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CTO > SEC Filings for CTO > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for CONSOLIDATED TOMOKA LAND CO

Form 10-Q for CONSOLIDATED TOMOKA LAND CO


30-Apr-2014

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, 2013. 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. The terms "us," "we," "our," and "the Company" as used in this report refer to Consolidated-Tomoka Land Co. together with our consolidated subsidiaries.

OVERVIEW

Consolidated-Tomoka land Co. is a diversified real estate operating company. We own and manage commercial real estate properties in nine states in the U.S., as well as two self-developed, flex-office properties, with multiple tenants, located in Florida. The Company had an additional flex-office property under construction as of March 31, 2014 which is adjacent to an existing self-developed property. As of March 31, 2014, 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 of over 10,500 acres. As of March 31, 2014, we also had an investment in a fixed-rate mezzanine commercial mortgage loan collateralized by the borrower's equity interest in 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 March 31, 2014, we had invested approximately $187.4 million in forty-three single-tenant income properties primarily through this tax-deferred structure.

No income properties were acquired during the three months ended March 31, 2014. During the three months ended March 31, 2013, the Company acquired seven income properties at a total purchase price of approximately $27.6 million.

Our current portfolio of single-tenant income properties generates approximately $12.1 million of revenues from lease payments on an annualized basis and had an average remaining lease term of 10.0 years as of March 31, 2014. We expect to continue to focus on acquiring additional income-producing properties during fiscal year 2014, and in the near term thereafter, maintaining or 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 Williamson Business Park (formerly known as Mason Commerce Center). This represents the first phase of a four-building planned commercial development. As of March 31, 2014, 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. Construction is expected to be complete by May of 2014. The Company has leased approximately 7,700 square feet of the property under construction to an affiliate of Lamar Advertising Company for 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 approximately 83% of the building under lease to three tenants. As of March 31, 2014, on an annualized basis, our self-developed, flex-office property portfolio generated approximately $819,000 of revenue from lease payments.

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 during the year ended December 31, 2013; two of which were sold during the three months ended March 31, 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. 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.


Table of Contents

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

Real Estate Operations. As of March 31, 2014, the Company owned over 10,500 acres of land in Daytona, Beach, Florida, along six miles of the west and east side of Interstate 95. 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 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 with and interest in our land assets. During the three months ended March 31, 2014, the Company sold approximately 3.1 acres to Halifax Humane Society, Inc. for $391,500, or approximately $128,000 per acre, for a gain of approximately $347,000. This parcel is located on LPGA Boulevard, just west of I-95 in Daytona Beach, Florida and is adjacent to an existing property owned by Halifax Humane Society, Inc. During the three months ended March 31, 2013, we did not close on any land transactions.

The Company owns impact fee and mitigation credits which, in aggregate, totaled approximately $6.0 million and $6.1 million as of March 31, 2014 and December 31, 2013, respectively. During each of the three months ended March 31, 2014 and 2013, the Company received cash payments of approximately $73,000 for impact fees with a basis of equal value. Cash payments received for the sale of impact fee credits are not reflected as revenue in our consolidated statements of operations.

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 three months ended March 2014 and 2013, no impairment charges were recognized.

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 and drilling. Our subsurface operations consist of revenue from the leasing of exploration rights and in some instances revenues from royalties generated from oil production from the leased acreage. The Company also received oil royalties from operating oil wells on 800 acres under a separate lease with a separate operator for revenues of approximately $69,000 and $72,000, during the three months ended March 31, 2014 and 2013, respectively.

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 three months ended March 31, 2014 and 2013, lease income of approximately $812,000 and $226,000 was recognized, respectively. There can be no assurance that the Oil Lease Amendment will be extended beyond the expiration of the current term of September 2014 or, if renewed, on similar terms or conditions.

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. Revenue from surface entry rights released totaled approximately $4,000 and $40,000 during the three months ended March 31, 2014 and 2013, respectively, which is included in Revenue from Real Estate Operations in our consolidated statements of operations.


