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CTO > SEC Filings for CTO > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for CONSOLIDATED TOMOKA LAND CO


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

We make forward-looking statements in this Quarterly Report, particularly in this Management's Discussion and Analysis, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any statements in this Quarterly Report that are not historical facts are forward-looking statements. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions, or any other statements relating to our future activities or other future events or conditions. These statements are based on our current expectations, estimates, and projections about our business based, in part, on assumptions made by our management. These assumptions are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those risks factors described in our Annual Report on Form 10-K for the year ended December 31, 2011, and our subsequent Quarterly Reports on Form 10-Q.

OVERVIEW

We are a diversified real estate operating company. We own, acquire, and manage commercial real estate properties in five states in the U.S., with two self-developed properties located in Florida. We also own and manage a land portfolio, in excess of 11,000 acres in Florida, of which approximately 10,200 acres are located within and form a substantial portion of the western boundary of the City of Daytona Beach, and are well-located near central Florida's Interstate 4 corridor and along both sides of Interstate 95. We also have golf course operations, lease property for billboards, agricultural, and hunting operations, and own and manage subsurface oil and mineral rights. The results of our agricultural and subsurface leasing operations are included in Real Estate Operations on our consolidated statement of operations.

Income Property Operations. Since 2000, we have pursued a strategy of investing in income properties by utilizing the proceeds from real estate transactions qualifying for income tax deferral through like-kind exchange treatment for tax purposes. Through the end of 2011, we had invested approximately $120 million in twenty-six income properties through this tax-deferred structure, one of which was sold in December 2011, for $2.7 million, with two additional properties sold in the second quarter of 2012, for a total of $8.0 million. In the second quarter of 2012, the Company acquired a 14,280 square-foot property leased by Walgreen Co., located in Boulder, Colorado, for a total acquisition cost of $7.4 million. The Company utilized the $2,779,511 in investment proceeds from the December 2011 sale of the property formerly leased by Barnes & Noble, located in Lakeland, Florida, in addition to the $4,090,323 of proceeds from the May 2012 sale of the Walgreens store located in Powder Springs, Georgia, to complete this acquisition. The lease to Walgreen Co. for this newly acquired property has an initial term of more than 20 years. In September 2012, the Company purchased property in Phoenix, Arizona for $1.7 million, utilizing approximately $610,000 from a prior land transaction. The proceeds from the sale of the third property are being held by an intermediary for reinvestment through the tax-deferred like-kind exchange process. Our current portfolio of income properties generates approximately $8.9 million of annual revenues from lease payments and has an average remaining lease term of 10.2 years, as of September 30, 2012. We expect to continue to focus on income producing investments during fiscal 2012, and in the near term thereafter, maintaining our use of the aforementioned tax deferral structure whenever possible.

The Company owns three retail banking sites in Florida and Georgia, originally leased by RBC Centura Bank ("RBC"). In March 2012, RBC's U.S. retail banking unit merged with PNC Bank. The Company does not expect the merger to have an adverse impact on the leases for these properties. Two of our bank sites are currently operating as PNC Bank. During the fourth quarter of 2009, RBC closed the branch at one of the retail banking sites owned by the Company located in Altamonte Springs, Florida. Tenant remains obligated on the lease for the remaining term of the lease and the scheduled lease payments have continued to be collected.

As part of our overall strategy for investing in income-producing investments, we have self-developed two projects in Daytona Beach, Florida. The first project is a two-building, 31,000 square-foot flex office space complex located within Mason Commerce Center in Daytona Beach, Florida. This represents the first phase of a four-building planned commercial development. The second phase would allow for an identical two-building project to be built. As of September 30, 2012, the occupancy of the two-building complex is 94%. The second self-developed property is the first phase of a twelve-acre, four-lot commercial complex located at the northeast corner of LPGA and Williamson Boulevards in Daytona Beach, Florida. The parcel includes a 22,000 square-foot, two-story office building known as the Concierge Building, with approximately 75% of the building under lease to two tenants.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

Our focus on acquiring income-producing investments includes a continual review of our existing income property portfolio to identify opportunities to recycle our capital through the sale of properties based on, among other possible factors, the current or expected performance of the property and favorable market conditions. Pursuant to our on-going review, two properties were sold in the second quarter of 2012, and four other income properties were listed for sale as of September 30, 2012. The Company anticipates making new investments in other income-producing assets with the proceeds from selling these properties, utilizing the tax-deferred like-kind exchange structure, as circumstances permit.

