Description

GOLF TRUST OF AMERICA INC is a company under liquidation with a target completion date of late 2005 or earlier. As of November 1, 2004, it owns the following assets:

- Tiera Del Sol. 1 public daily fee 6,351 yard 18 hole golf course (opened in 1982) in Albuquerque, New Mexico.
Stonehenge Golf Courses, which includes Wildewood , a private 6,751 yard 18 hole golf course in Columbia, South Carolina (opened in 1974) and Woodcreek Farms, a private 7,002 yard 18 hole golf course in Columbia, South Carolina (opened in 1997). The Woodcreek Farms golf course was recognized as one of the Farms, "Best Courses By State," 19th in South Carolina, Golf Digest, 2000. (Private clubs are generally closed to the public and generate revenue principally through initiation fees and membership dues, golf cart rentals and guest green fees. Initiation fees and membership dues are determined according to the particular market segment in which the club operates. Revenue and cash flows of private country clubs generally are more stable and predictable than those of public courses because the receipt of membership dues generally is independent of the level of course utilization.)
The West Innisbrook Resort, a 4 course resort, located in Palm Harbor (Tampa) Florida, which includes the Copperhead Course (18 holes, 7087 yards, opened in 1972), the Island Course (18 holes, 6999 yards, opened in 1970), Highlands North (18 holes, 6245 yards, opened in 1971), Highlands South (18 holes, 6450 yards, opened in 1977). The Copperhead Course is the site of The PGA TOUR'S Chrysler Championship. The West Innisbrook was ranked the "Top 100 You Can Play," Golf Magazine, 2000; "Top 100 U.S. Resort Courses," Golf Digest, 1999; Island Course, "Top 75 Resort Courses," Golf Digest, 1992. The 2004 edition of Zagat’s Golf Resorts Survey gives this resort one of the highest scores possible. (Resort courses are daily fee golf courses that draw a high percentage of players from outside the immediate area in which the course is located and generate a significant amount of their revenue from golf vacation packages.)
- In addition, GTA owns a 38 acre parcel of land within the Innisbrook Resort, that is planned for a residential community of 400 units. GTA also owns three condominium units in the West Innisbrook Resort.


The liquidation plan was adopted in early 2001 in response to industry conditions. Over the last three years, GTA has sold 31 of 34 properties. Management has indicated that they plan to resolve the liquidation by late 2005, if not earlier. The CEO and CFO own a total of about 1,020,600 and have performance incentives upon liquidation. The estimated/appraised liquidation value is around $2.32 per share. However, this uses a fair value estimate of $39 Million for the West Innisbrook Resort (“ The Resort”) (which includes golf courses, rental pool contracts, three condo units, and 38 acres of land with a plan to develop it into a residential community of 400 units), which I believe is worth a lot more. Secondly, this estimate does not include the positive or negative cash flows from operating the Resort. We have several reasons to believe the cash flows from the Resort are headed higher.

VALUATION

By way of background, in June 1997, GTA issued a mortgage loan to the borrower (Golf Host) in the amount of $79 million dollars. The loan is collateralized by the West Innisbrook Resort. On July 17, 2004 GTA finally took ownership of the West Innisbrook Resort after the borrower initially defaulted after the attacks on September 11, 2001 hurt the travel industry. From $79 Million dollars, West Innisbrook has been written down three times down to a value of $39 Million, not withstanding $7 Million dollars worth of renovations completed in 2002.

REPLACEMENT VALUE APPROACH
We believe the replacement value for the golf courses alone(including the $7 Million dollar renovation in 2002) is $36 Million. The 38 acre land and the three condo units are worth $ 5 Million. And another $15 Million, which are valued at 20 Million, in the 10Q. Our total replacement valuation for the Resort (plus the land, condos and the intangibles) is 56MM. This equates to a net liquidation value of $4.64 per share. Use 7.27M for shares outstanding. (Look at the 10-Q page 30 to get this number. 7,409,000 - 141,000 shares)

(From the 10Q on the value of the Intangible assets)
“ We recorded at closing on July 15, 2004, an intangible asset worth approximately $20,378,000. This intangible represents the contributory value to the business enterprise of the following contractual relationships that existed at July 15, 2004: the trademark and tradename of "Innisbrook"; the rental pool; the guest room bookings; the club memberships; and the water contract that provides irrigation water for the golf courses at no charge up to certain specified levels.

