Glimpse #2 at Colleton River Finances--How far does $26 million go?

During the town hall meeting in June, the Board reported that the Club had about $26 million in cash on hand. But financial analysts focus on funds flow, rather than the balance sheet:

• Where did the money come from?
• Where will the money go?

Make no mistake--having $26 million on hand (and no debt) is great news. My opinion is that the Club is well positioned to have a significant cash balance by the end of 2023--but the Board needs to be vigilant to ensure that this COVID bonus doesn't fall through the Club's hands.

Where did the money come from?

Here's some history on the finances of the Club. Simply put, COVID has been great for the Club. Leaving aside the $850,000 paid to the Club by Uncle Sam through the "Paycheck Protection Program" (a truly stupid program--but I'm willing and eager to take advantage of any federal government program that actually personally benefits me--they're few and far between!), COVID stimulated the Low Country real estate market which increased property values (which--to date--has benefitted all of us), enabled the Club to sell the river and marsh lots it acquired from Goodwin for a $7 million profit, and generated millions of dollars in capital contributions from the heightened pace of real estate transactions. 

Most Owners are aware that in 2019 the Owners of the Club voted to acquire all of the Dye-side developer's unsold lots (the "Goodwin Lots"). The Club acquired about 95 lots and paid $5.5 million in cash (which was financed with borrowed money). As part of the deal, the developer was no longer obligated to pay assessments (the developer was paying about $1.5 million per year in assessments prior to the sale). Based upon a review of the land records for 2019-2021, the Club sold the high value river and marsh lots and netted about $12.4 million. Once the $5.5 million acquisition debt was repaid, the Club cleared around $7 million of cash. 

According to the 2021 financial statements, during 2021, the Club also collected around $7.1 million of "special assessments" for the amenities project (i.e., money that was paid by the Owners for the amenities, but not yet spent).

So once the ear-marked special assessment money and the one-time revenue from the sales of the Goodwin Lots are excluded from the $26 million, the cash balance is still about $12 million. Sure beats a poke in the eye with a sharp stick! But if you look at the average year-end cash balance for 2017-2019 (the three years "before Goodwin"), the Club typically has a year-end cash balance of about $5 million (due to the timing of when assessments are received and the need for keeping some cash on hand). So our cash balances are about $7 million higher than "normal" (once one accounts for the cash from real estate sales and the pre-paid amenities assessments. Much of the $7 million comes from the extraordinarily high level of sales transactions and the increased "capital contribution" (i.e., the "transfer fee") on the sale of each lot or house.

Where will the money go?

Let's make some simplifying assumptions. First, assume that future operations of the Club will be fully funded by operations (including the annual operating assessment) and will require no additional subsidy (however, given the current inflation rate of nearly 10 percent, one of four events will likely occur: (1) the annual operating assessment will be increased; (2) prices for Club services will increase; (3) management will squeeze costs to offset inflation (but see the Club's historical performance); or (4) the capital fund or real estate fund will be used to subsidize operations)). Second, based upon recent history, the replacement reserve fund will require an additional subsidy of about $1 million per year over and above the replacement reserve assessment (please recall that $2.8 million was "gifted" to the replacement reserve fund from the real estate fund in 2020 to supplement the replacement reserve assessment). And third, it doesn't really matter what "bucket" the cash is in--clever lawyers and accountants will transfer funds among the real estate, operating, replacement reserve, and capital funds, as necessary-we always have.

Where does that leave us over the next two years?

Cash on hand (year end 2021)            $26 million

Amenities assessments receivable:     $4 million  

Cash available:                                    $30 million  

Amenities Cost:                                 ($21 million)

Required Minimum Cash Balance:     ($5 million)

Replacement reserve subsidy:             ($2 million)

Cash requirements:                            ($28 million)

"Excess" cash:                                         $2 million

We've pretty much spent all of the year end 2021 cash on hand. The wild card will be the capital contributions to be received by the Club. Historically, the Club has seen about 40 sales transactions annually, but during the COVID boom, the number of transactions has reached over 90 per year. (A recent Realtor report indicates that sales within Colleton River during the first half of 2022 fell from 28 houses and 29 lots to 21 houses and 17 lots relative to the same period in 2021 (a decrease of 33%)). At $60,000 each, during the next two years we can reasonably expect to receive between $4.8 million (at 40 sales per year) and $10.8 million (at 90 sales) from the capital contribution "tax"  imposed on the sale of property in the Club (just a reminder that while the buyer pays the capital contribution, the cost will ultimately be shouldered by the seller though a sales price that is lower than it would otherwise be). So a reasonable forecast would be that the Club should have about $12 million to $18 million of cash available at the end of 2023 (after the amenities have been paid for and including the $5 million "transactional balance" that is maintained at year end). The Club has a significant financial cushion.

But forecasts tend to understate actual results. What could go wrong?

• The amenities project could experience further delays, more cost overruns, and additional changes in scope. 
• For those keeping score at home:
• The cost of the amenities when the vote occurred in March 2021 was $16.5 million, compared with the current "guaranteed maximum price" of $21 million.
• The completion dates of the three phases have "slipped":
• The tennis center was initially promised to be finished by December 2021, but completion is now estimated to be the end of 2022.
• On June 10, the Board reported that Construction would begin within three weeks (i.e., by end end of the second quarter). But here we are in late-July and site prep has just started. I wonder if this project will be delivered on the revised schedule?
• The fitness center was originally promised by March 2023, but site prep just started and the Board has forecast completion by the end of 2023.
• The Dye re-fresh was promised by September 2022 and is now forecast to be completed by the end of September 2023. 
• The scope of the amenities project has been reduced by not moving the Nicklaus pro shop, as originally advertised. No word on whether this change in scope decreased the price from $21 million.
• Further delays and changes in scope would be a red flag that the $21 million promise is in jeopardy.
• Additional demands could be made on the Club:
• Road and leisure path work could cost more than forecast and require more replacement reserve spending (my guess would be that we have over 15 miles of road within the Club and a quick internet search indicates that repaving a two lane road can run $300,000-$1,000,000 per mile).
• Resolving the seawall lawsuit (see here and here) could impose additional unforeseen costs on the Club.
• The economy could continue to deteriorate.
• Higher inflation could increase costs and result in either deferring spending or imposing higher annual assessments.
• A recession could result in a reduction in home sales and the receipt of fewer capital contributions

So the bottom line is that Club enjoys a significant cushion that in all likelihood will be sufficient to withstand a few million dollars of "unexpected" costs. If we are able to avoid further cost overruns on the amenities, the Club may actually experience a significant surplus in its capital account that would be available to fund the next round of spending on upgrading our facilities. Or the excess cash could lessen the need for continued increases in the annual assessments. It'll be interesting to see what our cash balances are by the end of 2023. If I were setting goals for management, I would set the following goal for December 31, 2023:

• No debt 
• Total cash balances equal to:
• $7 million (the current "excess cash" balance of $2 million plus the operating cash balance of $5 million) plus the capital contributions received by the Club from 1/1/2022 to 12/31/2023 (for instance, if 50 sales transactions per year occurred in 2022-2023 and the capital contribution remained $60,000, the cash balance at the end of 2023 should be about $13 million).

I wonder what year end 2023 cash target has been incorporated into the management objectives developed (in secret) by the compensation committee?