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CTO > SEC Filings for CTO > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for CONSOLIDATED TOMOKA LAND CO


31-Oct-2013

Quarterly Report


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

Forward-Looking Statements

When the Company uses any of the words "anticipate," "assume," "believe," "estimate," "expect," "intend," or similar expressions, the Company is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in "Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K, for year ended December 31, 2012. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q or any document incorporated herein by reference. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q, or the aforementioned risk factors.

OVERVIEW

We are a diversified real estate operating company. We own and manage commercial real estate properties in nine states in the U.S., and two self-developed multi-tenant properties located in Florida. As of September 30, 2013, we owned 37 single-tenant income-producing properties, with more than 759,000 square feet of gross leasable space. We also own and manage a land portfolio of over 10,000 acres in Florida, a majority of which is located within and forms a substantial portion of, the western boundary of the City of Daytona Beach (the "City"). Our land is well-located along both sides of Interstate 95 and near central Florida's Interstate 4 corridor. We also have an investment in a commercial mortgage loan collateralized by a hotel property in Atlanta, Georgia. We have a golf course operation which consists of the LPGA International golf club, lease property for billboards, have agricultural operations that are managed by a third party and consist of leasing land for hay production, timber harvesting, and hunting leases, and own and manage subsurface interests. The results of our agricultural and subsurface leasing operations are included in Agriculture and Other Income and Real Estate Operations in our consolidated statements of operations, respectively.

Income Property Operations. We have pursued a strategy of investing in income-producing properties by utilizing, when possible, the proceeds from real estate transactions qualifying for income tax deferral through like-kind exchange treatment for tax purposes. Through September 30, 2013, we had invested approximately $187.4 million in forty-three single-tenant income properties primarily through this tax-deferred structure. We have sold six of these income properties, with two sold in February 2013 for $7.6 million, one sold in May 2013 for $3.4 million, and three sold in prior years for a total of $10.9 million. During the nine months ended September 30, 2013, we acquired the following nine income properties at a total purchase price of approximately $39.3 million:

On January 3, 2013, the Company acquired four properties leased to Bank of America, N.A. in both Los Angeles County and Orange County, California, at an aggregate purchase price of approximately $8.0 million. As of the acquisition date, the remaining terms of the leases were 15.0 years.

On January 23, 2013, the Company acquired a 34,512 square-foot free-standing building situated on 3.62 acres in Glendale, Arizona. The total purchase price was approximately $5.0 million. The property is under lease to an affiliate of Big Lots with a remaining term of 10 years, as of the acquisition date.

On January 31, 2013, the Company acquired a two-building 133,000 square-foot office complex leased to Hilton Resorts Corporation in Orlando, Florida. The total purchase price was approximately $14.6 million. Both buildings are under a long term lease, which provides for annual lease escalations with over eight years remaining in the term, as of the acquisition date.

On July 25, 2013, the Company acquired a 16,280 square foot building leased to a subsidiary of Rite Aid Corp. in Renton Washington, a suburb of Seattle. The total purchase price was approximately $6.6 million. As of the acquisition date, the remaining term of the lease was 13 years, with lease escalations during the six five-year option periods.

On September 13, 2013, the Company acquired a 25,600 square foot building leased to Big Lots in Germantown, Maryland. The total purchase price was approximately $5.0 million. As of the acquisition date, the remaining term of the lease was approximately 10.4 years, with three five-year option periods.

Our current portfolio of income properties generates approximately $13.8 million of revenues from lease payments on an annualized basis and had an average remaining lease term of 10.17 years as of September 30, 2013.

We expect to continue to focus on acquiring additional income-producing in the near term utilizing the aforementioned tax deferral structure whenever possible.


Table of Contents

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

As part of our strategy for investing in income-producing investments, we have self-developed two multi-tenant flex properties, and in the third quarter of 2013, began construction of two additional multi-tenant flex properties, all located in the City. The first two buildings consist of a 31,000 square-foot flex office space complex located within the Gateway Center. The two buildings under construction, which represent the final phase of a four-building planned commercial development, are largely identical to the original two buildings, each consisting of 15,360 square-feet of leasable flex/office space. In connection with the commencement of construction the Company announced the signing of a new ten-year lease with Lamar Advertising Co. for approximately 7,700 square feet of the new flex/office space. The Company expects the two buildings, totaling approximately 30,720 square feet on approximately 4.51 acres, to be available for occupancy in the second quarter of 2014. The Company intends to make the entire remaining building, comprising approximately 15,360 square feet of flex/office space, available for lease or purchase by a single tenant.