Intangible Assets Estimated Fair Value
Water Contract $ 2,300,000
Rental Pool 10,078,000
Guest Bookings 1,100,000
Club Memberships 4,400,000
Trade Name 2,500,000
$ 20,378,000
(Note: the rental pool contract allows GTA, through Westin, to rent out the condos owned by third party owners)

This $56 Million dollar valuation is not far from the comparables. This equates to about $2,107 per acre. This compares with a $3,537 per acre valuation for the Sandpiper transaction, $2,412 per acre for the Emerald Dunes, $2,155 per acre valuation for the Legends Properties. These transactions were done at a worse environment. And the West Innisbrook Resort has a PGA championship golf course. Furthermore, earlier this year, Blackstone acquired Boca Resorts in a sign that bodes well for the industry. We’ve diligently compiled the 31 transactions made by GTA over the last three years. We summarize them below for your comparison. Because of formatting difficulties, I passed a comma delimited vile and you can copy the block and paste it to notepad, save it as a .csv file and open in Excel.

Private,Opened,2001,"City, State",$ Per Yard,Yardage,Consideration,Eqvlnt,Closing,When Acq,Cost
Y,1972,Ohio Prestwick,"Akron, OH",899,7066,"6,350,000",1.0,1/4/01,7/98,"6,400,000"
,1992,Raintree,"Akron, OH",624,6886,"4,300,000",1.0,1/4/01,9/97,"4,600,000"
Y,1989,Persimmon Ridge,"Louisville,KY",729,7129,"5,200,000",1.0,2/15/01,3/98,"7,500,000"
Y,1979,Club of the Country,"Louisburg,KS",418,6357,"2,655,000",1.0,3/16/01,10/97,"3,100,000"
,1995,Brentwood,"White Lake Township, MI",415,6262,"2,600,000",1.0,3/20/01,12/98,"7,000,000"
Y,1992,Metamora,"Metamora, MI",711,6933,"4,931,000",1.0,4/9/01,5/99,"5,865,000"
Y,1994,Silverthorn,"Tampa, FL",623,6827,"4,250,000",1.0,4/12/01,6/98,"4,700,000"
,1957,Palm Desert,"Palm Desert, CA",610,6678,"4,075,000",1.5,4/20/01,12/98,"5,800,000"
,1994,Woodlands,"Gulf Shore, AL",972,6584,"6,400,000",1.0,5/1/01,1/96,"1,400,000"
,1983,Cooks Creek,"Ashville, OH",571,7000,"4,000,000",1.0,5/16/01,10/98,"6,100,000"
,1996,Legends Virginia,Virginia,758,14254,"10,800,000",2.0,6/15/01,1/96,"11,900,000"
,,Royal New Kent,Providence Forge ,,,,,,,
,,Legends of Stonehouse,"Williamsburg, VA",,,,,,,
,1989,Eagle Watch,"Atlanta, GA",848,6896,"5,850,000",1.0,7/6/01,9/97,"6,400,000"
,1993,Olde Atlanta,"Atlanta, GA",1149,6789,"7,800,000",1.0,7/6/01,1/96,"1,440,000"
, ,Legends Properties (2),"Myrtle Beach, SC",2155,41484,"89,411,000",6.5,7/31/01,1/96,"62,000,000"
,1990,Heathland,"Myrtle Beach, SC",,6785,,,,,
,1992,Parkland,"Myrtle Beach, SC",,7170,,,,,
,1990,Moorland,"Myrtle Beach, SC",,6799,,,,,
,1986,Heritage Gold Club,"Pawley's Island, SC", ,7040,,,,,
,1983,Oyster Bay,"Sunset Beach, NC", ,6685,,,,,
,1989,Tiburon,"Omaha, NE", ,7005,,,,8/97,"6,000,000"
Y,1980,Sweetwater,"Apopka, FL",635,6300,"4,000,000",1.0,9/18/01,9/98,"5,000,000"
,1990,Emerald Dunes,"West Palm Beach, FL",2412,7006,"16,900,000",1.0,9/7/01,2/98,"22,400,000"
,1989,Polo Trace,"Delray Beach, FL",1176,7100,"8,350,000",1.0,10/22/01,7/98,"12,300,000"
,1964,Cypress Creek,"Boynton Beach, FL",602,6808,"4,100,000",1.0,11/28/01,9/98,"4,200,000"
Y,1994,Pete Dye,"Bridgeport, WV",1853,7248,"13,432,000",1.0,12/19/01,12/99,"10,000,000"
,,2002,, ,,,,,,
Y,1984,Northgate Country Club,"Houston, TX",1663,6540,"10,875,000",1.5,5/8/02,1/96,"3,800,000"
, ,Bonaventure Country Club,"Ft. Lauderdale, FL",795,13200,"10,500,000",2.0,7/12/02,2/98,"23,700,000"
,1970,Green Monster Course,,,7011,,,,,
,1978,The Resort Course,,,6189,,,,,
,1992,Osage National Golf Club,"Lake of the Ozarks, MO",469,7150,"3,350,000",1.5,7/22/02,8/98,"11,200,000"
,,2003,, ,,,,,,
,1977,Lost Oaks Golf Course,"Palm Harbor, FL",357,6450,"2,300,000",1.0,1/13/03,10/97,"5,900,000"
, ,Eagle Ridge Inn & Resort,"Galena, IL",1756,23066,"40,500,000",3.5,1/30/03,5/98,"47,000,000"
,1997,The General,"Galena, IL", ,6820,,,,,
,1977,North Course,"Galena, IL", ,6836,,,,,
,1984,South Course,"Galena, IL", ,6762,,,,,
,1991,East Course,"Galena, IL", ,2648,,,,,
,1996,Mystic Creek Golf Club,"Dearborn, MI",515,6802,"3,500,000",1.5,4/17/03,1/98,"10,000,000"
,1972,Sandpiper Golf Course,"Santa Barbara, CA",3537,7068,"25,000,000",1.0,6/17/03,3/98,"32,000,000"
,1995,Black Bear,"Orlando, FL",221,7002,"1,550,000",1.0,7/27/04,11/97,"4,750,000"
,1975,Wekiva,"Orlando, FL",373,6640,"2,475,000",1.0,1/27/04,9/98,"6,500,000"
,,Innisbrook Resort,"Palm Harbor, FL", ,"26,576",,4.0,,6/97,"79,000,000"
,1972,Copperhead,, ,"7,087",,,,,
,1970,Island,, ,"6,999",,,,,
,1971,Eagle'sWatch,, ,"6,245",,,,,
,1971,Hawk's Run,, ,"6,245",,,,,
,1982,Tierra Del Sol,"Albuquerque, NM",279,"6,351","1,775,000",1.0,11/27/04,5/98,"3,600,000"
Y, ,Stonehenge Golf,"Columbia, SC", ,"13,753",,2.0,,12/97,"10,500,000"
,1974,Wildewood Country Club,,,"6,751",,,,,
,1997,Woodcreek Farms,,,"7,002",,,,,

