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CTO > SEC Filings for CTO > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for CONSOLIDATED TOMOKA LAND CO

Form 10-K for CONSOLIDATED TOMOKA LAND CO


10-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW

Forward-Looking Statements

When the Company uses any words such as "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 or risks 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 this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K 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 Annual Report on Form 10-K.


Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW (continued)

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, flex-office properties, with multiple tenants, located in Florida. The Company has an additional flex-office property under construction as of December 31, 2013 which is adjacent to an existing self-developed property. As of December 31, 2013, we owned thirty-five single-tenant income-producing properties, with more than 740,000 square feet of gross leasable space. We also own and manage a land portfolio, as of December 31, 2013 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. In January 2014, the Company successfully foreclosed on approximately 600 acres of land west of I-95, bringing the Company's land portfolio to over 10,500 acres. As of December 31, 2013, we also had an investment in a floating-rate 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, which is managed by a third party, and we also 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, respectively, in our consolidated statements of operations.

Income Property Operations. We have pursued a strategy of investing in income-producing properties, when possible, 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 2013, we had invested approximately $187.4 million in forty-three single-tenant income properties primarily through this tax-deferred structure. We have sold eight of these income properties, one of which was sold in 2011, for approximately $2.9 million, two of which were sold in 2012, for a total of approximately $8.0 million, and five of which were sold in 2013, for a total of approximately $18.6 million. During the year ended December 31, 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. The initial terms of the leases are 15 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 property is under lease to Big Lots with an initial term of 10 years. The purchase price totaled approximately $5.0 million;

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 $14.6 million. Both buildings are under a long term lease, with over eight years remaining in the term, which provides for annual lease escalations;

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; and

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 single-tenant income properties generates approximately $12.1 million of revenues from lease payments on an annualized basis and has an average remaining lease term of 10.1 years as of December 31, 2013. We expect to continue to focus on acquiring income-producing properties during fiscal year 2014, and in the near term thereafter, maintaining our use of the aforementioned tax deferral structure whenever possible.

As part of our overall strategy for investing in income-producing investments, we have self-developed two flex-office properties in Daytona Beach, Florida. The first property is a two-building, 31,000 square-foot flex-office space complex located within Mason Commerce Center. This represents the first phase of a four-building planned commercial development. As of December 31, 2013, the occupancy of the completed two-building complex was 94%. In 2013, we began construction of the second phase which includes a two-building, flex-office project of similar size. The Company has leased approximately 7,700 square feet of the property under construction to an affiliate of Lamar Advertising Company under a lease with an initial term of approximately 10 years. The second self-developed property is the first phase of a twelve-acre commercial site located at the northeast corner of LPGA and Williamson Boulevards in Daytona Beach, Florida. The parcel includes a 22,000 square-foot, two-story, flex-office building known as the Concierge Office Building, with 74% of the building under lease to two tenants. As of December 31, 2013, on an annualized basis, our self-developed, flex-office property portfolio generated approximately $819,000 of revenue from lease payments. In January 2014, we signed a lease with a third tenant, which brought the occupancy to approximately 83%.


Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW (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 income 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, five properties were sold in 2013. All of the proceeds from these sales were deployed through the like-kind exchange structure, in acquiring certain of the income properties we purchased in 2013 and 2012. The Company anticipates that future investments in income-producing assets could use the proceeds from selling non-core properties, utilizing the tax-deferred like-kind exchange structure, as circumstances permit.

Real Estate Operations. As of December 31, 2013, the Company owned over 10,000 acres of land in Daytona, Beach, Florida, along six miles of the west and east side of Interstate 95. In January 2014, the Company successfully foreclosed on approximately 600 acres of land west of I-95, bringing the Company's land portfolio to over 10,500 acres. 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 operations 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 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 approximately $618,000 or $37,000 per acre. The gain on the sale of this land totaled approximately $573,000. In 2013, we completed three land transactions of approximately 11.66 acres for total proceeds of approximately $3.0 million or approximately $257,000 per acre, of which two parcels totaling approximately 5.43 acres were east and 6.23 acres were west of Interstate 95. The total loss on these sales equaled approximately $80,000, with two transactions totaling approximately 9.6 acres resulting in an aggregate loss of approximately $660,000 and the third transaction for approximately 2.02 acres resulting in a gain of approximately $581,000.

The Company owns impact fee and mitigation credits which totaled approximately $6.1 million and $6.3 million as of December 31, 2013 and 2012, respectively. During the years ended December 31, 2013 and 2012, the Company received cash payments of approximately $232,000 and $348,000, respectively, for impact fees with a basis of equal value.

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 land transactions. The timing for these land 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 expect the overall real estate market, particularly home building, will remain inconsistent in the near term, and as a result we believe our ability to enter into land transactions will remain challenging.

Real Estate Impairments. During the year ended December 31, 2013, the Company conducted an impairment analysis on 6.23 acres of land in Daytona Beach, Florida, 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 second quarter of 2013 which we deemed highly probable of closing. Although the transaction was subsequently terminated prior to closing, 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. The 6.23 acres of land were sold under a new sales contract on December 20, 2013, resulting in an additional loss of $416,236, as more fully described in Note 5 "Land and Subsurface Interests."

