John Albright – President and Chief Executive Officer Mark Patten – Chief Financial Officer.

Craig Kucera – B. Riley FBR Liz Cohernour – Wintergreen Steve Olsen – Private Investor.

Good morning, and welcome to the Consolidated-Tomoka Third Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to John Albright, President and CEO. Please go ahead sir..

Thank you, operator. Good morning and welcome to today’s conference call to review the operating results of Consolidated-Tomoka Land Company for the quarter ended September 30, 2018. My name is John Albright, President and CEO of the company.

On the call with me is Mark Patten, our Chief Financial Officer; and Dan Smith, our General Counsel and Corporate Secretary. 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 may make certain statements that may be considered to be forward-looking statements under federal securities law.

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. Also, we filed our Q3 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 be referencing during this call. With that, I’ll turn it back over to John..

At this time, we’ll open it up for questions.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Craig Kucera from B. Riley FBR. Please go ahead..

Hey, good morning guys..

Good morning..

I wanted to go through your, you know, some of the strategic initiatives that you outlined in your slide deck and in the press release. You’re thinking about generating maybe upwards of $125 million of proceeds from multi-tenant sales next year and even possibly this quarter because they are at market, which makes sense to be more of a pure play.

It looks like the expected disposition yields are about 5.75% to maybe 6.5%.

As you look at the pipeline of sort of potential acquisitions, do you anticipate that to be effectively neutral? Or is there potential for accretion there? And are you thinking about any skew towards retail or office or just the continued mix?.

Yes. I think to start at the latter part, probably be a continued mix, but if we had the opportunity, certainly skewing towards the retail would be the desire. But as you can see from our acquisitions, sometimes, we’re finding pretty compelling yield on the office side.

But we’ll be – basically, on the recycle of the multi-tenanted properties, we’re going to take our time, make sure we try to get premium pricing and obviously fit some of that exchange into the two acquisitions we just made. But obviously, we feel like we’ll be able to make accretive yields based on where these properties should trade.

So the idea would be, obviously, to have accretive transactions from the recycling..

Got it.

And it looks like there’s two other multi-tenant assets that are relatively small, at least from an NOI contribution perspective in Brandon and Dallas, are those – are you ultimately looking to potentially sell those down the road or are those likely long-term holds?.

Yes, eventually. But obviously, we’re taking care of the larger assets. But eventually, we’ll definitely get to those. But as you mentioned, they’re fairly small..

Right. You got a goal out here now to really get you pretty much to 85% income properties by the end of 2019, and really not have too much land left to sell.

Can you update us on where that puts you in consideration for potentially converting to a REIT from the perspective of timing?.

Yes, so I think still, we’re in that kind of timing of thinking about it, having the board consider it. And obviously, it needs to go to shareholders. But it looks like 1/1/2020 would be reasonable target for us..

Got it. And, Mark, I guess, you go to the balance sheet about half your debt currently, is floating.

When you think about selling a lot of this land and sort of recycling capital to what the company looks like, maybe at that point in 2020, how does the balance sheet look? Do you continue to carry that amount to floating rate debt or kind of – can you give some color about how you think balance sheet looks like down the road?.

Yes, thanks Craig. The way we’ve kind of done it in the past, which is how I think we’d probably approach in the future even as we get to close to 2020, is the credit facility is kind of our functional capitalization of transactions in front of the reverse transactions of selling land. So I think that’s probably how we’ll try and continue to do that.

So whether we look at some fixed-rate debt just simply for different reasons other than how we fund our acquisitions. But I think right now that’s how we see it happening..

Got it.

Just wanted to get a little bit more color on the acquisitions you guys recently completed here and in fourth quarter with the fidelity acquisition in Albuquerque, what are the annual escalators there?.

Yes. So that one, we – we’re happy to have an annual escalation on that. So that’s kind of not very regular that you would have an office building with annual escalations, but this one does. So we’re pretty thrilled with that..

And as the – you guys put out that the acquisition cap rate was 7.75, is that a cash, or is that a gap over the 10-year remaining lease term?.

Well, that’s the cash investment cap rate..

Got it.

And the escalators at the Jacksonville ground leases, I think, there’s a note that it generally increases every five years, is that given that it was built 2017 should we assume that we won’t see anything until 2022? Or is it – is that a fair assumption?.

Well, they’re staggered, obviously, on when the lease commences – happen. But these are fairly new, so you can – safe to assume that it’s going to be more towards the five years. There – we do have one that’s annual, but, yes, I would say five years out is when you’re going to see most of the activity..

Okay. Just a few more for me, and I’ll hop off to get to queue. You closed with these two acquisitions in Jacksonville and Albuquerque, I think you closed about $103 million year-to-date, which is above the midpoint of your guidance.

