CTO Realty Growth - 10-Q quarterly report FY

(Exact name of registrant as specified in its charter)

 

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reports required to be filed by Section 13 or 15(d) of the

Securities Exchange Act of 1934 during the preceding 12 months (or

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classes of common stock, as of the latest practicable date.

Class of Common Stock Outstanding

November 10, 2008

$1.00 par value 5,727,515

 

PART I - FINANCIAL INFORMATION

See Accompanying Notes to Consolidated Financial Statements

See Accompanying Notes to Consolidated Financial Statements
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See Accompanying Notes to Consolidated Financial Statements

 

The Company paid income taxes totaling $3,325,122 for the nine-months ended September 30, 2008.
See Accompanying Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

 

The Company has contracts in place for the construction of a 12 acre, 4 lot commercial complex, including a 23,000 square-foot "Class A" office building, this is in addition to the construction of a road on the Company's core Daytona Beach lands.  These contracts totaled $6,496,255, of which $4,669,427 was remaining to be paid at September 30, 2008.

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to be read in conjunction with the financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in the last annual report on Form 10-K.

OPERATIONS OVERVIEW

The Company is primarily engaged in real estate land sales and development, reinvestment of land sales proceeds into income properties, development of income properties on Company lands, and golf course operations.  The Company owns approximately 11,200 acres in Florida, which form a substantial portion of the western boundary of the City of Daytona Beach.  The Company lands are well-located in the growing central Florida Interstate 4/Interstate 95 corridor, providing an excellent opportunity for reasonably stable land sales in the near-term future and following years.

With its substantial land holdings in Daytona Beach, the Company has parcels available for the entire spectrum of real estate uses.  Along with land sales, the Company selectively develops parcels primarily for commercial uses. Although pricing levels and changes by the Company and its immediate competitors can affect sales, the Company generally enjoys a competitive edge due to low costs associated with long-time land ownership and a significant ownership position in the immediate market.

Sales and development activity performed by the Company and third party developers on and around Company owned lands have been strong in the last several years. These activities included the sale of 120 acres of land to Florida Hospital for the construction of a new hospital, which is anticipated to open mid-year 2009, the expansion of the Daytona Beach Auto Mall, the opening of a second office building in the Cornerstone Office Park, continued development within the 250-acre Gateway Commerce Park (where a 32,000 square-foot industrial building is currently under construction), and development of the 60-acre Interstate Commerce Park, both adjacent to Interstate 95, and the sale of approximately 100 acres of land west of Interstate 95 on which a private high school was constructed and opened in August 2008.  Construction nears completion on the future City of Daytona Beach police headquarters, located adjacent to Gateway Commerce Park. In the first half of 2008, development also commenced on a 288-unit apartment complex, a medical office building, and a townhouse residential community on the east side of Interstate 95.  On the west side of the interstate, development has commenced on a fire station, a hotel, an elementary school, and a 59,000 square-foot furniture retail store in the Interstate Commerce Park.

In 2000, the Company initiated a strategy of investing in income properties utilizing the proceeds of agricultural land sales qualifying for income tax deferral through like-kind exchange treatment for tax purposes.  At September 30, 2008, the Company had invested approximately $120 million in twenty-six income properties through this process.   This  investment includes the April 2008 purchase of a Harris Teeter supermarket in Charlotte, North Carolina, for approximately $9.7 million.

Lease revenue of approximately $9.2 million is projected to be generated annually on this investment base.  This income, along with income from additional net-lease income property investments, will continue to decrease earnings volatility in future years and add to overall financial performance.  This strategy has enabled the Company to enter into the business of building, leasing, and holding in its portfolio select income properties that are strategically located on Company lands.

The Company currently has two self-developed projects in process.  The first project is a two-building 31,000 square-foot flex office space complex located within Gateway Commerce Park.  Construction of these buildings was completed in the third quarter of 2008.  Leases are currently in negotiation on this project.   Also under development by the Company is a 12 acre, 4-lot commercial complex, located at the corner of LPGA and Williamson Boulevards.  Site work, building plans, and permitting are complete for this project.  The parcel will include a 23,000 square-foot “Class A” office building.  Construction of the building began in July 2008 with the execution of a lease with Merrill Lynch for a significant portion of the building.  Leases are currently in negotiation for additional space in the building.

