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CONSOLIDATED TOMOKA LAND CO CTO
May 27, 2014 - 10:00am EST by
cuyler1903
2014 2015
Price: 40.95 EPS $0.00 $1.15
Shares Out. (in M): 6 P/E 0.0x 0.0x
Market Cap (in $M): 242 P/FCF 0.0x 0.0x
Net Debt (in $M): 46 EBIT 0 0
TEV (in $M): 288 TEV/EBIT 0.0x 0.0x

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  • Real Estate
  • Sum Of The Parts (SOTP)
  • Underfollowed
  • Insider Buying
  • Management Stock Options
 

Description

Extraordinarily mispriced, high quality real estate company with large margin of safety, huge “hidden” land assets, clear imminent catalysts, heavy insider buying and 95-250% estimated upside to fair value.  Currently trading at its 2004 and April 2009 share price.  As I discuss below, I expect the stock to trade sharply higher in the coming weeks and months as the story is understood and catalysts play out.

Consolidated Tomoka Land Co. (www.ctlc.com; AMEX: CTO, $40.95) is a Daytona Beach, FL based diversified real estate corporation (not a REIT, yet) that was founded in 1902 and owns the following:

  1. 35 single tenant income-producing properties in 9 states with >740,000 s.f. of gross leasable space.  These properties are leased to prime retail tenants (e.g. CVS, Walgreens, PNC, Chase, Bank of America). 
  2. 2 self-developed, flex-office properties with multiple tenants, located in Florida.
  3. 10,600 acres of residential, commercial and industrial purpose land in the fast-growing Daytona Beach area, all within 9 miles of the Atlantic Ocean and close proximity to I-95 and I-4.  Much of this property has been owned for decades.  Must watch video in the below “document links” section.
  4. 490,000 acres of Subsurface Rights (oil and mineral) in 20 Florida counties.
  5. LPGA International Golf Club (two 4-star rated 18 hole courses/clubhouse/restaurant), located in Daytona Beach and managed by a third party.
  6. $5mm 12% commercial mortgage secured by an upscale Atlanta hotel property.
  7. $9mm L + 725 mortgage note secured by a retail shopping center, announced in May.
  8. $6.3mm 6.0% redevelopment loan with option to buy, announced in May.
  9. Agricultural operations, managed by a third party, that consist of leasing land for hay production, timber harvesting, hunting leases, billboard leases.

Keys to the thesis include:

