John Albright - CEO Mark Patten - CFO Dan Smith - General Counsel.

David Corak - FBR Capital Markets.

Good day and welcome to Consolidated-Tomoka Land Company First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to John Albright.

Please go ahead..

Thank you. Good morning, and welcome to today’s Consolidated-Tomoka Land Company’s Conference Call to review our operating results for the first quarter ended March 31, 2017. My name is John Albright, President and CEO of Consolidated-Tomoka Land Company.

On the call with me this morning 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 from last night. In addition, let me note that we filed our first quarter 2017 investor deck last night, which is now available on our website.

Our investor deck provides additional information you may find useful. Lastly, as most of you know, our 2017 annual shareholder meeting is next week on Wednesday April 26.

As you all likely also know, we are in the midst of a proxy contest with Wintergreen Advisers in connection with the matters to be voted on at the 2017 annual meeting, including the election of the company's Board of Directors.

Because of these circumstances, we respectfully request and will require that during the Q&A which we’ll hold at the end of our prepared remarks, those of you wishing to ask a question need to 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 investor deck.

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. While we look forward to reviewing our results for the first quarter of 2017 and highlight a number of developments in our business, my opening remarks will address the state of our business and the progress we're making in executing our business plan.

The first quarter of 2017 was truly a significant quarter for our company in many ways beyond simply the strong financial results.

As you know from our release, we finally closed the first Minto contract, a landmark transaction for CTO in which we sold 1,581 acres for approximately $27.2 million and achieved a tax deferred gain of approximately $20 million, delivering $2.20 in earnings per share after tax.

While we're thrilled to close this transaction, the announcement that coincided with this deal will likely prove to be transformational for not just CTO, but Daytona Beach, Volusia County and quite possibly the state of Florida, and indeed the retirement community industry.

The announcement of Minto’s partnership with Margaritaville Enterprises and the launch of Latitude Margaritaville brand for a new Minto age restricted lifestyle community, was unprecedented and clearly tapped into a underserved demand segment in the active adult residential space.

We’ve mentioned before that Minto indicated that they expect to deliver nearly 300 units per year, if not more, when they get fully ramped up for this 3,400 unit age restricted development. With very little marketing today, the Latitude Margaritaville project has generated more than 50,000 folks registering to learn more about this project.

We firmly believe that this project will provide an economic engine for our area for years to come. We're particularly pleased because we believe this engine will serve to activate more of our available land for any number of real estate investment classes.

We’re also pleased to have been able to deploy all the proceeds from the Minto transaction through the 1031 tax deferred structure into four income property acquisitions, including all three properties acquired this year. At the quarter end, we completed the sale of 28 acres to an affiliate of VanTrust Real Estate, a developer out of Kansas City.

VanTrust is developing the site into a 400,000 square foot distribution center for the global medical device and pharmaceutical company B. Braun. B. Braun is bringing an incremental 175 jobs, along with retaining the Gambro operations that they recently acquired. In addition, our pipeline of land contracts remain strong.

even though we’ve closed the number of transactions in our pipeline, we have added deals that we put under contract, a couple in December, including that 35 acre site for Buc-ee’s, which will be the first outside of Texas for this very popular, large scale convenience store, a 30 acre contract for the auto dealership, and a nine acre contract for possibly a specialty grocer.

Our pipeline now includes eight contract with eight separate buyers for approximately 2,200 acres and potential proceeds of approximately $81 million or an average price per acre of approximately 37,000.

As we have stated on a number of occasions this past year, our board and our company remain committed to maximizing long term value for all of our shareholders. As part of this commitment, we were able to invest approximately $3.7 million in our buyback program from the beginning of the year through April 13, buying back more than 71,000 shares.

It’s important to mention that this activity reflects the completion of the $10 million buyback program that we were able to launch after year-end earnings in February 2016 2016 and the commitment of our new $10 million buyback program that we announced last month.

Through April 13, we have already deployed over $1.1 million of our $10 million buyback program. In aggregate, including just the last two full years and the last four months of this year, we have repurchased more than 340,000 shares, deploying more than $17.7 million at an average price per share of $51.60.

Now I’ll turn it back over to Mark to review our operating results..

Thanks, John. As John mentioned, we had very strong quarter, driven by significantly increased revenues, of which the substantial majority was from our land sales. In addition, our earnings benefited from one element of the acquisition of the golf course land for LPGA International, which relates to the accounting treatment for the related land lease.

I'll get to that in a moment. Our total revenues for the quarter ended March 31, 2017 increased by more than $20 million to approximately $38.7 million, an increase of more than 110% from the same period in 2016. As I noted, the largest contributor was from our real estate operation segment, which includes land sales.