As of September 30, 2013, the occupancy of the two completed buildings is 94%. The second self-developed property is the first phase of a planned twelve-acre, four-lot commercial complex located at the northeast corner of LPGA and Williamson Boulevards in the City. The parcel includes a 22,000 square-foot, two-story office building known as the Concierge Office Building. As of September 30, 2013, approximately 74.3% of the building was leased to two tenants.

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 income properties based on, among other possible factors, the current or expected performance of the property and market conditions. Pursuant to our on-going review, three properties were sold during the nine months ended September 30, 2013. The Company made new investments in other income-producing assets with the proceeds from selling these properties, utilizing the tax-deferred like-kind exchange structure.

As part of our strategy for investing in income-producing assets, in August 2013, the Company acquired a $19.56 million performing loan secured by an upper upscale hotel in Atlanta, Georgia, at a discount to par of approximately $2.05 million. The loan has an interest rate of 1-month LIBOR plus 450 basis points and matures in March 2014. The discount will be recognized ratably into income through the maturity date as a component of the interest income recognized on the loan.

Real Estate Operations. Until the significant downturn in the U.S. economy in 2008, the Company's land transaction activity had been reasonably strong. 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 operations during this period were consistent with the overall trend of national and local economies and real estate markets in general. Over the last several years, roads and interstate overpasses have been constructed, extended, or improved in the City and in Volusia County, 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 or $37,245 per acre. The gain recognized on the sale of this land totaled $573,069. The Company received approximately $181,000 and $159,000 from third parties for the purchase of impact fees in the first nine months of 2013 and 2012, respectively.

During 2011, the Company conducted an impairment analysis on approximately 300 acres of land, which had been reacquired in 2009 through a foreclosure proceeding. The analysis resulted in an impairment charge of $2,606,412, which represented the entire cost basis of the property. Management decided to abandon the property due to the high carrying costs associated with these parcels, as they were subject to the Indigo Community Development District bond issue, relative to the current market environment for undeveloped land. In the fourth quarter of 2012, the Company sold substantially all of its interest in this land to a third party for de minimus cash proceeds and the assumption of approximately $238,000 of accrued liabilities.

During the nine months ended September 30, 2013, the Company conducted an impairment analysis on 6.23 acres of land, which had been reacquired through a foreclosure in 2009. Approximately 3.21 of these acres were subject to a sales contract that was executed during the quarter ended June 30, 2013, which was subsequently terminated. However, the analysis resulted in an impairment charge of $616,278, representing the portion of the cost basis of the property that management considered to be un-recoverable based on the land under contract and other current market prices.


Table of Contents

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

Historical revenues and income in our real estate operations are not indicative of future results because of the unique nature of land transactions and variations in the cost basis of our 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 of these real estate transactions, from the time of preliminary discussions, contract negotiations, and due diligence periods to closing, can last from several months to several years. Although we believe there have been recent indications of improvement in the overall economy and credit markets, we do not expect a significant improvement of economic conditions in the near term, in particular with the real estate market, and as a result we believe our ability to enter into land transactions will remain challenging. Further, despite an increased level of interest in our land holdings by developers and other interested parties, we do not believe land transactions will occur consistently from quarter to quarter and year to year.

The Company has a 3.4 acre pad site at the southeast corner of LPGA and Williamson Boulevards under contract with a convenience store operator which is expected to close in the fourth quarter of 2013. The Company also has a 2.0 acre pad site along LPGA Boulevard, on the east side of Interstate 95, under contract with a retail bank which is expected to close late in the fourth quarter of 2013.

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, we executed an eight-year oil exploration lease (the "Exploration Lease") covering approximately 136,000 net mineral acres, primarily located in Lee and Hendry Counties, and received a $913,657 first year rental payment. An additional $922,114, representing the guaranteed payment for the second year rent payment, was received in September 2012. The two payments totaling approximately $1.83 million have been recognized into income as of September 2013. On September 22, 2013, the Company entered into an amendment of the Exploration Lease (the "Amendment"). Under the Amendment, the net mineral acres under Exploration Lease was reduced from approximately 136,000 net mineral acres to approximately 82,000 net mineral acres in Hendry County. The approximately 54,000 net mineral acres removed from the Exploration Lease were located in Lee County, Florida. In addition, in connection with the Amendment, the Company received a payment of $4.293 million, representing the rental payment for the third year of the Exploration Lease and payments related to the drilling requirements contained in the lease. Of the total payment received by the Company, $1.0 million relating to the drilling requirement will be recognized into income immediately with the remaining $3.293 million related to the rent payment for the third year of the lease being recognized into income ratably over 12 months beginning in September 2013. The Company also generates income from the release of surface entry rights.

As of September 30, 2013, the Company also received oil royalties from operating oil wells on 800 acres under a separate lease with a separate operator. The Company received oil royalties of approximately $86,000 and $54,000 during the three months ended September 30, 2013 and 2012, respectively. The Company received oil royalties of approximately $231,000 and $216,000 during the nine months ended September 30, 2013 and 2012, respectively.