Table of Contents

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

Golf Operations. Golf operations consist of the LPGA International golf club, a semi-private golf club consisting of two 18-hole championship golf courses, designed by Rees Jones and 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. During the 2012 and 2013 fiscal years, 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 (the "City"). Due to the continuing losses of the golf operations, the Company recorded an impairment charge totaling approximately $4.0 million, 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, will 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 March 31, 2014, approximately $2.4 million of the rent, previously deferred that will not be due to the City, remained to be amortized through September 2022.

Commercial Mortgage Loans. Our investment in commercial mortgage loans or similar structured finance investments, such as mezzanine loans or other subordinated debt, has 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. However, we may also invest in construction loans secured by the commercial or residential real estate being developed and the underlying land. 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 remaining commercial mortgage loan principal of $19.5 million was paid in full. The total revenue recognized during the three months ended March 31, 2014 was approximately $844,000 including the remaining accretion of the purchase discount of approximately $650,000, interest income of approximately $36,000, and an exit fee of approximately $195,000, offset by the remaining amortization of fees of approximately $37,000.

On January 31, 2014, the Company acquired a mezzanine loan secured by the borrower's 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. Interest income recognized during the three months ended March 31, 2014 was approximately $100,000.

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, as well as hunting leases.


Table of Contents

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

SUMMARY OF OPERATING RESULTS FOR QUARTER ENDED MARCH 31, 2014 COMPARED TO MARCH
31, 2013

Total revenue for the three months ended March 31, 2014 increased 46% to approximately $7.1 million, compared to approximately $4.9 million for the three months ended March 31, 2013. The increase of approximately $2.2 million included approximately $450,000 of additional rent revenue generated by our income property portfolio, particularly from our acquisitions in 2013, approximately $944,000 of income generated by our commercial mortgage loan investment, and approximately $938,000 of increased revenue from our real estate operations offset by reductions in our revenue from golf operations and agriculture and other income totaling approximately $87,000. Net income for the three months ended March 31, 2014, was approximately $1.5 million, or $0.26 per share, versus net income of approximately $337,000, or $0.06 per share in same period in 2013. Contributing to the increase in net income of approximately $1.2 million were the after tax results of the aforementioned increases in our revenues of $2.2 million net of the increase in direct costs of those revenues of approximately $124,000, offset by increases in our depreciation and amortization of approximately $73,000 attributable to our larger income property portfolio, and increased interest expense of approximately $116,000. Our increased net income also benefited from lower general and administrative expenses, which decreased by approximately $243,000, with such decrease primarily reflecting a decrease in our stock compensation costs of approximately $153,000 and a one-time separation payment of approximately $103,000 that occurred in the first quarter of 2013.

INCOME PROPERTIES

Revenues and operating income from our income property operations totaled approximately $3.4 million and $3.1 million, respectively, during the three months ended March 31, 2014, compared to total revenue and operating income of approximately $3.0 million and $2.7 million, respectively, for the three months ended March 31, 2013. The direct costs of revenues for our income property operations totaled approximately $340,000 and $230,000 for the three months ended March 31, 2014 and 2013, respectively. The 15% increase in revenues during the three months ended March 31, 2014 reflects our expanded portfolio of income properties. Our increased operating income from our income property operations reflects increased rent revenues offset by an increase of approximately $111,000 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, as well as property taxes on other acquisitions in the third quarter of 2013.

REAL ESTATE OPERATIONS

During the three months ended March 31, 2014, operating income from real estate operations was approximately $1.1 million on revenues totaling approximately $1.3 million, an increase of approximately $880,000 in operating income compared to the same period in 2013. For the three months ended March 31, 2013, revenues were approximately $338,000 and income was approximately $217,000. 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 in September 2013, which included 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. Additionally, during the three months ended March 31, 2014, the Company sold approximately 3.1 acres to Halifax Humane Society, Inc. for $391,500 or approximately $128,000 per acre for a gain of approximately $347,000. During the three months ended March 31, 2013, there were no land transactions. The increase in oil lease revenue from the three months ended March 31, 2014 to the three months ended March 31, 2013 was approximately $586,000.