Are you actively working on other transactions that could potentially close here in the fourth quarter? Or I know your is up to $120 million, but do you feel, given that you’re already above the midpoint here early in fourth quarter, do you have a sense of a sort of what the rest of the year looks like?.

Yes. We’re still active in looking at opportunities. But it’s safe to say, we’re not reaching for anything. If there’s something out that really fits and we like it a lot and it’s accretive to the portfolio as far as quality and so forth and yield, we would certainly transact..

Okay. O’Connor elected to terminate its contract that the industrial park.

Can you give us some additional color there on what happened? And are you seeing continued interest in that parcel from other potential parties?.

Yes. So O’Connor, it definitely – I will say this in general, that there’s not going to be a buyer for that 850 acres without having some sort of insight into tenant activity, whether it’s in a tenant in hand or our knowing that something could happen there as far a the user.

So they weren’t able to find a tenant and their time was kind of running out for them. They needed– they just didn’t want to spend more money without seeing something concrete from tenant activity.

So we do have another group that’s interested to put it under contract, but they would more or less want to run the same kind of program, look out for tenants. And we’re right now talking to advisors on the leasing side about strategies to optimize that parcel, so it’s such a large parcel.

So we’re actively thinking about what – how’s the best way to attack it. And I’m sure here, won’t be very long until we come up with a strategy that we’ll pursue..

Okay. It’s not big part of your business, but the golf course, I think you guys are hopeful, putting in a new operator, that operations could improve.

And I guess – what happened, I guess, that triggered the impairment charge this quarter?.

Well, it was a couple of things. And appreciate you bringing that up. So when we brought in Arcis a year ago, December, we were really hopeful that they could take it to the next level in terms of improvement. Just haven’t been able to achieve that yet.

And so when we basically looked at the second half of the year, what we really decided was we should look at different opportunities or strategic alternatives for that asset.

And once we did that, we actually engaged some folks to help us on the valuation side of the business, and then also started to engage with interested parties, and that kind of give us the triggering event..

Okay. And one more for me.

Just on the dividend, assuming you did complete a reconversion, do you have a sense, from the perspective of a payout ratio, of what – maybe what kind of payout ratio that you think the board was contemplating on a recurring FFO or AFFO basis once you’ve completed the vast majority of these land sales and capital recycling in 2019?.

Yes. I don’t think – we’re not really there yet. We haven’t really crossed that bridge, so we’re focused on getting more land sales done and get us in that position. And obviously have more color for you later next year..

All right. Thanks, guys. Appreciate it..

Appreciate it, thanks..

Thanks, Craig..

And our next question comes from Liz Cohernour from Wintergreen. Please go ahead..

Thanks guys. I actually have two questions here that are both follow-ups on the ones that have just been asked. With respect to a REIT conversion, what considerations are you giving to, and how significant is it for the company to look at, the tax changes that have been implemented over the last year? John P. Albright.

Well, I guess, I’d say that it’s certainly a data point for us to consider. I mean, if you drop the corporate rate down to basically 25% – 21% for the corporate, but the mix is 25%, that’s certainly relevant. But when you consider our land basis, it’s still – 21% of that gain is still a pretty big number..

Right. And if you were to be acquired by somebody who could match up their tax needs and yours, those – a lot of those issues would be going away. A second question goes to the golf operations.

At that time of the acquisition in 2017, CTO acquired the land, as I recalled, something like $1.1 million, plus a donation of over 14 acres of land, to the City of Daytona, which is next – the land next to the municipal stadium. And at that time, the land was valued at somewhere between $250,000 or $300,000 an acre.

The press reported comments from the city that they were surprised anybody was willing to be paying that much. And the – at December of 2016, you valued the golf at the little over $3.5 million. March of 2017, after the purchase, it was $5.8 million. June of 2018, it was $5.7 million.

And now you’ve got the writedown of $1.1 million, which gets you to $3.1 million, which is sort of a big drop between $5.7 million and $3.1 million. It looks to me like more than $1 million. But this whole thing looks like it was basically misdirected or a gift to the city..

So obviously, whoever decided in the company’s history to build this golf project clearly wasn’t – in the company’s history, that, that idea in hindsight, but that’s hindsight. So when we bought the land lease from the city, the golf operation was unsellable. No one would buy it because of the land lease.

So the purchase of the land lease was necessary to have a property or operation that you could sell. So that’s the – was the necessary step to make to put us in position to sell the golf operations..

The other thing I’d say, Liz, is that, that payment was basically buying out a lease where we were going to have to pay it over the next eight years. So it’s not as if that was an incremental incurrence of cost, because we would have been paying that lease payment for the next seven, eight years..

Right. And that lease was, again, a management-negotiated lease..

The prior management, that’s right..

Same shareholders, prior management, yes?.

Yes..

Okay.

And just as a point of inquiry, the shares that are bought back during the course of the year, how many of them are typically awarded to management in terms of bonuses?.

I don’t understand the question.

Mark, you want to take that?.