Golf operations consist of the operation of two golf courses, a clubhouse facility, and food and beverage activities within the LPGA International mixed-use residential community on the west side of Interstate 95, south and east of LPGA Boulevard.  The Champions course was designed by Rees Jones and the Legends course was designed by Arthur Hills.

The Company’s agricultural operations consist of growing, managing, and selling of timber and hay on approximately 10,600 acres of Company lands on the west side of Daytona Beach, Florida.  The Company is currently in the process of converting a significant portion of its timberlands to hay production.

 

The overall national and local economies continue to be weak and unstable with both the residential and commercial real estate markets depressed.  Based on current market conditions, the Company's fourth quarter closing volume will be lower than in recent years as some of our potential purchasers have either put their expansions on hold or have requested extensions. One such event was the cancellation of the $17.4 million contract for the sale of 25 acres of land, intended for retail use, near the Florida Hospital site.  This contract was signed and previously reported in the third quarter of 2007.  Despite these market conditions, the Company expects earnings to be positive in the current year. Earnings and positive cash flow are expected to be generated due to the Company’s low debt and significant revenue generated from the Company's portfolio of net leased income properties.  During the current economic slowdown, which is anticipated to continue for the foreseeable future, the Company is concentrating on conversion of forestry lands into hay operations, and the leasing of our self-development projects discussed above; as well as the design and permitting of future roads, completing construction of Tournament Drive west of Interstate-95 to connect to the new elementary school, and obtaining land use entitlements, all of which we anticipate will enhance the long-term value of our land holdings.

Net income totaled $105,246, equivalent to $.02 per share, for the third quarter of  2008.  These profits represented a substantial decrease from the profits of $2,102,564, equivalent to $.37 per share, generated in the third quarter of 2007.  The decline in earnings can be attributed to lower profits from real estate sales as no real estate transactions closed during the third quarter of 2008. The lower profits were somewhat offset by increased earnings from income properties.

For the nine months ended September 30, 2008, the Company realized net income amounting to $2,432,562, equivalent to $.42 per share.  This income represented an 8% decline from the income of $2,634,692, equivalent to $.46 per share, posted in 2007’s same period.  The lower profits were primarily the result of lower real estate sales volume, which was  offset by higher earnings from income properties and lower general and administrative expenses as the result of an addition to income for decreased stock option accruals.

The Company also uses Earnings before Depreciation, Amortization, and Deferred Taxes (EBDDT) as a performance measure.  The Company’s strategy of investing in income properties through the deferred tax like-kind exchange process produces significant amounts of depreciation and deferred taxes.

The following is the calculation of EBDDT:

 

EBDDT is calculated by adding depreciation, amortization, and the change in deferred income tax to net income as they represent non-cash charges. EBDDT is not a measure of operating results or cash flows from operating activities as defined by U.S. generally accepted accounting principles. Further, EBDDT is not necessarily indicative of cash availability to fund cash needs and should not be considered as an alternative to cash flow as a measure of liquidity. The Company believes, however, that EBDDT provides relevant information about operations and is useful, along with net income, for an understanding of the Company’s operating results.

 

The downturn in EBDDT for the third quarter of 2008 to $1,103,586 from $3,165,382 in the prior year’s same period can be directly attributed to lower real estate sales volume.

EBDDT increased for the nine-month period in 2008, to $5,536,262 from $5,119,297 in 2007’s same period.  This increase, on lower earnings, was due to the increase in deferred taxes during the period.  The rise in deferred taxes was due to the increase in such taxes associated with like-kind exchanges and stock options. Deferred taxes in 2007 were partially offset by the reversal of deferred taxes on gains from a year-end 2006 transaction for which the like-kind exchange process was not completed, as the Company was unable to identify investment property which met established criteria.

 

 

During the third quarter of 2008, a loss totaling $247,320 was posted from real estate sales, as no land sales transactions were closed during the period.  For the third quarter of 2007, profits amounting to $2,367,558 and revenues totaling $2,994,820 were generated on the sale of 11 acres of land.

