Consolidated-Tomoka Land Company (CTO) is the largest land owner in the Daytona Beach area, with approximately 11,500 acres. The company focuses primarily on the self-development of this property, and using 1031 exchanges to invest proceeds in income-generating properties.
In addition to this development land, the company owns 26 net leased income-generating properties that management believes to be worth approximately $120 MM. These properties are 100% debt free and threw off approximately $9.5 MM in revenues in 2009, indicating a potential unleveraged return of 7.75%. This cash is used to pay down debt service related to the company's development land and to fund operations.
CTO currently trades at a share price of $28.43, down from a high in 2007 of nearly $80. Its current share price indicates a market cap of approximately $162 MM. Using the company's balance sheet, this indicates a price to book of approximately 1.37. However, the company's balance sheet, in my opinion, understates assets and overstates liabilities. Land is reported at cost from acquisition in and around 1902 and, inclusive of development costs that are not broken out, equates to approximately $2,100 per acre. However, historical land sales from 2006 (earliest year available) to 2009 for commercial land have ranged from $139,389 - $191,390 per acre and for residential land, $47,087 to $100,000 per acre.
CTO's total liabilities of approximately $59 MM include $35 MM in deferred tax liabilities related to 1031 exchanges. These liabilities will not be realized so long as the company continues not to sell its assets. Other significant liabilities include $12.6 MM in notes payable related to the development land and $8.9 MM in accrued liabilities.
Excluding tax deferrals gives a price to book ratio of approximately 1.1. Assuming a more realistic land value of say $30,000 / acre gives a ratio of nearly 0.3. This land value is clearly supportable by recent sales, but the obvious question is timing related to future land sales.
Ownership and Liquidity
The company is 65% owned by institutional investors and 8% owned by insiders, but most notably the company is 38% owned by Wintergreen Fund and Wintergreen Advisors, investment vehicles run by activist investor David Winters. Winters has been invested in the fund for some time but in the past three weeks has purchased an additional $1.6 MM worth of shares at a price of $26.15 - $26.94. The company has also seen insider buying by three directors in recent months, at a price of $27 - $28. The stock is extremely illiquid, with a 3-month average volume of approximately 11,000 shares traded per day.
It should be noted that David Winters' relationship with the company has been somewhat adversarial but to the benefit of shareholders. As illustrated in Winters' presentation linked below, the company's board of directors has suffered from a lack of independence. Further, the company's eleven directors may be considered to be excessive.
However, Winters' willingness to hold management to task and the company's large percentage institutional ownership is favorable in the long-term. Already Winters has been successful in declassifying board members, resulting in annual elections, and in fixing the board's directors at eleven, whereas previously the potential number of directors had been unfixed (notably, just prior to Winters' involvement, the number of directors had increased from nine to eleven).
Daytona Beach Fundamentals
The key risk for this company is the state of the Daytona Beach housing market. With a population of approximately 64,000, Daytona Beach is primarily tourism oriented, with over 8,000,000 visitors per year and miles of beaches. The city is home to the Daytona International Speedway, a NASCAR venue; and is widely recognized as a major Spring break destination.
Florida has suffered the effects of the recent crash in the housing market and Daytona Beach is no exception. According to the US Census, Daytona Beach's Volusia County saw an increase in housing units of approximately 17% from April 2000 to July 2009. During that same period, Florida's overall housing stock increased 21%. However, Daytona's population during the period increased negligibly. According to Zillow, median home prices for Daytona Beach fell from a high in April 2006 of $183,000 to a low in September 2010 of $79,000 (57% decline). This compares to a drop in median home values at the state level during the same time period of $307,000 to $145,000 (52% decline).
The Deltona-Daytona Beach-Ormond Beach, FL Metropolitan Statistical Area currently has a 12.5% unemployment rate, compared to 11.9% for the state. With a major high tech corridor along I-4, Daytona Beach is home to such notable employers as NASCAR and International Speedway Corporation; the Ladies Professional Golf Association; Gambro-Renal Products (medical manufacturing); Brown & Brown, Inc. (insurance); Enrichment Industries (vocational rehabilitation/manufacturing/assembly); Crane Cam (automotive manufacturing); Advanced Ordnance (military hardware); X1R (auto lubricants); Raydon (simulators); Piedmont Plastics, Inc. (plastics manufacturing); Embry-Riddle Aeronautical University (aviation-aerospace education); Halifax Community Health Systems (hospitals/health care); Consolidated-Tomoka Land Co. (land development); and Ocean Design (subsea electrical and fiber-optic interconnect systems).
As a result of the depressed real estate market, CTO management has adopted a number of strategies to attempt to create value with its land holdings. Company land has been used to construct two LPGA golf courses, both rated 4.5 out of 5 stars. In 2009, a $200 million, 277-bed hospital was constructed, in addition to an elementary school and police headquarters. These new improvements should help drive demand to the company's holdings.
CTO benefits from strong real estate holdings and minimal debt. Even the most modest estimates of value for the company's land holdings result show the company's stock to be significantly underpriced. Based on the above, I would consider CTO to be a strong value-oriented investment for an individual with a moderate to high level of risk and with a minimum holding period of 24 to 36 months.