That segment of the business represented the $20 million increase I mentioned, with the Minto’s sale generating a significant majority of that increase. Net income for the first quarter totaled $12.7 million, an increase of approximately $11.3 million from the same period last year, which is an increase of nearly 800%.

Our basic net income per share of $2.28 per share was an increase of $2.03 per share compared to the same period in 2016, or an increase of 812%.

Our net income in the first quarter of 2017 reflected the increased revenues I mentioned earlier, offset by the associated increase in direct cost of revenues of approximately $7.2 million, which primarily reflects the cost basis for our increased land sales revenue, as well as a few other elements of our operating results that I'll highlight.

Our G&A expense was lower by approximately $1.6 million. A year ago in the first quarter, we incurred approximately $1.6 million in accelerated non-cash stock compensation expense.

So absent that item, you might consider our G&A as flat year over year, but we believe it's worth mentioning that a year ago in the first quarter, our G&A included approximately $1 million in costs that we'd hoped would be non-recurring.

The cost for lawyers and accountants to investigate allegations and claims from our largest shareholder that were ultimately determined to be baseless and without merit. Consequently, we’d hoped our G&A for the first quarter of 2017 would reflect the year over year decrease.

However, recent activities of our largest shareholder have again caused us to incur significant G&A cost that we hope would be non-recurring, including legal costs and costs associated with the proxy contest that I referred to earlier and other related expenses. As a result, our G&A was fairly flat year over year as I mentioned.

As you would expect, with the growth of our income property portfolio, our depreciation and amortization expense was up nearly $700,000 year over year. And finally, the final item impacting our net income pertains to the LPGA International transaction that I referred to earlier.

In connection with buying out the lease we had with the City of Daytona Beach for the land that basically represented all of the golf course land and other areas of the club, we paid $1.5 million to acquire the property and terminate the lease.

Had the lease not been terminated, we would have had to pay the remaining lease payments through 2022, which totaled approximately $1.7 million. Because of the structure of the original lease payments, we've been applying straight line accounting for this lease since its inception.

So when the lease was terminated, we recognized the non-cash income item representing the elimination of the straight line liability. Stated differently, for GAPP we reversed the liability we had built up since we won't have to pay the cash rent in the next five years.

That non-cash income item, the amount of the deferred liability that we eliminated was approximately $2.2 million, which equated to $0.24 per share in after tax earnings in the first quarter's results. Because of this non-cash item relating to the LPGA International lease termination, we expect to exceed our EPS guidance for the full year.

In addition, the recent land transaction that we put under contract for 30 acres on the west side of Interstate 95, we believe is likely to close in the near term. So the impact of that closing will also contribute to us succeeding our EPS guidance for the full year. Our liquidity position remained strong at quarter end.

We finish the quarter with approximately $8.5 million in cash, which includes approximately $4.1 million of cash that’s restricted related to our 1031 exchange transactions. And we had a borrowing capacity in our credit facility of more than $50 million based on the level of borrowing base assets.

Our net debt, which represents the full face value of our outstanding debt at quarter end, less our cash and restricted cash affiliated with the 1031 exchange transaction, stayed relatively flat to where we were at year end, approximately 32.9% relative to our total enterprise value, which compares favorably to our leverage guidance of less than 40% of total enterprise value.

We feel it’s also worth making note that our book value per share increased by $1.191 per share to approximately $27.88, which is an increase of 7.4% compared to year end 2016.

The growth we achieved in this key financial metric is reflective of the substantial impact that land sales transaction have on our book value, while the deployment of those proceeds through the tax deferred 1031 structure generates growth in our NOI that translates into continued growth in a measurable element of our evaluation.

Finally, I'd like to reiterate a few points I made in our year end call regarding our purchase of the LPGA International Golf Course land and the related buyout of the company's land lease with the City at Daytona Beach. In the simplest terms, there were five elements of consideration we provided to the city.

First, we simply prepaid the rent that we were going to pay over the next five years. As I mentioned, an obligation of $1.7 million. Second, we contributed approximately 14 acres of land that had a basis of zero on our books. And limited value to us is there was three odd shaped parcels which surrounded the city's municipal football stadium.

Third, we agreed to renovate the greens on the Jones course that have not been renovated in any fashion since they were first planted nearly 20 years ago, which is a very long time for a golf course that intends to keep the LPGA qualifying school and hopefully have an LPGA tour event in the near future.

Fourth, we agreed to provide additional consideration of up to $700,000 based on a charge of $1 per golf round, which based on the annual rounds played, would take about 10 years to reach. Lastly, we committed to share with the city 10% of the upside of any potential sale transaction above $4 million.

In exchange for that, we consolidated the fee interest ownership of the land with a leasehold interest which is essential for having optimum optionality and increased interest for this asset.

Under the prior structure where the ownership of golf club effectively bifurcated between CTO and the city, committing to any significant level of capital improvements was unlikely and our ability to joint venture monetize the operations would have been limited or less optimal from a valuation perspective.