For the first nine months of 2008, revenues and profits totaled $2,358,789 and $1,126,881, respectively. These revenues and profits were realized on the sale of 21 acres of land.  For the same period of 2007, the sale of 104 acres of property, including a charitable contribution of 25 acres valued at $1,500,000, generated revenues and profits of $8,860,680 and $4,027,242, respectively.  Also included in sales during the first nine months of 2007 was the sale of approximately $1,900,000 of impact fee credits. Costs and expenses were substantially higher in 2007’s nine-month period with the higher cost basis associated with both the charitable contribution and impact fee credits.

The addition of the Harris Teeter supermarket, located in Charlotte, North Carolina, to the Company’s inventory of income properties in April 2008 generated increased revenues and profits for both the third quarter and first nine months of 2008 when compared to the same periods of 2007.  During the third quarter of 2008, revenue and profit gains of 8% and 11%, respectively, were realized. Revenues and profits totaled $2,380,052 and $1,864,627, respectively, for the third quarter of 2008.  Profits of $1,687,198 were produced on revenues of $2,207,308 for the same period of 2007.  A 5% gain in revenues for the first nine-months of 2008 produced a 6% increase in profits for the period. For the first nine-month period of 2008, profits totaling $5,465,157 were produced on revenues of $6,874,518.  During 2007’s same period, revenues and profits amounting to $6,537,982 and $5,164,790 were realized, respectively.

 

A 12% decline in golf operations revenues during the third quarter of 2008 produced an 11% increase in losses.  Losses from golf operations totaled $717,416 in 2008’s third quarter on revenues of $814,067.  During the same period of 2007, losses of $647,559 were generated on revenues totaling $930,164.  Both golf and food and beverage activities contributed to the decline.  Revenues from golfing activities decreased 13% on a 26% decline in the number of rounds played, offset by a 14% increase in the average rate per round.  Food and beverage revenues fell 12% during this period.  Golf operations costs and expenses decreased 3% due to lower payroll and cost of sales on the lower volume during this period.

During the first nine months of 2008, losses recorded from golf operations totaled $1,435,487 on total revenues of $3,481,770.  This loss represented an 8% increase over 2007’s same period loss of $1,329,516.  During the first nine months of 2007, revenues of $3,907,346 were produced.  The 11% decrease in revenue for 2008 represented a decline in both golf and food and beverage activities.  Golf revenues were down 8% on a 16% fall in the number of rounds played, offset by a 9% increase in the average rate per round played.  Revenues from food and beverage activities were 18% lower during this period.  For the nine-month period, golf operations costs and expenses fell 6% when compared to the prior year.   This decline in costs and expenses was achieved as the lower volume reduced payroll expenses and cost of sales.

Profits on the sale of other real estate interests totaled $590,439 and $794,696 for the third quarter and first nine months of 2008, respectively.  These profits were realized on the release of subsurface rights on 772 acres, of which the release of  537 acres occurred in the third quarter.  During the first nine months of 2007, profits on the release of subsurface interests totaled $1,400,979, of which $816,235 was earned in the third quarter.  Releases were granted on 645 acres and 394 acres for the nine months and third quarter of 2007, respectively.

Interest and other income declined 39% during the third quarter of 2008 compared to 2007’s same period.  The decrease, to $91,089, was due to lower interest earned on lower balances for investment securities and funds held for investment through the like-kind exchange process. These decreases were somewhat offset by higher interest on mortgage notes receivable.  Interest and other income earned in 2007’s third quarter totaled $149,627.

For the nine-month period, interest and other income rose 19% to $535,839.  Interest and other income totaled $450,420 during 2007’s first nine-month period.  The higher earnings were achieved on higher interest from mortgage notes receivable in addition to increased interest on funds held for reinvestment through the like-kind exchange process.  Lower interest earned on lower balances for investment securities offset these increases for the nine-month period.

During the third quarter of 2008, general and administrative expenses increased 35% when compared to the same period of 2007. The increase, to $1,410,864, was the result of higher stock option accruals along with increased legal and other costs associated with shareholder relations.  General and administrative expenses amounted to $1,044,337 in 2007’s third quarter. 

