John Albright - President, CEO & Director Mark Patten - Principal Accounting Officer, Senior VP & CFO.

Craig Kucera - B. Riley FBR.

Good morning, and welcome to Consolidated-Tomoka's First Quarter 2018 Earnings Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to John Albright. Please go ahead..

Thank you, operator. Good morning, and welcome to today's conference call to review the operating results of Consolidated-Tomoka Land Co. for the quarter ended March 31, 2018. My name is John Albright, President and CEO of the company. On the call with me is Mark Patten, our CFO; and Dan Smith, our General Counsel and Corporate Secretary.

Mark and I will review the details of our first quarter financial results in a moment. First, I'll turn it over to Mark to provide you with customary disclosures regarding our comments on this call today and a few points regarding the format of our call..

Thanks, John. Good morning, everyone. During our call today, we'll make certain statements that may be considered to be forward-looking statements under federal securities laws.

The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made.

Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in our earnings release issued last night. Let me note that we filed our Q1 2018 investor presentation last night, which is now available on our website.

Our investor presentation provides additional information you may find useful and that we may reference during this call.

On another note, the company, its directors and certain of its executive officers may be deemed to be participants in the solicitation of proxies from the company's shareholders in connection with the company's 2018 Annual Meeting of Shareholders, which is scheduled for next Wednesday, April 25.

The company filed its definitive proxy statement back in March, and we have filed and may file additional related proxy materials with the SEC in connection with any solicitation of such proxies.

Shareholders of the company are strongly encouraged to read the proxy statement and all other related materials filed with the SEC carefully and in their entirety when they become available as they will contain important information about the 2018 annual meeting.

Lastly, as many of you likely know, in connection with our upcoming 2018 annual meeting, we have received a shareholder proposal and a nomination of 3 director candidates from Wintergreen Advisers on behalf of Wintergreen and the funds that they serve as financial adviser, collectively our largest shareholder.

We respectfully request and will require that during the Q&A this morning, which we'll hold at the end of our prepared remarks, those of you wishing to ask a question should ensure that your question pertains solely to the results for the first quarter and, as applicable, to the transactions that have occurred during the quarter or to the information contained in our Q1 2018 investor presentation.

We want to ensure the call today is appropriately focused on our first quarter results, which we believe is the primary interest of the attendees on the call. We very much appreciate your cooperation to this request. With that, I'll turn it back over to John..

Thanks, Mark. We were pleased with the results we achieved in the first quarter. During the quarter, we completed the sale of nearly 35 acres to Buc-ee's for approximately $14 million, representing a price per acre of $400,000.

We terminated our contract with a specialty grocer on 9 acres near the intersection of LPGA Boulevard and Williamson Boulevard due to their default on the contract and executed a new contract on that same 9 acres with a developer at nearly $500,000 more than the previous purchase price with a potentially faster close.

As of today, our pipeline represents potential sale of just over 6,000 acres or approximately 74% of our remaining landholdings with total potential proceeds of just over $137 million, reflecting an average price per acre of approximately $23,000.

I'm going to turn it over to Mark to highlight a few elements of our first quarter operating results before I discuss the activities in our income property portfolio as well as some other matters relating to other segments of our business..

Thanks, John. As John mentioned, we had a solid first quarter. As our release noted, we achieved net income of $1.97 per share on revenues of nearly $25 million.

The highlights for the quarter in terms of revenues and earnings include the impact of the approximately $14 million in revenue and the resulting approximately $1.61 in earnings per share from the Buc-ee's land sale that John discussed as well as a surface entry rights transaction we completed on approximately 600 acres of our subsurface interest, which contributed approximately $0.06 per share net of tax.

In that transaction, we also acquired 40 surface acres in Henry County, which we expect will provide a potential future drilling site for Kerriton [ph]. In addition, the sale of the 4 multi-tenant flex-office properties that John will discuss in a moment provided approximately $0.49 per share in earnings after tax.

While our total revenues and net income decreased versus the first quarter of 2017 due primarily to the impact of the Minto land transaction last year versus the size of the Buc-ee's land sale this year, our revenues from the income properties portfolio increased by over $2.1 million, including nearly $1.6 million related to our recent acquisitions that weren't in our results in Q1 of last year and almost $400,000 of increased revenue from The Grove property in Winter Park and our newly opened beach restaurant properties.