During the first quarter of 2012, the Company signed an excavation agreement for fill dirt removal with up to four nine-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 December 31, 2012, we recognized the entire non-refundable payment into income. The income from this excavation agreement was reclassified from Other Income into Real Estate Operations in the fourth quarter of 2012, and all prior quarterly information has been adjusted accordingly.

Golf Operations. Golf operations consist of two 18-hole championship golf courses with a three-hole practice facility, a clubhouse facility, and food and beverage services located within the LPGA International mixed-use residential community on the west side of Interstate 95 in the City. LPGA International is a semi-private golf club consisting of an 18-hole course designed by Rees Jones and an 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. The Company entered into a management agreement with an affiliate of ClubCorp America ("ClubCorp"), 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, brings 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, and our affiliation with ClubCorp will 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 with the City to, among other things, amend the lease payments under its golf course lease (the "Lease Amendment") whereby the base rent payment, which was scheduled to increase from $250,000 to $500,000 as of September 1, 2012, would remain at $250,000 for the remainder of the lease term and any extensions would be subject to an annual rate increase of 1.75% beginning September 1, 2013. The Company also agreed to invest $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 equal to 5.0% of gross revenues exceeding $5,500,000 and 7.0% of gross revenues exceeding $6,500,000. Since the inception of the lease, the Company has recognized the rent expense on a straight-line basis resulting in an estimated accrual for deferred rent. Upon the effective date of the Lease Amendment, 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 City, and will be recognized into income over the remaining lease term, which expires in 2022. As of September 30, 2013, approximately $2.5 million of the rent previously deferred that will not be due to the City remained to be amortized.

Agriculture and Other Income. Substantially all of our other income consists of revenues generated by our agricultural operations. The Company's agricultural lands encompass approximately 9,700 acres in Daytona Beach, Florida. Our agricultural operations are managed by a third-party and consist of leasing land for hay production, timber harvesting, and hunting leases.

SUMMARY OF OPERATING RESULTS FOR QUARTER ENDED SEPTEMBER 30, 2013 COMPARED TO
SEPTEMBER 30, 2012

Total revenue for the three months ended September 30, 2013 increased 79% to $6.4 million, compared to $3.6 million for the three months ended September 30, 2012. The increase of approximately $2.8 million included approximately $1.2 million of additional rent revenue generated by our income property portfolio, particularly from our acquisitions in the fourth quarter of 2012 and the three quarters in 2013, as well as $1.0 million in revenue from the amendment of the Exploration Lease, approximately $644,000 of income generated by our commercial mortgage loan investment, and approximately $120,000 of increased revenue from our golf operations offset by a reduction in our agriculture revenues of approximately $75,000. Net income for the three months ended September 30, 2013, was approximately $1.2 million, or $0.22 per share, versus a net loss of approximately $557,000, or $(0.10) per share in same period in 2012. Contributing to the increase in net income of approximately $1.8 million was the after tax results of the aforementioned increases in our revenues of $2.8 million net of the increase in direct costs of those revenues of approximately $271,000, offset by increases in our depreciation and amortization of approximately $229,000, attributable to our larger income property portfolio, and increased interest expense of approximately $357,000, including an increase in deferred loan cost amortization of approximately $26,000. Our increased net income also benefited from lower general and administrative expenses, which decreased by approximately $1.1 million, with such decrease reflecting a decrease in our stock compensation costs of approximately $195,000 and decreased legal expenses of approximately $104,000, while the September 30, 2012 general and administrative expenses were also impacted by a charge taken in the third quarter of 2012 of approximately $612,000 pertaining to a legal reserve and approximately $145,000 related to a one-time payment to a retiring senior executive.

INCOME PROPERTIES

Revenues and operating income from our income property operations totaled approximately $3.4 million and $2.9 million, respectively, during the three months ended September 30, 2013, compared to total revenue and operating income of approximately $2.2 million and $2.0 million, respectively, for the three months ended September 30, 2012. The direct costs of revenues for our income property operations totaled approximately $427,000 and $200,000 for the three months ended September 30, 2013 and 2012, respectively. The 54% increase in revenues during the three months ended September 30, 2013 reflects our expanded portfolio of income properties, with fifteen income properties having been acquired during the twelve months ended September 30, 2013. Our increased operating income from our income property operations reflects increased rent revenues offset by an increase of approximately $228,000 in our direct costs of revenues, primarily the result of two of the properties acquired in January 2013, which are base stop leases resulting in increased operating expenses, for these properties, including property taxes.