 

For the first nine months of 2008, general and administrative expenses decreased 54% to $2,555,806, when compared to the prior year’s same period.  General and administrative expenses totaled $5,525,328 in the first nine months of 2007. This significant variance was primarily the result of a $3,093,216 net change in stock option expenses resulting from a decrease in the price of Company stock in the first half of 2008, and an increase in stock price during the first six months of 2007.   Also contributing to the variance were lower post-retirement benefit costs.  These increases were partially offset by higher legal and other costs related to shareholder relations.

The Company held cash, restricted cash, and investment securities totaling $5,844,807 at September 30, 2008. This amount represented a decrease of $15,599,663 from the balance of $21,444,470 held at December 31, 2007.  The primary uses of these funds, in addition to the purchase of the Harris Teeter income property, which cost approximately $9,700,000, were for the payment of income taxes, development and construction activities, and the continued conversion of Company timber lands to hay.  Income taxes of $3,325,000 were paid in the first nine months of 2008.  Development and construction activity approximated $5,000,000 during this nine-month period and included construction of roads on the Company’s core lands adjacent to LPGA Blvd. and the completion of the 31,000 square-foot flex office space complex in Gateway Commerce Center.  Additionally, construction commenced on the 23,000 square-foot “Class A” office building.  Approximately $2,742,000 was expended on clearing and planting of lands for hay operations.  Funds totaling $1,718,084 were used to pay dividends of $0.30 per share.

Capital expenditures anticipated for the remainder of 2008 consist of  road construction, conversion of timber lands to hay, and the development and construction of the “Class A” office building on Company owned land. The total amount of these capital expenditures is projected to be approximately $2,000,000.  The office building is approximately 40% pre-leased to Merrill Lynch with the remainder held as speculative space at this time.  Financing of both the office building and the just completed flex space buildings is anticipated to be put in place upon completion, in the first quarter of 2009, at a 50% loan to value ratio.

Capital to fund the planned expenditures in 2008 is expected to be provided from cash and investment securities (as they mature), operating activities, and financing sources that are currently in place, including the $20 million revolving line of credit (of which approximately $1,975,000 was outstanding at September 30, 2008).  The Company also beleives that it has the ability to borrow on a non-recourse basis against its existing income properties, which are all free of debt as of the date of this filing.  As additional funds become available through qualified sales, the Company expects to invest in additional real estate opportunities.

The Company’s Board of Directors and management continually review the allocation of any excess capital with the goal of providing the highest return for all shareholders over the long term. The reviews consider various alternatives, including increasing or decreasing regular dividends, declaring special dividends, commencing a stock repurchase program, and retaining funds for reinvestment, including road development and hay conversion of timber lands. The Board of Directors has reaffirmed its support for the continuation of the 1031 tax- deferred exchange strategy for investment of agricultural land sales proceeds, self-development of income properties, and development of infrastructure on Company owned lands.

During 2005 and 2006, the Company closed transactions for which it had post-closing obligations to provide off-site utilities and/or road improvements.  Full cash payment was received at closing, and warranty deeds were transferred and recorded.  The sales contracts did not provide any offsets, rescission, or buy-back if the improvements were not completed.  During the first six months of 2007, post-closing obligations were competed, and revenues and profits of $667,252 and $563,467 were recognized, respectively, on these transactions.  No post-closing obligations existed at September 30, 2008 and 2007, and in accordance with SFAS No. 66 no revenues or profits were deferred.

The Company acquires income properties with long-term leases in place.  Upon acquisition, the portion of the purchase price which represents the market value associated with the lease is allocated to an intangible asset.  The amount of the intangible asset represents the cost of replacing the tenant should the lease be discontinued.  Factors such as vacancy period, tenant improvements and lease commissions, among others are considered in calculating the intangible asset.  The intangible asset is amortized over the remaining life of the lease at the time of acquisition.  At September 30, 2008, the intangible asset associated with the income properties totaled $5,115,113 net of amortization of $1,481,428.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has reviewed the recoverability of long-lived assets, including real estate and development and property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may or may not be recoverable.  Real estate and development is evaluated for impairment by estimating sales prices less costs to sell.  Impairment on income properties and other property, plant, and equipment is measured using an undiscounted cash flow approach. There has been no material impairment of long-lived assets reflected in the consolidated financial statements.