We finished the quarter in a strong liquidity position, including approximately $3.7 million in cash and nearly $55 million of capacity in our credit facility. Our book value per share increased to $34.86 at March 31, 2018, an increase of approximately 6% during the quarter.

And our leverage level bumped up to approximately 37% at quarter-end relative to our total enterprise value.

I'll also mention that we increased our quarterly dividend to $0.06 per share for the first quarter of 2018, which would equate to an annualized dividend level of $0.24 per share, which would be an increase of more than 30% over the dividends paid in 2017.

Now I'll turn it back over to John to discuss activities in our income property portfolio and the loan portfolio..

Thanks, Mark. Regarding our loan investment portfolio, we expect that the two loans totaling approximately $12 million in outstanding principal will both be repaid by the end of the second quarter. The first quarter was a busy quarter for our income property portfolio.

As mentioned in our year-end conference call, our 2 net lease restaurant properties on a 6-acre beach parcel opened in late January, and both operators have seen strong traffic in the first quarter.

In February, we acquired a newly built commercial retail property in downtown Aspen, Colorado, for approximately $26.5 million, net of the master tenant's contribution to the purchase.

We bought this 19,600-square-foot property at initial cap rate that's below the low end of our investment guidance but with significant rent escalations during the 20-year master lease, which we feel gives us a compelling risk-adjusted return.

Finally, we also completed the sale of our 4 multi-tenant flex-office properties here in Daytona Beach that we self-developed. We sold these office properties for approximately $11.4 million or $168 per square foot and generated a gain of approximately $3.7 million or approximately $0.49 per share after tax.

We were able to include this transaction as a one of the reverse 1031 transactions that went into our acquisition of the single-tenant office property in Hillsboro, Oregon in the fourth quarter of 2017.

This transaction represents a compelling recycling of our capital for us as we sold these multi-tenant office assets in Daytona Beach at above replacement cost and invested the proceeds into a single-tenant net lease property outside of Portland leased to Wells Fargo at below replacement cost and at a higher yield than the Daytona Beach properties and with a stronger credit.

That concludes our prepared remarks. At this time, we'll open it up for questions.

Operator?.

[Operator Instructions]. Our first question comes from Craig Kucera with B. Riley FDR..

I wanted to start off with the acquisition you closed during the quarter and just get a little bit more color, particularly on the lease structure.

If you're talking about going from a 4.5% initial to potentially 7.25% in a couple of years, kind of how do you -- I guess sort of beyond that, do you continue to see those rent escalators? Or are those just sort of a quick ramp-up and then something a little flatter?.

Sure. Thanks for the question. So the building, when we transacted and bought the building, only had a roughly 25% leasing and is completely a brand-new property.

And the contract purchasers have a deep bench of tenants that are interested, and what they were interested in was the structure with us where it gives them time to curate the right tenant mix to optimize the value.

So what we did was structure the master lease where it comes in at a low -- a fairly low going-in cap rate, but it escalated and steps up fairly steeply. And also, we have a percentage rents ability to do even better than that.

And so that allows them to ramp up their leasing without feeling the pressure to just jam in some tenants that wouldn't be optimal for the long term. And so we're very, very comfortable with the structure in that. We have a master lease as one credit, and then as they lease up the building, we have subleases as an additional credit.

And they're putting in TI and so forth. So the -- we're really excited about the structure, and I think the returns over the years will be very compelling for the quality of their property and the location..

I see.

So sort of what is your embedded occupancy assumption trying to get up to that, call it, 7.25% on top of your guidance?.

So it's a small building, so it doesn't take much to get there. But I will -- I would say that once it's fully leased up, you could see that this would be a high single digit kind of equity yield on the property. And so if you imagine kind of 8%, 9% on their lease-up and then our master lease kind of keeps on ramping up.

And also, they'll have a percentage rent clauses so they can do better than that..

Okay. I got it. Excellent color. Going to Buc-ee sales this quarter, I think you mentioned in the press release that there is a component that will be deferred until you complete some mitigation.

Do you have a sense of the time frame at which you might recognize that gain?.

Yes, probably, I would say that's kind of a 8-month time frame or something like that. It could be less, but it has to do with the Army Corps. So it's a little bit of a time element that we don't have control of. But I would say that, that would be a good starting point..

Okay. Going to your lease rollover, I know you don't have a lot of lease rollover the next few years. You do have a Barnes & Noble coming due here in the next year or so.