  • Far off the radar.  Never written up on VIC.  No analyst coverage.  No conference calls.  Very few people have ever heard of the company.  Awareness of the situation is the greatest catalyst here.
  • Incredibly cheap.  CTO is presently trading at prices it saw in 2004 and April 2009.  In 2005 the stock traded for ~$90.  Assets are more valuable now than even in 2005-6 and new management and likely catalysts are now in place.  Excluding the DTL (which could likely be eliminated in REIT conversion) the stock trades at only 1.57x book value.
  • Enormous “hidden” land assets.  CTO owns 10,600 acres of residential, commercial, and industrial purpose land in the fast-growing Daytona Beach area.  The implied value of this land by the market is only $11,000/acre, while recent transactions have occurred at prices ranging from $37,000/acre (Q2 2012, CTO’s worst property, industrial land FAR west of I-95, bottom left pink area in first picture) to $382,000/acre (Q4 2013).
  • Imminent catalysts.  Local reports (see article links below) make it clear that CTO is about to sell 76 acres of property for development by Trader Joe’s for a new distribution center.  This sale has not been announced by the company, but is apparently under contract.  In addition to creating a new land comp, this development will significantly bolster the value of the neighboring property.
  • New, highly incentivized Wall Street-bred CEO.  Due to activism by Wintergreen Advisers, John Albright joined CTO as CEO in August 2011.  Formerly he was Co-Head and Managing Director of Archon Capital, a wholly-owned Goldman Sachs subsidiary in Dallas.  Prior, he was Executive Director of Merchant Banking-Investment Management for Morgan Stanley.  Albright has been granted 96,000 restricted shares, which vest based on the stock achieving the stock price hurdles of $36, $40, $46, $53, $60 and $65.  The first two hurdles have been achieved, 64,000 shares presently remain unvested.
  • Heavy insider buying.  In the last 3 months alone, 6 separate insiders (Chairman, CEO, CFO, and 3 directors) have purchased $236,000 of stock in the open market, in addition to the $100,000+ purchased in open market in late 2013.  This insider buying indicates a strong sense of urgency to me.
  • Growing cash flow.  Run-rate EBITDA of $14.7mm ($12.3mm contribution from income properties), up from roughly $1mm in 2010-2011.
  • Likely REIT Conversion.  CTO is presently a C-corporation, a conversion to a REIT (or spin of income-producing assets into REIT) would unlock significant value, create awareness and bring new investor class.
  • Large deferred tax liability.  CTO has a $32.4mm deferred income tax liability ($5.50/diluted share) that would likely be eliminated in a REIT conversion.
  • Underleveraged.  Against an asset base with an estimated value ranging from $570-860mm, the company only has $47mm of total debt.  CTO currently pays 1.9% on its $66mm revolver with an accordion up to $125mm.  The company can make significantly accretive investments using this line of credit, such as those announced recently.
  • Stock repurchase active.  The company is actively repurchasing stock under an $8mm authorization.  It retired nearly $1mm worth in Q1 2014.
  • Limited float.  Long-term holders Wintergreen Advisers (run by well-known Michael Price protégé David Winters, has bought stock as high as $79.99 and owns 26% of CTO), Third Avenue Management (owns 9% of CTO) and insiders collectively 37% of the shares outstanding.  I suspect the vast majority of the float is owned by accounts that are not interest in selling at prices anywhere near here.
  • Meaningful short interest.  Remarkably, there are 116,000 shares short, which is 12x the ADV.  While only 2% of shares, as the situation becomes understood a significant short squeeze could result given the huge disparity between current price and underlying asset value.  Covering 116,000 shares short is likely impossible at prices near here.
  • Strong local economy.  Daytona Beach area is growing rapidly, and is being bolstered by a $400mm expansion of the Daytona International Speedway and “One Daytona” revitalization.  The Trader Joe’s distribution center (links below) illustrates this point as well.  See latest CEO letter in annual report on this topic as well.
  • Potential additional activism.  In addition to Wintergreen and Third Avenue’s stakes, Carlson Capital (formerly a 13D filer itself with 355k shares) began to increase its stake in CTO again in Q1.  It is unlikely that Carlson is satisfied with its 143k share stake in CTO, which is a mere 0.07% of their $8.5bn disclosed long portfolio.  In addition, it is worth noting that Wintergreen’s stake represents ~4% of its disclosed $1.7bn of AUM and ~7% of its US long exposure (per 13F).  Clearly, David Winters is highly engaged here.
  • Potential sale of Company or bulk land assets.  CEO and board are significant shareholders and are firmly aligned in creating value.  Highly attractive acquisition target for a wide variety of larger REITs and developers.  Trader Joe’s again illustrates this point.

Valuation:

  • Values income properties conservatively based on NOI and cap rate range.  A highly qualified industry expert has advised us that sub 6% cap rate is achievable for properties of this type, though we have used 6.0-6.5% range for our valuation. 
  • Values other assets at book value (golf, subsurface rights, cash, securities, other).  There could be very significant upside to the subsurface rights here, but I have no way of estimating so I give it a range of 1.0-2.0x book value.  Note that impact fee and migration credits are typically sold to developers, as is discussed in latest CEO annual report letter.
  • Values land at a range (low, mid, high) of values significantly discounted to CTO’s internal recent land sale comps and list prices.  I believe this valuation is likely very conservative, particularly at the low end.  Note that management itself cites its recent sale of 11 acres to RaceTrac, CarMax and Intracoastal Bank for $289k/acre in its annual report as “help[ing] demonstrate imbedded value.
  • Estimated equity value/share of $80-150, representing 97-267% appreciation potential from current price of $40.95.