At the time the Company’s debt was refinanced in 2002, the Company entered into an interest rate swap agreement.  This swap arrangement changes the variable-rate cash flow exposure on the debt obligations to fixed cash flows so that the Company can manage fluctuations in cash flows resulting from interest rate risk.  This swap arrangement essentially creates the equivalent of fixed-rate debt.  The above-referenced transaction is accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS No. 133.”  The accounting requires the derivative to be recognized on the balance sheet at its fair value and the changes in fair value to be accounted for as other comprehensive income or loss.  The Company measures the ineffectiveness of the interest rate swap derivative by comparing the present value of the cumulative change in the expected future cash flows on the variable leg of the swap with the present value of the cumulative change in the expected future interest cash flows on the floating rate liability.  This measure resulted in no ineffectiveness for the periods ended September 30, 2008 and September 30, 2007.  A liability in the amount of $526,620 at September 30, 2008 has been established on the Company’s balance sheet. The change in fair value, net of applicable taxes, in the cumulative amount of $323,476 at September 30, 2008 has been recorded as accumulated other comprehensive loss, a component of shareholders’ equity.

 

The Company maintains a stock option plan pursuant to which 500,000 shares of the Company's common stock may be issued.  The current Plan was approved at the April 25, 2001 shareholders’ meeting. Under the Plan, the option exercise price equals the stock market price on the date of grant, the options vest over five years and all expire after ten years.  The Plan provides for the grant of (1) incentive stock options, which satisfy the requirements of Internal Revenue Code (IRC) Section 422, and (2) non-qualified options, which are not entitled to favorable tax treatment under IRC Section 422.  No optionee may exercise incentive stock options in any calendar year for shares of common stock having a total market value of more than $100,000 on the date of grant (subject to certain carryover provisions).

In connection with the grant of non-qualified options, a stock appreciation right for each share covered by the option may also be granted.  The stock appreciation right will entitle the optionee to receive a supplemental payment, which may be paid in whole or in part in cash or in shares of common stock, equal to a portion of the spread between the exercise price and the fair market value of the underlying shares at the time of exercise.  All options granted to date have been non-qualified options, with a stock appreciation right granted for each option share granted.

Both the Company’s stock options and stock appreciation rights are liability classified awards under SFAS No. 123R "Share Based Payment," and are required to be remeasured to fair value at each balance sheet date until the award is settled.

 

The principal market risk (i.e. the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is interest rates. The objective of the Company’s asset management activities is to provide an adequate level of liquidity to fund operations and capital expansion while minimizing market risk. The Company utilizes overnight sweep accounts and short-term investments to minimize the interest rate risk. The Company does not actively invest or trade in equity securities.  The Company does not believe that its interest rate risk related to cash equivalents and short-term investments is material due to the nature of the investments.

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party.

Certain statements contained in this report (other than statements of historical fact) are forward-looking statements. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “will,” “could,” “may,” “should,” “plan,” “potential,” “predict,” “forecast,” “project,” and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they were made. Forward-looking statements are made based upon management’s expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on the Company will be those anticipated by management.

 

We wish to caution readers that the assumptions, which form the basis for forward-looking statements with respect to or that may impact earnings for the year ended December 31, 2008, and thereafter, include many factors that are beyond the Company’s ability to control or estimate precisely. These risks and uncertainties include, but are not limited to, the strength of the real estate market in the City of Daytona Beach and Volusia County, Florida; the ability to successfully execute acquisition or development strategies; any loss of key management personnel; changes in local, regional, and national economic conditions affecting the real estate development business and income properties; the impact of environmental and land use regulations; the impact of competitive real estate activity; variability in quarterly results due to the unpredictable timing of land sales; the loss of any major income property tenants; and the availability of capital. These risks and uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements.

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes to those risk factors. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company.

 

While we periodically reassesses material trends and uncertainties affecting our results of operations and financial condition, we do not intend to review or revise any particular forward-looking statement referenced herein in light of future events.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

CONSOLIDATED-TOMOKA LAND CO.

                    (Registrant)