Kind of what you are your plans there? Are they renewing? Or are you looking at maybe getting a new tenant?.

Yes. So we have a very interested tenant for that space. They are working on entitlements for what they want to do there, and so they have to work with some of the other tenants in that center. And so we've kept on extending Barnes & Noble until the timing matches up with this particular tenant.

But even if this other tenant weren't able to do what they want to do, the property is very marketable because it's right at -- is adjacent to ONE DAYTONA right across the speedway.

So even though -- when you look at our property list, you see a Barnes & Noble with a short-term lease in Daytona Beach, that might sound like a very risky kind of lease expiration. But if you -- on the ground, you would say, okay, there's 5 different buyers for this at any time.

So it's a very -- it would be a very liquid asset if we wanted to sell it, but we're working with a new tenant to take over that spot..

And do you have a sense of kind of what the rent would be relative to current rent? Would it be a positive spread or relatively flat?.

I would say that would be a -- it would be on a rent basis lower, but on a credit basis, higher and a longer lease term. So if you went to go sell it, even though it's less rent, it would perhaps equate to a higher valuation because of the credit in the lease term versus what you have with Barnes & Noble..

Okay, I got it. It looks like you transitioned your golf operator this quarter.

Can you tell us kind of what your expectations are? Do you think they'll be able to run it at a lower expense? Or do you think you'll see maybe some improvement on the revenue side or perhaps both?.

Yes, actually -- thanks, Craig. Yes, we switched over to Arcis Golf based on out of Dallas, and we're actually pretty hopeful that they'll have a positive impact on both. On the revenue side, look, the biggest opportunity for us is the rooftops that are getting built around us.

On the cost side, I think they're just going to be -- they're going to be better at managing some of the elements of product and running a course..

Okay. Going to your G&A expectations for the year, I know you guys broke out sort of the split between non-cash and the cost of the proxy and cash.

But can you give us a sense of what you're expecting for the overall year?.

Yes, I think if you sort of look at your published report and you think about where we were thinking about we would be, I think we're a little bit lighter than you in terms of the total G&A, including the stock comp.

We'll see where it shakes out these first 2 months of the quarter in terms of getting through the process that we're in now and if anything else comes up. But I think just generally, we're probably about $500,000-or-so lighter than your expectation..

Okay. That's helpful. Now over to The Grove at Winter Park. I think in late 2016, it was 35% leased. Today, it's 63%.

Just so I understand your underwriting, are you saying that you'll be hitting an 8% to 10% unlevered yield once it's 70% leased and sort of we should see it improving from there? Or is that at a higher occupancy?.

No, that's correct. So I will say that the rents are coming in higher than we underwrote, but the timing of getting these tenants open have been a lot longer. The county that the property is in is just very slow on the permitting side. And so we're getting there.

There's a couple of tenants that are going to open up next month, so the velocity should get better. But that's based on the current occupancy..

Okay. You mentioned that you had -- I think it was a specialty grocer that defaulted, and you were able to find another buyer for a nice premium.

But on the default, were there -- was there any hard money that you received or any proceeds from that? Or is that pretty much still out there?.

Yes. We did have a -- I mean, it's not a large amount. So yes, we did capture some deposit. But as I've always talked to investors about, we're not really big on getting big deposits. What we want people to do is spend money on entitlements, which can be very, very expensive.

So even though we collected this deposit, the tenant did spend some entitlement money that we're going to be able to utilize for the next folks. So anyway, we're excited to get another group in here, which is a developer who has relationships actually with the grocer that defaulted, and they could come back around. But we'll see..

Okay, one more for me. I know you released an update on a potential REIT evaluation in third quarter and an estimated E&P distribution.

Can you tell us where the board is in that process today?.

Sure. So we've done all of the kind of work here to be ready to be in a position. We've always said that the board won't consider it until we get through more land sales and monetization where even though we're kind of 60-40 right now income versus land, we'd love to see that more in a 70-30, 80-20.

And once we're at that point, the board will consider it and make a decision and go from there. But we want to be focused on getting these land sales done where we're -- would look more like a typical REIT..

[Operator Instructions]. At this time, I'm seeing no further questions. I would like to turn the conference back to John Albright for any closing remarks..

Thank you very much for attending the call. And if you have any questions, we're around. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..