Real Estate Operations. Until the significant downturn in the U.S. economy in 2008, the Company's land transaction activity had been reasonably strong in the preceding several years. During 2009, however, land transactions decreased significantly, and in fiscal years 2010 and 2011, there were effectively no land transactions. We believe the trend in Company revenues and income from real estate transactions during this period were consistent with the overall trend of the national and local economies and the real estate markets in general. Over the last several years, roads and interstate overpasses have been constructed, extended, or improved, in the Daytona Beach, Volusia County area, which we believe will benefit Company-owned land and may have a positive impact on future activity of our land assets. In the second quarter of 2012, we completed the sale of 16.6 acres of industrial land west of Interstate 95 at a price of $618,272.

Historical revenues and income are not indicative of future results because of the unique nature of land transactions and variations in the cost basis of the owned land. A significant portion of the Company's revenue and income in any given year may be generated through relatively large commercial real estate transactions. The timing for these real estate transactions, from the time of preliminary discussions through contract negotiations, due diligence periods, and the closing, can last from several months to several years. Although we believe there have been recent signals of improvement in the overall economy and credit markets, we do not expect a significant improvement of economic conditions, in particular with the real estate market, during the remainder of 2012, and as a result we believe our ability to enter into land transactions will be challenging in the near term.

The Company owns full or fractional subsurface oil, gas, and mineral interests in approximately 490,000 surface acres in 20 Florida counties. Our subsurface operations consist of revenue from the leasing of exploration rights and in some instances additional revenues from royalties applicable to production from the leased acreage. During 2011, an eight-year oil exploration lease covering approximately 136,000 net mineral acres primarily located in Lee and Hendry Counties was executed and a $913,657 first year rental payment was received. An additional $922,114, representing the guaranteed payment for the second year delay rental lease payment was received in September 2012. After the second year of the lease, the Company will receive royalty payments if oil production occurs. Alternately, if production does not commence by the third anniversary of the effective date of the lease and the lease is not terminated by the parties at that time, the Company will receive additional lease payments based upon the acres remaining under lease. The Company also generates income from the release of surface entry rights.

Golf Operations. Golf operations consist of the operation of two 18-hole championship golf courses with a three-hole practice facility, a clubhouse facility, and food and beverage activities within the LPGA International mixed-use residential community on the west side of Interstate 95 in Daytona Beach, Florida. LPGA International is a semi-private golf club consisting of the 18- hole course designed by Rees Jones and the 18- hole course designed by Arthur Hills.

The Company leases the land and certain improvements attributable to the golf courses under a long-term lease with the City of Daytona Beach, Florida. Due to the continuing losses of the golf operations, the Company recorded an impairment charge totaling $4,012,476, before income tax, in 2011. The Company entered into a management agreement with an affiliate of ClubCorp America, effective January 25, 2012, to manage the LPGA International golf and clubhouse facilities. We believe ClubCorp, which owns and operates clubs and golf courses worldwide, will bring substantial golf and club management expertise and knowledge to the LPGA International golf operations, including the utilization of national marketing capabilities, aggregated purchasing programs, and implementation of an affiliate member program, which should improve membership levels through the access to other member clubs in the affiliate program.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

In July 2012, the Company entered into an agreement to, among other things, amend the remaining lease payments under the golf course lease (the "Lease Amendment") whereby, the base rent payment scheduled to increase from $250,000 to $500,000 as of September 1, 2012, for the remainder of the lease term and any extensions, was reduced to $250,000 for the remaining term, subject to an annual rate increase of 1.75% beginning September 1, 2013. Under the lease Amendment, the Company agreed to make capital expenditures of at least $200,000 prior to September 1, 2015 for certain improvements to the facilities. In addition, pursuant to the Lease Amendment, beginning September 1, 2012, and continuing throughout the initial lease term and any extension option, the Company will pay additional rent to the City in the amounts of 5% of gross revenues (as defined in the Lease Amendment) exceeding $5,500,000 up to $6,500,000 and 7% of gross revenues (as defined in the Amendment) exceeding $6,500,000. Since the inception of the lease, the Company has been recognizing the rent expense on a straight-line basis resulting in an estimated accrual for deferred rent equal to $3,847,949 as of September 30, 2012. Upon the effective date of the amendment to the lease, the Company's straight-line rent was revised to reflect the lower rent levels through expiration of the lease. As a result, approximately $3.0 million of the rent previously deferred will not be due to the landlord, which amount will be recognized into income over the remaining lease term of 10 years.

