Business context and reporting period
Consolidated-Tomoka Land Co. (the registrant in this 2016 filing; identified in the request as CTO Realty Growth, Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2016. It operated a diversified real estate business: 29 commercial properties across nine states, approximately 10,500 acres of land in Daytona Beach, Florida, three commercial loan investments, golf operations, and subsurface interests.
Financial performance and position
- Third quarter: Revenue was $12.2 million, up 47% from $8.3 million. Operating income was $15.9 million versus $5.1 million; the quarter included an $11.4 million gain on the sale of 14 properties. Net income attributable to the company was $8.2 million, or $1.44 per diluted share, versus $2.1 million, or $0.36 per share.
- Nine months: Revenue was $43.4 million, up 87% from $23.2 million. Operating income was $27.0 million versus $8.8 million. Net income attributable to the company was $11.2 million, or $1.95 per diluted share, versus $2.7 million, or $0.45 per share.
- Revenue drivers: Income-property revenue increased to $6.0 million for the quarter and $18.5 million for nine months, reflecting acquisitions and below-market lease accretion. Real estate operations revenue was $4.6 million and $19.0 million, respectively, substantially affected by Town Center land-sale revenue recognized as infrastructure work progressed.
- Cash flow: Nine-month operating cash flow was negative $4.2 million, compared with positive $4.9 million in 2015. Investing activities provided $24.6 million, principally from property dispositions; financing activities used $15.4 million. Cash increased to $9.0 million from $4.1 million at year-end 2015.
- Liquidity and debt: Restricted cash was $6.6 million, including $3.1 million held for future like-kind-exchange reinvestment. Long-term debt had a $141.3 million face value ($135.6 million carrying value), down from $173.7 million face value at year-end 2015. The credit facility balance was $4.0 million, with approximately $58.8 million of available borrowing capacity. The company reported compliance with debt covenants.
- Equity and distributions: Shareholders’ equity was $149.3 million, compared with $140.4 million at December 31, 2015. The company repurchased 113,429 shares for approximately $5.5 million during the first nine months and declared and paid $0.08 per share in dividends.
Material changes versus the prior comparable period
- Nineteen income properties were sold for approximately $74.3 million and eight properties were acquired for approximately $49.8 million during the first nine months. The portfolio sale generated an approximately $11.1 million after-tax gain.
- Town Center development-related revenue recognition contributed approximately $16.5 million of revenue and $13.0 million of gains in the first nine months, compared with substantially less in the prior-year period. These amounts depend on completion of infrastructure work, rather than representing an equivalent amount of current-period cash receipts.
- Real estate operating results improved, while general and administrative expense rose to $8.5 million from $6.1 million. The increase included approximately $1.6 million of accelerated stock-compensation expense and approximately $1.3 million of shareholder-matter and strategic-review costs.
- Interest expense rose to $6.7 million from $4.8 million for nine months, reflecting additional borrowing and convertible-note costs, including a $367,000 write-off of loan costs on debt assumed by the portfolio-sale buyer.
Outlook, commentary, risks, and unusual items
- Management targeted $20.2 million to $35.2 million of additional income-property investments during the remainder of 2016, potentially more if certain land sales closed. It expected to fund acquisitions with cash, credit availability, operating cash, and property or land-sale proceeds, including through like-kind exchanges.
- As of October 28, eight land-sale agreements covered approximately 4,054 acres and potential proceeds of about $98.5 million. Closings, timing, permits, and final terms were uncertain; management cautioned that buyers could terminate in some circumstances.
- A proposed subsurface-interest sale was initially valued at approximately $24 million, but after quarter-end the buyer proposed materially reducing the interests to be acquired. The company was evaluating that proposal; the transaction was not assured.
- Management stated it expected sufficient liquidity for operations, capital needs, and debt service over the next 12 months. This outlook relies in part on available credit, operating cash flow, completion of like-kind exchanges, and potential asset sales.
- Environmental restoration obligations were estimated at approximately $2.0 million, with about $1.1 million remaining accrued after payments. The company warned the estimate could change materially; additional mitigation-credit needs were not estimable. It also reported approximately $1.3 million of costs to investigate shareholder allegations and pursue strategic alternatives, with further costs possible.
- The strategic review concluded in July 2016, although discussions with interested parties regarding certain assets could continue without a defined timetable or assurance of a transaction. The filing also disclosed a separate Chapter 11 filing by an oil-royalty operator and a property-access condemnation matter involving a Harris Teeter tenant site.
- Subsequent to quarter-end, the company acquired a California office property for $30 million and sold approximately 17 acres for $3.0 million. It also repurchased additional shares. These transactions occurred after September 30 and are not included in the quarter-end balance sheet.
Important facts for investors to verify
- How much reported earnings depended on property-sale gains and percentage-of-completion Town Center revenue, and how much cash those activities generated in the period.
- Whether the land-sale pipeline and subsurface-interest transaction close, on what schedule, and at what proceeds after any amendments, permits, or price changes.
- The remaining environmental restoration and mitigation-credit exposure, and whether estimates or required permits change.
- Liquidity after planned acquisitions, tenant-improvement and infrastructure commitments, share repurchases, and debt service; also confirm ongoing covenant compliance.
- The performance and credit quality of the three commercial loans, including the borrowers’ exercised maturity extensions, and the effect of property acquisitions and dispositions on rental income and lease occupancy.