Also the transaction resulted in immediate reduction in the operating cost of the golf operations by nearly $300,000 a year by eliminating the lease payment to the city. That's approximately 70% of the reported loss for all of 2016 and more than 30% of the total cash loss in 2016.

In addition, we believe this transaction secured for our company the upside in potential membership growth and related revenues that might come from the Latitude Margaritaville homeowners we all expect will be generally retirees, but have a fair amount of free time to do things like play golf.

We live in a community that does not have a golf course, which is adjacent to our club which has two golf courses. Consider this metric. Every 30 homeowners that join our club would generate at least $100,000 in new membership revenue.

As I noted at year end, we believe that combining the fee simple and leasehold ownership interest, greatly enhances our ability to maximize the value potential of this asset.

In addition, as we mentioned in our 10-K, we're planning to move out of the more than 8,000 square foot of office space that we rent from a third party at a cost of approximately $200,000 a year, moving into a 7,500 square foot vacant space in our single story flex project Williamson Business Park that has remained vacant since we completed the building in 2014.

Approximately 30% to 35% of that estimated $800,000 in cost reference in the 10-K reflects the cost to complete the build out of the shell, a cost that we would have incurred were we to have leased the space to a third party tenant. We're not moving from a trailer to a palace.

We're actually downsizing and moving from a Class A office building into a flex office space that we own. So the simple analysis should sound something like this. Invest $800,000 in one of our own buildings to make $200,000 a year or in our case save $200,000 of overhead, which will be reflected directly and immediately to our bottom line.

That's a 25% return on our capital and increases the value of the flex office building should we decide to sell it. Now I’ll turn it back over to John to discuss some of the other activities from the first quarter..

Thanks, Mark. With regard to our income property portfolio, we had a strong quarter, investing more than $19 million at a weighted average investment yield and acquisition of approximately 6.4% above the low end of our guidance of 6%.

Subsequent to quarter end, we acquired a 22,500 square foot single tenant property just outside of Boston for $6.3 million, which represented a 7.1% investment cap rate at the acquisition date. The property is leased to Jo-Ann stores under a triple net lease, with a remaining term of 12 years.

We really like this asset for a number of reasons, but to mention a couple of highlights. It’s situated along a high traffic corridor for Metro Boston and is an area that has high barriers of entry for new supply and strong demographics.

In addition to our income property acquisitions, we have also executed both leases for the two restaurants we’ll be developing on the beach parcel site in Daytona Beach.

We’re pleased to have completed these two 15 year leases, one with the operator for LandShark Bar and Grill, which is a Margaritaville concept, and the other with Cocina 214 Restaurant & Bar.

As we mentioned in our earnings release, we're expecting to complete the development of these two restaurants, each at a little over 6,000 square feet in time for the tenants to commence operations in the first quarter of 2018. That concludes our prepared remarks. At this time, we'll open it up for questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from David Corak with FBR Capital Markets. Please go ahead..

Good morning guys.

Can you kind of walk us through just very broadly how you're feeling about the various retail sector exposures in your income producing portfolio at this point and how we should think about that transforming going forward, if you’re comfortable with exposures now or if you are more favor - you're favoring other sectors going forward. .

Sure. Thanks, Dave for the question. So obviously we've been very focused on investing in really good located real estate and strong markets, more infill locations, stronger demographics as you will see from our investor presentation that we put up last night.

There's a page there that has our demographics of our portfolio compared to some net lease REITs. And so obviously we're always thinking about the downside.

And so for instance when we buy retail pieces of property, for instance Jo-Ann's in Boston, we're looking at the rental rate that they’re paying, the basis we’re paying and what could back fill that box if something happens.

And given that location with 100,000 people a day of traffic, with the infill nature very difficult to develop anything else in that corridor, we feel very comfortable that there'll be other retailers to backfill it if something ever happened to that tenant. Same thing with for instance Staples in Sarasota. Urban property.

We’ve put in on our investor presentation an aerial showing that location where it's again an infill type location. We feel very good that if they ever left, there’d be plenty of tenants that would like that exposure on Fruitville Road and plenty of people that would fit into that kind of box.

So we're always looking for real estate that's going to be more of a long term position that will always have different users. So when we bought a portfolio of restaurants, that's not going to have an effect on - the Amazon effect if you will. Those are really strong locations in Austin and Charlottesville and in Charlotte, North Carolina.

Obviously BofA in Monterey, California with development potential. So we're always kind of looking over our shoulder and always kind of looking at the downside.

So we feel very comfortable with our portfolio and as we invest going forward, we're always looking for something that that particular tenant might not be there forever and we're not relying on that tenant to meet our returns. .

Okay. Fair enough.

