Corporate Secretary September 14, 2016
Consolidated-Tomoka Land Company
P.O. Box 10809
Daytona Beach, FL 32120-0809
To: The Independent Directors
Jeffry B. Fuqua
John J. Allen
William L. Olivari
Chester Skinner, III
Howard C. Serkin
Thomas P. Warlow, III
Laura M. Franklin
Dear Sirs and Ms. Franklin,
"You can fool all the people some of the time and some of the people all the time but you cannot fool all of the people all the time"
We are reaching out to you in an attempt to help you better understand the many ways in which your actions, and in many cases, lack thereof, have harmed shareholders of Consolidated-Tomoka Land Company ( CTO). Our hope is that you may realize the errors of your past, the blatant betrayal of your shareholders, and remedy this through swift actions, suggested below.
Over the past several years, this board has sat idly by as management has been given full reign over the company and its assets. John Albright has continually made questionable decisions and fully refuses to implement the necessary strategic changes called for by shareholders. Additionally, his continued arrogance has cost CTO shareholders a significant sum through both direct financial indiscretions and indirectly as the result of the lack of confidence the public markets have in the company's ability to create value for its stockholders.
Some of these transgressions include:
-Allowing management to carefully craft a narrative that the land owned by CTO is some toxic, undesirable asset that can only be given away at massive discounts to current market value.
Per numerous sources (mainly investors who have spoken directly with CTO management), beginning at or around the time rumblings with Wintergreen Advisers started last October, both John Albright and Mark Patten began asserting that they would not think selling the company was a favorable outcome for the simple reason that the land would not get anywhere near full value. Thus, when the Board decided to hide from investors the results from the sale process, it fell back upon a preconceived narrative spread by CTO management. Strikingly, the narrative has been adopted by some investors whom still naively take this company and its executives at its word.
However, per the company's own investor deck published last July, a high 50's share price would imply a paltry per acre value of less than $15,000 per acre.
Breaking this down, this suggests that neither $50,000 per acre East of I-95 (less than 30% of market prices achieved during the five years current management has been here) and $10,000 an acre for the remaining land West of I-95 (a 50% discount to the price currently under contract for over 3000 acres, in bulk, to Minto Communities) were attainable numbers during the sales process. Thus, we are left to conclude, that either A) CTO management has done such a horrendous job creating value that they were only able to receive offers representing a 70-80% discount to established market prices on their land, or B) that they received offers higher than this and blatantly chose disregard the wishes of their investors and hide them. As noted on your July conference call, the numbers do not add up. In the shocking event in which offers received were valuing the company so poorly, that is a direct reflection of the work your current management group has done. Whether it truly is A or B, someone needs to be held responsible. There are questions that need answering.
-Selling the company's mineral assets at quite possibly the lowest valuation we will likely ever see in our lifetime.
There is a good chance, that February of 2016 will mark the generational low in oil prices. Had these assets been sold at a more opportune time; rather, any time other than this, we have great confidence a much better price would have resulted. At a minimum, we estimate current management cost shareholders over $30,000,000, or nearly $5 a share by their neglect of these assets.
-A deliberate attempt to discredit and belittle one of the company's shareholders.
It is not a secret that beginning in November of 2015, certain officers of Consolidated-Tomoka began circulating the idea that the company's largest shareholder, Wintergreen Advisers, was financially strained and on the verge of having to liquidate its large holding in your company. So much is listed in both your 10-k and your annual proxy. Management also made it a point to spread this when speaking with numerous individual and institutional shareholders. This resulted in a large overhang and depressed the value the market was willing to give your company. It also may have influenced the strategic evaluation.
Further ironic, would be the misrepresentation of Wintergreen Advisers as a desperate shareholder in dire financial straits when 1) Wintergreen Advisers is a notoriously conservative investment adviser, 2) holds copious amounts of cash on hand at pretty much all times, and 3) has been a shareholder for more than a decade. This is in direct contrast to your current CEO who, 1) has a dangerously high percentage of his personal net worth invested in CTO stock, 2) holds much of the stock in a margin account, 3) has a substantial line of credit taken out against his CTO stock, and 4) has been a continuous seller of CTO stock. We did not ask to be placed in the situation where we need to speculate which side to take, but to maliciously derive the conclusion that one side simply wants an exit at all costs without considering that the other side may also want to protect and prolong the generous benefits from said job, is pretty silly.
-John Albright has been a continued seller of Consolidated-Tomoka stock, despite regularly indicating the stock holds a much great value than the current market price.
This behavior is outrageous, contradictory, and hardly representative of a leader. We question how any Board member, let alone all of you, can sit quietly as your CEO both touts the company stock and value to investors while regularly unloading it on them. Not only is this risky behavior from a regulatory stand point, but also quite unethical in our opinion. We would hope the current Board raise issue about the conflicting nature of management's current stance on repurchasing shares "opportunistically" while simultaneously selling stock into said "opportunity". It appears none of you have.