During the year ended December 31, 2011, the Company also conducted an impairment analysis on 317 acres of land in Daytona Beach, Florida. The analysis resulted in an impairment charge of $2,606,412. The charge represented the entire cost basis of the property, reflecting both the high carrying costs associated with these parcels relative to the current market value of the land and management's determination to not pay the property taxes or other property assessments, and to not contest any legal proceedings, which would result in the forfeiture of title to the land through issuance of a tax deed or foreclosure. The Company sold substantially all of its interest in this land to a third party for de minimus proceeds and the assumption of approximately $238,000 of accrued liabilities, in the fourth quarter of 2012.

Subsurface Interests. The Company owns full or fractional subsurface oil, gas, and mineral interests in approximately 490,000 "surface" acres of land owned by others in 20 counties in Florida. The Company leases its interests to mineral exploration firms for exploration. Our subsurface operations consist of revenue from the leasing of exploration rights and in some instances revenues from royalties applicable to production from the leased acreage. During the year ended December 31, 2013, the Company also received oil royalties from operating oil wells on 800 acres under a separate lease with a separate operator. Production volume from these oil wells was 88,782 barrels in 2013, 81,441 barrels in 2012 and 104,211 barrels in 2011, resulting in revenues received from oil royalties of $267,693, $286,536 and $228,494, respectively.


Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW (continued)

During 2011, an eight-year oil exploration lease covering approximately 136,000 net mineral acres primarily located in Lee County and Hendry County, Florida was executed and a $913,657 first year rental payment was received. An additional $922,114, representing the guaranteed payment for the second year's delay rent, was received in September 2012. The two payments totaling approximately $1.83 million have been recognized ratably into income through September 2013. On September 22, 2013, the Company entered into an amendment of the exploration lease (the "Oil Lease Amendment"). Under the Oil Lease 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, Florida. The approximately 54,000 net mineral acres removed from the exploration lease were located in Lee County, Florida. In connection with the Oil Lease Amendment, the Company received a $3.293 million rent payment for the third year of the Company's eight-year oil exploration lease. The payment is being recognized ratably over the 12 month lease period ending in September 2014. Also during September 2013, the Company received, and recognized as revenue, a non-refundable penalty payment of $1.0 million relating to the drilling requirements in the lease. The terms of the lease state the Company will receive royalty payments if production occurs and may receive additional annual rental payments if the lease is continued in years four through eight. Lease income is being recognized on a straight-line basis over the guaranteed lease term. For the years ended December 31, 2013, 2012 and 2011, lease income of approximately $1.6 million, $919,000 and $251,000 was recognized, respectively.

The Company's current policy is to not release any ownership rights with respect to its reserved mineral rights. The Company may release surface entry rights or other rights upon request of a surface owner who requires such a release for a negotiated release fee based on a percentage of the surface value. Cash payments for surface entry rights released totaled approximately $120,000 and $46,000 during the years ended December 31, 2013 and 2012, respectively, which is included in revenue from real estate operations.

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 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. This excavation agreement was terminated after the first excavation period.

Golf Operations. Golf operations consist of the LPGA International golf club, a semi-private golf club consisting of two 18-hole championship golf courses, one course designed by Rees Jones and the other course designed by Arthur Hills with a three-hole practice facility, also designed by Rees Jones, a clubhouse facility, food and beverage operations, and a fitness facility located within the LPGA International mixed-use residential community on the west side of Interstate 95 in Daytona Beach, Florida. In 2012 and 2013, we completed approximately $534,000 of capital expenditures to renovate the clubhouse facilities, including a significant upgrade of the food and beverage operations, addition of fitness facilities, and renovations to public areas.

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, 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, which should improve membership levels through the access to other member clubs in the affiliate program.

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"). Under the Amendment, 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 December 31, 2013, approximately $2.5 million of the rent, previously deferred that will not be due to the City, remained to be amortized through September 2022.


Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW (continued)

Commercial Mortgage Loan. Our investment in commercial mortgage loans or similar structured finance investments, such as mezzanine loans or other subordinated debt, have been and will continue to be secured by commercial real estate or a borrower's pledge of its ownership interest in the entity that owns the real estate. In the future, we may invest in or originate mortgage loans secured by residential real estate developments. The first mortgage loans we intend to invest in or originate will typically be for fully constructed commercial real estate, located in the United States and that are current or performing with either a fixed or floating rate. Some of these loans may be syndicated in either a pari passu or senior/subordinated structure. Commercial first mortgage loans generally provide for a higher recovery rate due to their senior position. Commercial mezzanine loans are typically secured by a pledge of the borrower's equity ownership in the underlying commercial real estate. Unlike a mortgage this loan does not represent a lien on the property. Investor's rights in a mezzanine loan are usually governed by an intercreditor agreement that provides holders with the rights to cure defaults and exercise control on certain decisions of any senior debt secured by the same commercial property. We may originate mortgage loans or provide other types of financing to the owners of commercial real estate.