And then turning over to the beach parcel and the rents you guys are lining up to get from those two restaurants presumably I guess in 1Q ’18 or a little bit after, can you just talk about kind of the economics or the yield on that deal? I guess another way to look at it is, what's your basis in the land today? What do you have to put into it from here and then maybe even, what do you think the fair market value of the land is today? Obviously your previous partner bought that for somewhere in the $30 million range a few years ago, but how should we think about valuing that parcel today?.

Yes, sure. So you're right. So the way that transaction transpired before us was a developer bought it for $35 million. The lender or (indiscernible) money lender, made a loan for $25 million. They foreclosed on it. We bought into their position and totally bought 100% of their position after we were able to entitle it for a million square feet.

So our basis is $12 million. And so we signed up these two leases, one LandShark, one Cocina 214. And the structure is that we’d invest up to roughly $16 million on those two restaurants. One restaurant is going to put in more capital. The other will put in all the capital.

And the structure is, what we've looked at on the beach side is the highly successful beach restaurants in Daytona. There’s only a couple that are positioned beachfront and the parking situation for the other tenants are very constrained and challenged.

So we're, this particular parcel six acres, we have plenty of parking and we feel that with these new restaurant concepts, if they just did the sales of these other restaurants with older kind of facilities and limited parking, we're going to hit potentially double digit equity yields, unlevered equity yields.

So the way we look at it is obviously two restaurants, single storey restaurants on a six acre parcel on the beach that we just entitled for a million square feet, is going to be really a covered land play. So on its own, we feel like the returns are going to be very inspiring, but with long term potential of a redevelopment play.

And so you may remember that we structured in these leases that we can buy out the tenants after five years and tear down the restaurants if the market is robust enough to build a 20, 30 storey type condo, hotel or a mixture..

Hey David, just to be clear, what John was saying is our total basis once we build the restaurants, would be about 16 A. .

Okay, thank you for clearing that. That’s helpful. Just when we look at valuing that asset, it's certainly one that could be plus or minus $5 million or $10 million to the upside. So just trying to get a sense of that. But thank you for the color there.

And then moving over to Minto, can you just - I appreciate the comments earlier, but can you just talk about the traction that Minto is getting with this Margaritaville concept? I mean for all intents and purposes, I mean it's literally been all over the news, but in one of the press releases, one of the lines that Minto - someone from Minto said was that they're conceivably looking for more land than just one and two, conceivably more than the 6,000 to 7,000 homes that I think they specifically mentioned you guys in that as a potential seller.

How should we think about that going forward? I mean you obviously have that parcel of land that is adjacent to Minto two I believe that you’d proposed residential.

So I mean how should we think about that going forward?.

Yes. No, thanks. So you're right. Just to kind of back up. So the first phase that they purchased is going to basically handle 3,400 units. So when they talk about in their press releases that this community is 6,900 acres, they're obviously incorporating phase two that they have under contract with us.

And right now they're doing a lot of their engineering work, site planning work and so forth. And so - and they've also made public remarks that's been picked up in the press that they may look at acquiring additional land from us. And so that would mean our last parcel available would be that 1,000 acres. We call it track F along SR40.

So they’re certainly pleased with the unbelievable response. Right now they’re 100% focused on their project getting underway that you can see one of our aerials in our presentation that they've done a tremendous amount of work already.

So they're doing a lot of trade work with the different trades out there as far as making sure they can get the labor and the sub contractors necessary to deliver 300 homes plus per year. But yes, they see that with the traction they've gotten here and the popularity of this, that they're going to need more land.

So we hope that that strength follows through and we can kind of accommodate them. But that’s definitely something that could be on the cards. .

Okay.

And it’s definitely 55 and older in those communities?.

Yes, definitely. So it will be a little bit (indiscernible) for you, David..

Well, there goes that. Yes. Okay. Appreciate that. All right, then one last one for me.

Any update on the timing or economics at the Grove?.

Yes. So the Grove is going very well. We've had a very positive response from 24 Hour, that this opening for them has been very strong. And so we are around 56% leased now with lots of other tenants touring as we basically finish up the renovation. But these tenants that have been signed up, we're starting to build that work now.

So these tenants will basically all kind of come online or start coming online in the third and fourth quarter. So right now there’s a lot of coordination with regards to build out. So we have demoed the old space and do build out, but it's all going very well. And so it's getting more and more traction.

Wawa is still on tap for 2018 to start construction on their store there..

Okay, great. That’s helpful guys. I appreciate the time..

[Operator Instructions]. And there are no more questions at this time. So this concludes our question-and-answer session. I would now like to turn the conference back over to Mark Patten for any closing remarks..

Thanks, Steven. Thank you again everyone for attending our call this morning. We appreciate your interest in Consolidated-Tomoka Land Company. Have a great day. .

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