COMMERCIAL MORTGAGE LOAN

Interest income on the commercial mortgage loan held for investment represents approximately $137,000 of interest earned on the mortgage at a rate of 1-month LIBOR plus 450 basis points and approximately $527,000 of income from the accretion of the discount from the face value of the mortgage, offset by approximately $20,000 of amortization of the loan origination costs incurred in connection with the investment. This investment was made in September 2013 and the Company did not have investments in commercial mortgage loans in 2012.


Table of Contents

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

REAL ESTATE OPERATIONS

During the three months ended September 30, 2013, operating income from real estate operations was approximately $1.2 million on revenues totaling approximately $1.4 million, an increase of approximately $916,000 in operating income compared to the same period in 2012. For the three months ended September 30, 2012, revenues were approximately $422,000 and income was approximately $279,000. The increase in revenue and operating income from our real estate operations is primarily due to the amendment of our eight-year oil exploration lease, which included the receipt of a $1.0 million payment relating to the drilling requirements in the lease, which was recognized upon receipt, and the recognition of a portion of the $3.293 million lease payment received, which covers the lease period from late September 2013 through September 2014.

GOLF OPERATIONS

Revenues from golf operations totaled approximately $981,000 and $861,000 for the three months ended September 30, 2013 and 2012, respectively. The total direct cost of golf operations revenues totaled approximately $1.3 million for the three months ended September 30, 2013 and 2012. The Company's golf operations had a net operating loss of approximately $340,000 during the three months ended September 30, 2013, representing a 25% improvement over the net operating loss of approximately $453,000 in the same period of 2012. The approximately $113,000 improvement in the net operating results from the golf operations was due to an increase of approximately 41% in the number of members since September 30, 2012, which resulted in a substantial increase in revenues from membership activities without generating significant increased costs. In addition, our food and beverage revenues increased substantially as a result of the reopening of our renovated and expanded facilities.

AGRICULTURE AND OTHER INCOME

For the three months ended September 30, 2013, revenues from other sources, primarily our agriculture operations, totaled approximately $21,000, compared to approximately $96,000 in the same period in 2012. The 78% decrease in revenues during the three months ended September 30, 2013, is primarily attributable to revenues realized from additional timber harvesting during the three months ended September 30, 2012, as compared to the three months ended September 30, 2013. For the three months ended September 30, 2013, the direct cost of revenues totaled approximately $34,000, compared to approximately $29,000, in the same period in 2012, reflecting an increase of approximately $5,000, or 19% during the three months ended September 30, 2013. The agriculture and other operations had a net operating loss of approximately $13,000 in the three months ended September 30, 2013, compared to the net operating income of approximately $67,000 in the same period of 2012.

GENERAL AND ADMINISTRATIVE AND OTHER CORPORATE EXPENSES

General and administrative expenses totaled approximately $1.2 million and $2.3 million for the three months ended September 30, 2013 and 2012, respectively, a decrease of approximately $1.1 million or 48%. The decrease in the three months ended September 30, 2013 was primarily comprised of an approximate $104,000 decrease in legal expenses and an approximate $195,000 decrease in stock-based compensation. The three months ended September 30, 2012, also included a one-time pay out to a retiring senior executive of approximately $145,000, and a legal reserve related to the St. John's River Water Management District ("SJRWMD") litigation matter of approximately $612,000.

Interest expense totaled approximately $510,000 for the three months ended September 30, 2013 and approximately $153,000 for the three months ended September 30, 2012, respectively. The increased interest expense during the three months ended September 30, 2013, as compared to the same quarter in 2012, reflects our increased net borrowings to finance our acquisitions of income properties and our investment in a commercial mortgage loan. During the quarter, our long-term debt increased approximately $22.3 million and during the twelve month period ending September 30, 2013, our long-term debt increased approximately $50.0 million. Also, included in interest expense in the consolidated financial statements is the amortization of loan costs incurred in connection with the Company's long-term debt. For the three months ended September 30, 2013 and 2012, the amortization of loan costs totaled approximately $54,000 and $28,000, respectively.


Table of Contents

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

SUMMARY OF OPERATING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO SEPTEMBER 30, 2012

Total revenue for the nine months ended September 30, 2013 increased to $16.2 million, compared to $12.4 million during the same period in 2012. The increase of approximately $3.8 million included approximately $3.2 million of additional rent revenue generated by our income property portfolio, particularly from our acquisitions in the fourth quarter of 2012 and in the three quarters of 2013, as well as approximately $644,000 of income generated by our commercial mortgage loan investment, and approximately $315,000 of increased revenue from our golf operations, offset by a reduction in our real estate operations of approximately $407,000. Total revenue for the nine months ended September 30, 2012 included approximately $618,000 in revenue from a land transaction and approximately . . .

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