Other Income. During the first quarter of 2012, the Company signed an excavation agreement for fill dirt removal with up to four 9-month excavation periods and received an upfront non-refundable payment of $250,000 for the first excavation period beginning March 2012, and ending November 30, 2012. Through September 30, 2012, income of $118,265 was recognized on the excavation agreement with the remaining $131,735 to be recognized as fill dirt is excavated, or the excavation period expires.

Our agricultural operations consist of growing, managing, and selling timber and hay on approximately 10,200 acres of our land portfolio located primarily on the west side of Daytona Beach, Florida. In previous periods, we converted approximately 2,200 acres of our land portfolio used for timberland production into hay production. In March 2012, we engaged American Forest Management, Inc. to manage our timber, hay, and hunt leasing operations. The Company believes engaging external management will reduce operating expenses and increase operating efficiencies, and has allowed the Company to liquidate substantially all of its inventory of agricultural equipment. During the second quarter of 2012, a hay and hunting lease was executed on approximately 3,377 acres of land. It is anticipated that this lease will generate approximately $106,000 in revenue over the five-year term of the lease. During the first nine months of 2012, we sold substantially all of our agricultural equipment, generating proceeds of $480,150 and a gain of $242,051.

SUMMARY OF OPERATING RESULTS FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30,
2012

Total revenue for the quarter ended September 30, 2012, increased 19% to $3.8 million, compared to $3.2 million during the same quarter in 2011. This increase included increasing rent revenue from our income properties portfolio, in addition to revenue from subsurface leasing arrangements commencing in mid- September 2011. Total revenues for the nine months ended September 30, 2012, increased to $13.2 million, compared to $10.6 million during the same period in 2011. This revenue gain is primarily attributable to the sale of 16.6 acres of industrial land for $618,272, in addition to approximately $520,000 of increased rent revenue from our income property portfolio and revenues from subsurface leases. Additionally, revenue for the nine month period, includes approximately $730,000 recognized in connection with the final resolution of the Dunn Avenue Extension agreement between the Company, the City of Daytona Beach, and the County of Volusia, pursuant to which the Company received a refund of approximately $160,000 on previously paid amounts and eliminated an accrued obligation of approximately $570,000 for the Company's estimated share of remaining improvement costs. A loss amounting to $556,606, equivalent to $0.10 per share, was recorded in the quarter ended September 30, 2012. This loss compares to a loss of $4,217,992, equivalent to $0.74 per share, posted for the same period one year earlier, which included impairment charges totaling $4,065,000 after income tax. For the nine-month period ended September 30, 2012, net income totaled $537,381, equivalent to $0.09 per share. This net income compares favorably to the net loss of $4,158,115, equivalent to $0.73 per share, recorded in the nine months ended September 30, 2011, primarily due to the increased revenues in 2012 and the impairment charges posted during the 2011 period.

INCOME PROPERTIES

Revenues and income from our income property operations totaled $2,461,342 and $2,261,632, respectively, during the third quarter of 2012, compared to total revenue and income of $2,301,016 and $2,171,745, for the third quarter of 2011. The increased revenues and income reflect increases of approximately 7% and 4%, respectively compared to the results from the same period in 2011. These increases were substantially due to increased rents from the acquisition of the Boulder, Colorado, property additional leasing revenue from the expanded CVS store in Tallahassee, Florida, and increased occupancy, commencing in the fourth quarter of 2011, at our self-developed flex-office buildings in Daytona Beach, Florida. The operating costs and expenses of our income property operations increased approximately 54% during the period reflecting costs associated with due diligence costs and increased common area expenses at the flex-office space due to increased occupancy. Costs and expenses for the income property operations totaled $199,710 and $129,271 for the third quarters of 2012 and 2011, respectively.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