If you were to buy back 100,000 shares in the course of the year.

So over the last couple of years and this year, are about 50,000 or about – isn’t it about half of the shares that are bought back, that are awarded to management so that the total shares outstanding don’t go down by very much?.

Well, the way I’d say it is we bought back over – nearly 530,000 shares in last five years and there were not nearly that many shares granted under the equity incentive program..

Approximately half?.

I’m sure I’ve got the number. Happy to send it to you, Liz..

No. It’s just as you, on a routine basis, announce how many shares you bought back, the number of outstanding shares don’t go down by nearly as much. And it seems to be that, that’s because the shares are awarded in terms of bonuses, and then the bonuses are quite promptly sold by the recipient back to the company.

So it seems to be a round robin of shares moving around, where the shareholders pay to buy them back, and then the shareholders pay to give them to the executive. So I’m just curious as to how that works..

Okay. Well, thank you for that insight. Thanks, Liz..

Yep..

[Operator Instructions] And our next question comes with Steve Olsen, Private Investor. Please go ahead..

Good morning, John, Mark and Dan. I know you’ve been speaking about the recycling of the income- producing properties, but I was a little bit surprised at the speed and the size or the number of properties that you’re planning on recycling, and that might be on my end.

Using your low end of your sales proceeds, is it accurate to say that, from the company’s cost basis, these properties are breakeven to a slight gain?.

No. From where we purchased it, there’s some healthy gains, in our opinion..

Well, I added up to about $106 million being spent for the properties being sold at a range of $110 million to $125 million. Jacksonville was bought at $25 million. And maybe on your books, I’m not talking about a gap..

No, no. You’re talking about purchase price – Steve, I could….

Correct. And I mean, including the intangible – the amount that’s allocated to the in-place leases, you need to include that in your cost basis..

Well, okay. So, two things, one is that the range of $110 million to $125 million was purposely conservative. Hopefully, that makes sense. Two is that the intangibles, generally speaking, are going to generally wash out, the way that accounting works. So, I think you’re right on a book basis, that’s going to be relevant.

but on a cash basis, it’s really going to be fundamentally the property. So I guess, the way I’d think about it is that our objective was to demonstrate what it is we were trying to accomplish, and the range was intended to be prudent in terms of conservative..

Why do you say the intangible leases wash out?.

Because generally, the economics of the transaction aren’t going to take into consideration the accounting for intangible assets or liabilities recognized with a lease, or otherwise, a commission or anything else.

I mean, if you’re thinking from a book basis, then you’re right; but if you’re thinking from – but at the end of day, that’s non-cash, really..

But wait, the – let’s say, on Jacksonville, the $4 million or $5 million allocated to the lease is real cash of the company that now is being kind of amortized. So, it’s actually being lost and not considered as an expense when you determine your cash flow from that property. But I would argue that I want that $4 million back when you sell it.

If you say that it’s gone and you’re going to compare it to the $20 million that you’ve allocated to land and building, I think that’s improper..

I’d be happy to go through it with you offline. I’d just….

But practically, you did pay $25 million for Jacksonville, correct?.

Correct..

Okay. So I think, as owners of the company, we are going to compare the proceeds to the $25 million. You may have a GAAP basis of $17 million or $18 million, so you may show a gain on it..

Steve, we got it, that can certainly agree on $25 million. So let’s wait and see kind of where that appears and we can have a chat..

Okay, yes. And I appreciate you disclosing the sale proceeds from your original cost basis and not highlighting the GAAP gain..

Right. Sure. Yes. Understood..

Okay. And then we can see whether or not these added value to the NAV or have been just neutral or negative to the growth of the NAV over the past few years..

Exactly. Totally agree..

On the – help me understand the Jacksonville properties. Those are referred to as a ground lease. So I imagine, the company a few years ago, bought, I think it was a 7-Eleven in Dallas, a very small investment. But there, I think you owned the building and the land.

Here, a ground lease, I always understand that to mean somebody else spent the dollars to build the building.

Is that correct in Jacksonville?.

Correct..

So the building, obviously, will revert or will revert or will remain there on the land at the expiration of the lease.

But did the tenants pay for the building?.

The tenant. Yes, the tenant spent the money to build the building and all the site work. And at the end of the lease, that – the improvements revert to us..

Okay. Because just doing back of the envelope math, it’s about $4 million being allocated to this 1-, 1.5-acre parcel of land, is that correct? Because you’re not going to put the buildings on your book because you don’t own that.

Somebody else has that on their books and is earning a return on their, let’s say, $2 million $3 million that they spent on the building..

Correct..

Okay. All right. Thank you..

Thanks, Steve..

And this concludes our question-and-answer session. I would like to turn the conference back over to John Albright for any closing remarks..

Thank you very much for attending the investor call. And if you have any follow-up questions, please don’t hesitate. Thank you..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..