 

 

Land maps:

 

Noteworthy quotes (emphasis mine):

  • Regarding Trader Joe’s 76-acre land sale (5/20/14):
    • CEO:  “Consolidated-Tomoka’s president and CEO said his company is proceeding with the ground preparation project, which is expected to cost $1.6 million, because it is ‘under contract for the sale of the land and part of that contract requires us to do the site work.’”  Albright declined to identify the buyer of the land, saying it is against his company’s policy to discuss deals that have not yet closed.
    • CFO:  “We all have a high degree of confidence…We would not be doing what we are doing and plan to do unless the parties felt reasonably strong in this opportunity. There are a lot of folks rowing in the right direction.”
    • Volusia County manager:  “My understanding was that everything was a go. It was finalized and that’s why (Consolidated-Tomoka) felt comfortable about starting construction.”
  • CEO (4/23/14):  “The local market continues to show strength and the growing interest in our land holdings is directly correlated to the improved market conditions …We were delighted to have been able to repurchase almost $1 million of our common shares at favorable values.”
  • CFO (4/23/14):  “We are pleased with our operating results and the generation of substantive cash flows reflecting the full benefit of the growth in our income property portfolio, the income from our investment in commercial mortgage loans, and a land transaction we closed in February…We are also pleased that we have continued to achieve meaningful improvements in lowering our general and administrative expenses.”
  • CEO (2013 Annual Report):
    • “The cover of this year’s annual report ‘the wind at our back,’ is meant to convey to our shareholders that the environment is strengthening for our Company to continue its solid progress toward generating strong and sustainable cash flow and unlocking shareholder value.”
    • Regarding land value:  “In 2013, the Company sold three parcels of land for approximately $3 million on a total of just over 11 acres of land to RaceTrac, CarMax, and Intracoastal Bank at an average price of approximately $289,000 per acre.  We think that these prices help demonstrate the imbedded value of the Company to our shareholders.”
    • Regarding 600 acres won in litigation:  “This litigation resulted in the foreclosure of approximately 600 acres that were originally planned for development into approximately 900 residential units. We intend to move quickly to bring the expired entitlements and permits back into effect.  We hope to have a developer contracted on this property in 2014, and we believe the market is ready for this land to be absorbed.”
    • Regarding oil:  “In 1999, the Company was receiving royalties on 141,973 barrels of oil, compared with 2013, where we received royalties from just over 88,700 barrels of oil, on two existing wells.  Given today's advanced drilling technology, this area is now undergoing a renaissance.”
    • Regarding balance sheet:  “Currently, our leverage is very modest at less than 25%. We continue to look for suitable investments to move us closer to 40% leverage.”
    • Regarding dividends and C-corp status:  “Given our C Corp status and the double taxation associated with paying dividends, we tend to be modest on the dividends and reinvest the capital into strong cash flow investments.”
  • David Winters, Wintergreen Advisers (3/19/10):  “We are attracted to undervalued assets. Consolidated-Tomoka CTO owns approximately 11,000 acres of land in Daytona Beach, Fla., which is on their books at 1902 prices...We believe there is much more value in these 11,000 acres to be unlocked for shareholders."

Document links:

Key risks:

  • Shareholder unfriendly management decision-making (extremely unlikely given new management, board and incentives)
  • Limited daily volume in shares
  • Deflationary economic collapse (even then, CTO has little debt)
  • Very little risk of permanent capital loss at this price, in my view

Catalysts:

  • Investor awareness of the company and its highly valuable hidden assets; note that the stock rose from roughly the current price in late 2004 to nearly $90 by mid-2005
  • Announcement of Trader Joe's land sale
  • Conversion of company to a REIT or spin of income producing properties into a REIT (note CEO’s commentary regarding double taxation under present structure), eliminating Deferred Tax Liability of $5.50/share
  • Large land sale (proceeds could be recycled on tax-advantaged basis)
  • Sale of entire company to an existing REIT
  • Dividend increases
  • Share repurchases
  • Additional shareholder activism

 

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.  Do your own work.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Please see above.
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