VALUATION ON AN EARNINGS POWER BASIS

We have several reasons to believe cash flow will improve substantially. Among the reasons cited in the 10Q, the latest quarterly results were affected by: booking cancellations and lean-up and repair expenses due to the hurricanes in July and August , lack of high speed internet access turned away clients, uncertainty around the ownership and financial stability due to the negative publicity of Golf Host, the borrower of the GTA mortgage note.

Since then, they have installed high-speed internet access throughout the resort, bookings for the firs half of 2005 are up 57% (cited in the 10q) vs 2004, comparable resorts are showing +6% revenue growth, the economy is recovering, and the negative publicity around Golf Host has come and gone.

From July 17, 2004 to Sep 30, 2004, for reasons cited above, the Resort generated depressed revenues of $5.576 millon of revenues, which equates to a $6.7 million dollar quarter. The September quarter is also seasonally the weakest quarter, which averages 15% of annual sales. That alone, translates to $44 million annualized sales. With 6 percent growth among peers and comparables, and given the aforementioned reasons for upside potential, we estimate the resort can generate $50 million revenues next year.

EBIT MARGIN EBIT 10xEBIT 12xEBIT
8% $4M $40M $48M
10% 5 50M(base-case) 60M
12% 6 60M 72M

We estimate that on a base case scenario and on an earnings power basis, the Resort is worth $50M + another $5M from the land and the three condo units, or about $55M. This translates to a liquidation value of approx $4.55 per share.

Incidentally, looking back, Houlihan Lokey had the following appraisals for the Resort.
Date
Mar 2003 58M to 70.4M
Sep 2003 44M to 55M
Sep 2004 39M
An interesting fact is that GTA said that as of November 1, 2004, all of its asset sales for 31 of the 34 resorts totaled $305 million and were in line with their 2001 range or 2003 range of estimates. It seems that Houlihan Lokey’s had to write down the Resort to $39M due to the past and not forward-looking revenue outlook. In fact, the room renovations completed in 2002 and the installation of high speed internet access should improve revenues going forward.


So, in summary, I think this situation is a market-neutral special situation that can generate an IRR of 127% to 132% over the next 12 months or less. The 10-Q also noted: “We have received preliminary third-party indications of interest regarding a potential acquisition of the Resort; however, we have received no firm written offers.”


Catalyst

Company is in liquidation since 2001 with a target completion date in late 2005 or earlier

Catalyst

Company is in liquidation since 2001 with a target completion date in late 2005 or earlier.
An IRR of 125 to 137% from today's valuations over the next 12 months.