During the first nine months of 2012, income properties produced income of $6,722,285 on revenues of $7,241,189. Revenues for the nine-month period increased 8% with income rising approximately 6% over the same period in 2011. Revenues and profits totaled $6,723,261 and $6,348,599, respectively, in the corresponding period of 2011. The revenue gain was substantially due to increased rents from our acquisition of the Boulder, Colorado, property, additional leasing revenue from the expanded CVS store in Tallahassee, Florida, and increased occupancy at our self-developed flex office buildings in Daytona Beach, Florida. Income properties' costs and expenses rose 38% during the first nine months of 2012, when compared to the prior year, due to the same factors that had an impact on our third quarter results. Income properties costs and expenses for the first nine months of 2012 and 2011 totaled $518,904 and $374,662, respectively.

REAL ESTATE OPERATIONS

During the third quarter of 2012, income from real estate operations was $188,358 on revenues totaling $331,496. These results compare favorably to revenues and losses of $69,406 and $82,265, respectively, realized in the third quarter of 2011. The favorable revenue and income for the period, compared to the prior year, were substantially generated from subsurface royalties and leasing revenues.

Income from our real estate operations totaled $1,767,189 for the nine months ended September 30, 2012, on total revenues of $2,299,102. In addition to the revenues of $618,272 received from a land transaction on 16.6 acres, revenues included approximately $730,000 recognized in connection with the final resolution of the Dunn Avenue Extension agreement, the aforementioned revenues from our subsurface interests, and modest hay sales. During the first nine months of 2011, losses from real estate totaled $326,577 on revenues of $200,712. Revenues during the first half of 2011 were primarily generated from subsurface royalties.

GOLF OPERATIONS

The Company's golf operations incurred a loss of $453,102 during the third quarter of 2012, representing a 2% improvement over the loss of $462,230, before the impairment charges, in the third quarter of 2011. The improvement was achieved on a 3% rise in revenues offset by a modest 1% increase in costs and expenses. The revenue gain during the quarter, to $861,326, resulted from a higher average rate per round played offset by a slight decline in the number of rounds played. Revenues in the third quarter of 2011 totaled $838,646.

During the first nine months of 2012, golf operations incurred a loss of $766,975, representing a 17% improvement over the $928,616 loss incurred in the same period in 2011, largely due to a 6% decrease in costs and expenses achieved by the new management company, primarily from labor and cost of sales efficiencies. Golf operating costs and expenses totaled $4,210,959 and $4,488,542 in the first nine months of 2012 and 2011, respectively. Partially offsetting the expense decrease was a 3% decline in golf operations revenues, with revenues totaling $3,443,984 and $3,559,926 for the periods of 2012 and 2011, respectively. The revenue reduction was primarily attributable to a 15% decrease in rounds played during the period when compared to the prior year due to an extensive number of adverse weather days, partially offset by a 9% increase in the average rate paid per round played.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

OTHER INCOME

For the quarter ended September 30, 2012, other income totaled $186,458, a $169,812 increase over the prior year's same period in which other income totaled $16,646. Other income in the third quarter of 2012 was comprised primarily of sales of fill dirt, totaling $90,487, and income of $75,915 from our agriculture operations. Other income in the third quarter of 2011was from hay sales.

Other income totaled $264,894 for the nine months ended September 30, 2012, and was comprised primarily of revenues from the sale of fill dirt totaling $118,265 and income of $112,113, from our agricultural operations. During the first nine months of 2011, other income totaled $67,778 , and reflected primarily the sale of fill dirt totaling $26,000 and income of $19,546 from our agricultural operations.

GENERAL, ADMINISTRATIVE, AND OTHER CORPORATE EXPENSES

General and administrative expenses totaled $1,864,770 and $1,228,398 for the quarters ended September 30, 2012 and 2011, respectively. The increase in the third quarter of 2012 was comprised of a non-cash charge of $611,691 for the estimated settlement of the St. John's River Water Management District matter, and a one-time separation payment of $145,000 to a retiring senior executive.

General and administrative expenses totaled $4,200,082 and $3,459,469 for the first nine months ended September 30, 2012 and 2011, respectively. The increase during the nine months of 2012 was comprised of the aforementioned non-cash charge of $611,691 for the estimated settlement of the St. John's River Water Management District matter, and the one-time separation payment of $145,000.