GOLF OPERATIONS

Revenues from golf operations totaled approximately $1.4 million and $1.5 million for the three months ended March 31, 2014 and 2013, respectively. The total direct cost of golf operations revenues totaled approximately $1.3 million and $1.4 million for the three months ended March 31, 2014 and 2013, respectively. The Company's golf operations had net operating income of approximately $84,000 during the three months ended March 31, 2014, representing a 48% improvement over the net operating income of approximately $57,000 in the same period of 2013. The decrease in revenues reflected reduced revenues from greens fees which was due to a reduced level of rounds played as a result of a higher number of days of poor weather offset by increased revenues from our memberships. The approximately $27,000 improvement in the net operating results from the golf operations was primarily due to reduced operating costs particularly in our cost of sales and management of staffing.

INTEREST INCOME FROM COMMERCIAL MORTGAGE LOAN

Interest income on commercial mortgage loans totaled approximately $944,000 during the three months ended March 31, 2014. Specifically, interest income on the commercial mortgage loan which was acquired in August 2013 and paid in full in January 2014 totaled $844,000 during the three months ended March 31, 2014, including the remaining accretion of the purchase discount of approximately $650,000, interest income of approximately $36,000, and an exit fee of approximately $195,000, offset by the remaining amortization of fees of approximately $37,000. The mezzanine loan acquired in January 2014 at a fixed interest rate of 12% per annum contributed interest income of $100,000 during the three months ended March 31, 2014. The Company did not have investments in commercial mortgage loans during the three months ended March 31, 2013.


Table of Contents

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

AGRICULTURE AND OTHER INCOME

For the three months ended March 31, 2014, revenues from agriculture and other income, primarily our agriculture operations, totaled approximately $58,000, compared to approximately $98,000 in the same period in 2013. The 41% decrease in revenues during the three months ended March 31, 2014, is primarily attributable to revenues realized from additional timber harvesting during the three months ended March 31, 2013, as compared to the three months ended March 31, 2014. For the three months ended March 31, 2014, the direct cost of revenues totaled approximately $61,000, compared to approximately $31,000, in the same period in 2013, reflecting an increase of approximately $30,000, or 96% during the three months ended March 31, 2014. The increase in expenses is reflective of commissions on timber contracts and additional costs for the maintenance of the agricultural lands. The agriculture and other income operations had a net operating loss of approximately $4,000 in the three months ended March 31, 2014, compared to the net operating income of approximately $66,000 in the same period of 2013.

GENERAL AND ADMINISTRATIVE AND OTHER CORPORATE EXPENSES

General and administrative expenses totaled approximately $1.5 million and $1.8 million for the three months ended March 31, 2014 and 2013, respectively, a decrease of approximately $243,000 or 14%. The decrease in the three months ended March 31, 2014 was primarily comprised of a decrease in our stock compensation costs of approximately $153,000 and a one-time separation payment of approximately $103,000 that occurred in the first quarter of 2013.

Interest expense totaled approximately $413,000 and $297,000 for the three months ended March 31, 2014 and 2013, respectively. The increased interest expense during the three months ended March 31, 2014, as compared to the same quarter in 2013, reflects our increased net borrowings to finance our acquisitions of income properties and our investment in a commercial mortgage loan. During the three months ended March 31, 2014, our long-term debt decreased approximately $16 million and during the twelve month period ending March 31, 2014, our long-term debt decreased approximately $2.0 million. The decrease during the three months ended March 31, 2014, is primarily due to the payoff of the Company's previously held commercial first mortgage loan principal, of which $18.0 million of the proceeds were used to pay down the outstanding balance of the credit facility. 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 March 31, 2014 and 2013, the amortization of loan costs totaled approximately $55,000 and $41,000, respectively.

DISCONTINUED OPERATIONS

As of March 31, 2014 and 2013, no income properties were classified as held for sale in the consolidated balance sheets.

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