sale proceeds in income-producing real estate, using Section 1031 tax-deferred exchanges and moderate leverage.

Financial results and position

Income properties generated $9.035 million of revenue and $6.535 million of pretax segment income, slightly below 2010 segment income of $6.568 million. Golf generated $4.661 million of revenue but a $5.667 million pretax loss. Real estate operations had a $3.614 million loss, including a $2.606 million land impairment. No land transactions closed in 2011. The filing reports no conventional consolidated operating-margin measure.

Cash was $6,174 and restricted cash was $2.780 million at year-end; the restricted funds were designated for reinvestment through a like-kind exchange. The company had no investment securities at year-end after liquidating its approximately $5 million portfolio. Its $15.267 million debt comprised $9.684 million drawn on a revolving line and a $5.583 million term loan due July 2012. On February 27, 2012, it replaced these facilities with a $46 million unsecured revolver maturing in 2015, with a one-year extension option and an accordion feature up to $75 million. The filing states the company was covenant-compliant and expected liquidity to cover operations, capital needs and debt service.

Changes, outlook, risks and unusual items

• Net loss widened substantially, chiefly reflecting $6.619 million in pretax impairment charges: $4.012 million for golf assets and $2.606 million for land. The golf charge followed continuing losses and a revised decision that the operation was not a core holding; management contracted with ClubCorp to manage the facility in January 2012.
• General and administrative expense rose 56% to $6.089 million, reflecting stock-based compensation accruals, executive transition and severance costs, business-association expenses, and termination of the interest-rate swap. Income properties’ revenue was nearly flat; expenses increased 3%.
• Management did not expect significant improvement in the real estate market in 2012, though it saw the possibility of selected land transactions. It projected $10 million of income-property acquisitions in 2012 and anticipated reinvesting proceeds from planned sales of properties. Capital expenditures could be reduced at management’s discretion.
• Occupancy at the acquired single-tenant portfolio declined to 91% in 2011 from 92% in 2010; effective annual rent per square foot fell to $16.40 from $16.61. CVS and Walgreens together represented about 51% of consolidated revenue, creating tenant concentration exposure.
• Harris Teeter asserted that a highway-access change could give it a right to terminate its Charlotte lease; the company disputed that interpretation. A water-management permitting dispute remained pending for a state determination; management did not expect a material financial effect, but said the outcome was too early to assess.
• Other exposures include a weak Florida/Daytona Beach property market, further property impairments, development and permitting risks, hurricanes and other natural disasters, golf-market weakness, and variable-rate debt. Management said a 100-basis-point rate change would not materially affect financial position, results or cash flows.
• The company maintained its $0.04 per-share annual dividend, versus $0.30 in 2009, and said future dividends would depend on cash flow, market conditions and capital needs. It recorded a $140,436 loss on investment-security sales and terminated its interest-rate swap during 2011.

Key facts for investors to verify

1. Whether the 2012 credit facility was completed on the disclosed terms and how subsequent borrowing and liquidity developed.
2. Whether the proposed income-property sales and approximately $10 million of planned acquisitions closed, and their effect on recurring cash flow.
3. Whether Harris Teeter remained a tenant and the resolution or financial consequences of the access and condemnation dispute.
4. Whether golf losses, impairment assumptions and the ClubCorp management arrangement changed operating performance or asset values.
5. Whether tenant concentration, occupancy and rents stabilized, and whether the company resumed land sales in a still-weak market.
6. The cash-flow and funding implications of pension obligations, including the reported $1.587 million pension liability and estimated 2012 contribution of $300,000–$350,000.

Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The company disclosed that KPMG would be dismissed after completing the 2011 audit; it reported no disagreements or reportable events.