On August 7, 2013, the Company acquired a $19.6 million first mortgage loan secured by a hotel in Atlanta, Georgia, for approximately $17.5 million, a discount of approximately $2.05 million. The discount was being accreted into income ratably through the contractual maturity date in March 2014, which was included in Interest Income from Commercial Mortgage Loan in the consolidated financial statements.

On January 6, 2014, the commercial mortgage loan principal of $19.5 million was paid in full. The total revenue recognized in January 2014 is approximately $851,000 including the remaining accretion of the purchase discount of approximately $650,000, interest income of approximately $35,000, and an exit fee of approximately $196,000, offset by the remaining amortization of fees of approximately $30,000.

On January 31, 2014, the Company acquired a mezzanine loan secured by the borrowers' equity interest in an upper upscale hotel in Atlanta, Georgia, that was previously subject to the Company's first commercial mortgage loan investment. The Company purchased the $5.0 million performing loan at par. The loan matures in February 2019 and bears a fixed interest rate of 12.00% per annum.

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 on the west side of Daytona Beach, Florida. Our agricultural operations are managed by a third-party and consist of leasing land for hay production, timber harvesting, as well as hunting leases.

SUMMARY OF OPERATING RESULTS FOR YEAR ENDED DECEMBER 31, 2013 COMPARED TO
DECEMBER 31, 2012

Total revenue for the year ended December 31, 2013, increased 59.2% to approximately $25.8 million, compared to approximately $16.2 million for the year ended December 31, 2012. This increase included approximately $4.4 million in additional revenue generated by increasing rent revenue from our income properties portfolio, in addition to a $2.8 million increase in revenue from our real estate operations, which was comprised of an increase in revenue from land transactions of approximately $1.4 million reflecting the three land transactions we closed in December 2013 for approximately $3.0 million and approximately $1.6 million from our amended subsurface lease offset by lower revenues from the release of subsurface interests and $250,000 of revenues recognized in 2012 for the sale of fill dirt that was not renewed in 2013. Our income from continuing operations for the year ended December 31, 2013, was approximately $6.3 million versus approximately $864,000 in the same period in 2012. Net income for the year ended December 31, 2013, was approximately $3.7 million, or $0.64 per share, versus net income of approximately $599,000, or $0.10 per share in same period in 2012.

INCOME PROPERTIES

Revenues and operating income from our income property operations totaled approximately $12.8 million and $11.5 million, respectively, during the year ended December 31, 2013, compared to total revenue and income of approximately $8.5 million and $7.8 million, for the year ended December 31, 2012. The direct costs of revenues for our income property operations totaled approximately $1.3 million and $676,000 for the year ended December 31, 2013 and 2012, respectively. The 51.6% increase in revenues reflects the addition of nine properties in 2013 and a full year of results for six properties acquired in late 2012. Our operating income from our income property operations increased 47.6% which reflects the aforementioned increased rent revenues offset by an increase of approximately $658,000 in our direct costs of revenues which was primarily due to the expenses relating to two properties acquired in January of 2013 that have base stop leases whereby we are responsible for certain operating expenses of the properties and to the expensing of approximately $90,000 in costs associated with acquisitions of income properties with in-place leases and the costs associated with potential acquisitions that were terminated during the year.


Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW (continued)

REAL ESTATE OPERATIONS

During the year ended December 31, 2013, operating income from real estate operations was approximately $2.3 million on revenues totaling approximately $5.9 million, compared to revenues of approximately $3.1 million and income of approximately $2.4 million, for the year ended December 31, 2012. Revenues in 2013 include approximately $3.0 million from three land transactions of approximately 11.66 acres, and approximately $2.9 million in revenue from our subsurface operations including approximately $2.6 million from the lease of subsurface interests, which included $1.0 million received as a non-refundable drilling penalty. The operating income for our real estate operations in 2013 reflects the aforementioned revenues offset by approximately $2.8 million in the cost basis recognized with the land transactions along with closing costs and commissions on the transactions of approximately $246,000. The revenue and income for 2012 were substantially generated from a land transaction of approximately $618,000 on 16.6 acres, and approximately $730,000 recognized in connection with the final resolution of the Dunn Avenue Extension agreement, and from subsurface leasing income of approximately $919,000.

GOLF OPERATIONS

The Company's golf operations incurred a loss of approximately $412,000 during the year ended December 31, 2013, representing a 53.6% improvement over the loss of approximately $887,500 in the same period in 2012. Revenues from golf operations totaled approximately $5.1 million for the year ended December 31, 2013, compared to total revenues of approximately $4.5 million for the year ended December 31, 2012, an increase of 12.6%. The total direct cost of golf operations revenues totaled approximately $5.5 million and $5.4 million for the years ended December 31, 2013 and 2012, respectively, an increase of only 1.7%. The approximate $475,000 improvement in the loss from the golf operations was due to a 21.3% increase in membership, offset by a slight decrease in golf . . .

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