Stock compensation costs for the quarter and nine months ended September 30, 2012 were $446,678 and $870,303, respectively, reflecting the compensation charge recognized primarily for option and restricted share grants awarded to senior executives hired in 2011 and 2012.

In the first quarter of 2012 we recognized a loss of $245,726 related to the extinguishment of outstanding debt in connection with the new credit agreement entered into with BMO.

Interest expense totaled $124,650 and $167,996 for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, interest expense totaled $401,060 and $545,999, respectively. The lower interest expense for both periods of 2012, when compared to the prior year, was due to the lower interest rate on the new borrowing facility. During the first quarter of 2012, the Company wrote-off loan costs, totaling $245,726, associated with paying off the prior borrowing arrangement.

DISCONTINUED OPERATIONS

During the fourth quarter of 2011, three income properties were classified as assets held for sale on the Company's balance sheet with the applicable results of operations classified as discontinued operations, net of income tax. The sales transaction on these two properties closed during the second quarter of 2012. Additionally, the Company's property previously leased to Barnes & Noble in Lakeland, Florida, was sold during the fourth quarter of 2011. This property and the applicable results of operations were shown as discontinued operations on the statement of operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash, including restricted cash of $3,764,058, totaled $6,145,357 at September 30, 2012. The restricted cash is being held for additional investments utilizing the tax-deferred like-kind exchange structure.

Our total cash balance reflects an increase in our cash flow from operations, primarily resulting from our increased net income, and the receipt of the $922,114 delay rental payment on a subsurface lease at the end of the third quarter 2012.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

Our cash flows from investing activities used funds of $2,081,901 for the nine-month period ended September 30, 2012, and reflected the $7.4 million acquisition of the Boulder, Colorado property, and the $1.8 million acquisition in Phoenix, Arizona, offset by the disposition of the properties held for sale and the disposition of agricultural equipment.

Notes payable totaled $16,726,849 at September 30, 2012, an increase of approximately $1,460,135 from the balance as of December 31, 2011. Notes payable increased from the December 31, 2011 balance, largely due to our acquisition activities. In early October 2012, we paid down our credit facility, reducing notes payable by $600,000.

On February 27, 2012, we entered into a financing agreement with Bank of Montreal ("BMO"). The agreement consists of a $46.0 million revolving credit facility with a maturity of February 27, 2015, subject to a one-year extension at the option of the Company. The indebtedness outstanding accrues interest at a rate ranging from the 30-day London Interbank Offer Rate ("LIBOR") plus 175 basis points to LIBOR plus 250 basis points, with the spread over LIBOR based on a ratio of the Company's total indebtedness to total asset value. Under an accordion feature, the Company has the option to expand the borrowing capacity up to $75.0 million. The indebtedness under the facility is unsecured and is guaranteed by certain subsidiaries of the Company.

On September 20, 2012, the Company entered into the First Amendment to the Credit Agreement ("Amendment"). This Amendment, under the accordion feature, expanded the credit facility to $62.0 million. The Amendment also modified some of the restrictive covenants contained in the original Agreement. These changes to the restrictive covenants, are not considered material in nature. On September 21, 2012, an additional lender was added as a participating lender to the facility.

The facility replaced a $25.0 million revolving credit facility with SunTrust Bank, which had a maturity date of June 27, 2014. At the inception of the BMO facility, we drew $16.2 million, which included funds to pay off the $9.7 million outstanding balance on the prior SunTrust facility and approximately $5.6 million to pay off a term loan with SunTrust Bank, which had a maturity of July 1, 2012. The indebtedness outstanding under the prior revolving line of credit and term loan were secured by certain assets of the Company.

The Company used approximately $9.2 million of cash on the acquisition of property, plant, and equipment during the first nine months of 2012, which was substantially comprised of the $7.4 million acquisition of the property located in Boulder, Colorado and the $1.8 million acquisition of the property in Phoenix, Arizona, as described below. We are targeting an additional $5 million to $15 million of acquisitions in income producing properties during the remainder of 2012 which we would fund through our restricted cash, operating cash, and the available capacity on the credit facility.

As additional funds become available from additional land transactions or the sale of income properties qualified under the like-kind exchange deferred-tax structure, we expect to reinvest those proceeds into our acquisition of income . . .

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