John's unusual and contradictory behavior is not limited to this. During the conference call defending the strategic review process, John was asked what price he put on the company. His response? "we didn't put a price on the company". Strange because in the same release, it was stated that there was not a "meaningful enough premium received" during the process. How can one determine what meaningful is when they don't even know what price they are looking for? But also, we have on record the following statements from previous conversations and releases. "We continually measure our internal calculations of net asset value", "we do not feel the current market price of our stock represents the value of our company". So this essentially, in a black and white manner, proves that John is either lying about the process, or not mentally fit to be running this company when the primary goal is monetizing assets that trade at a discount to intrinsic value (a value that apparently is known and then unknown depending on when you talk to him). Perhaps this is why he was not able to get proper value for your land during the strategic review.
Unfortunately, this is not the only transgression John has committed. It has sadly begun to seem possible to us that John has either let his own personal financial issues effect his decision making in regards to creating shareholder value, or he is letting personal grudges influence him, perhaps it is both. Under this current Board's watch, John has been allowed to:
-Gamble on derivatives (unrelated to CTO's core business)
-Lose money investing in the securities of other public companies (unrelated to CTO's core business)
-Take almost five years to begin holding a regular conference call. This is something over 95% of public companies do.
-Take on both expensive and potentially dilutive debt in order to finance 1031 related deals before the front end of the transaction closes
-Issue risky, high yield loans (that are outside the scope of CTO's core business)
-Continuously mislead shareholders in relation to the company's buyback program. Quite frequently the term "active" is used in reference to the share repurchase program, however over the course of John's tenure, the share count has not been materially reduced. Further, when compared to other public companies often considered "active", CTO's purchases again look dismal and disingenuous.
-Take on a strategic alternatives process requested and paid for by shareholders, only to conceal the results of this process in pursuit of the same strategy openly rejected by shareholders as evidenced by the voting that occurred at your 2016 Annual Meeting. You can rationalize this however you'd like, but there is zero excuse for the lack of transparency. If the best indication of interest was not adequate, there was zero harm in letting the true owners of the company, the shareholders, the ones who requested and paid for the process decide. Instead, out of fear that shareholders, frustrated by your underperformance, would accept the offer, you chose to once again mislead them, and conceal the results of this process. We feel the entire process and the way in which it was run, was rife with conflicts of interest.
Further indirect consequences of management's actions include:
-Alienation of institutional shareholders
-Historically low average daily trading volume (also impairing the company's ability to repurchase stock)
-Significant embedded risk due to exposure to investments highly sensitive to changes in interest rates.
This is currently the single most disappointing facet of the strategy which you employ. The fact of the matter is that this simplistic, one-dimensional strategy is nothing new and something the company has been utilizing now for over a decade with pretty brutal results. What's more, is that it is common knowledge amongst many market participants that interest rates have been kept artificially low, and as a result, interest rate sensitive assets are quite possibly in the midst of a major bubble. The idea that you stand passively by as current management levers up the company with these same bubbly assets in hope of eventual transformation to a company resembling some of the frothiest in the entire market right now, its impeccably reckless. You are literally leading the sheep to slaughter. Of note, during the past week, your mini-REIT project has shed over 6.5% at the mere hint of a 25 basis point rate hike. Well, it was either that or because of some exceptionally timed insider selling by Chief Executive Officer Albright , but we're sure you get our point.
-Risk that the company's current shareholders grow tired of what is now years of underperformance and abandon their investments
-Risk that Wintergreen Advisers decides to abandon its investment due to the outrageously unprofessional and unethical behavior of CTO management in regards to their dealings with Wintergreen
-Risk that a hostile takeover occurs at a price that undervalues the company simply because investors have lost faith in the current group to realize the true value of the company and lose faith in the Board to hold management in check.
It was also quite disenchanting to see the Board's response to the shareholder vote on executive compensation. While we personally did not think the proposed compensation was out of line, shareholders as a whole clearly did. Thus it imperative to the credibility of the company to honor this. Which is why we were blown away by the fact that the Board has fully dodged any responsibility for changing this; rather you present nothing but vague promises to reach out to only certain shareholders in order to gain feedback under the guise of following through on this. Our question, is what shareholders does the company intend to reach out to? Is it the same select few who seemingly go along with whatever management suggests as has been done previously? Why is there even a need to do this? Shareholders already voted and nixed the current compensation plan. It seems again, quite disingenuous and deceptive to now try to work around the results of a shareholder vote with ambiguous solutions.
It is at our most dire request that the Board immediately take the following actions to improve value for CTO shareholders and bring back legitimacy to the company in the eyes of the public markets. Every day that goes by in which the continued narrative exists, is a failure that Consolidated-Tomoka Land Company management and Board of Directors is entirely responsible for. This narrative, one management has done nothing to dispel, is that the company today is only worth a fraction of what it was worth a decade ago despite both regional and national recoveries in the real estate markets. The notion that a share price in the ball park of where the stock was trading as recently as February of 2015 is on par with the private market value of the company, needs to be dispelled. It is time for you to finally stand up and defend the value your shareholders see in this company, and rid yourselves of anyone not on board with promptly unlocking that value. This Board has never, to our knowledge, stood up to management to defend the shareholders that they serve. Our suggestions for immediate action include:
- Disclose the company's internal calculations of net asset value.
Despite continued and substantial evidence to the contrary, management's refusal to disclose this allows certain market participants to continually and perpetually assign unrealistically low valuations to Consolidated-Tomoka's assets. It will not harm you to make an effort to be transparent. (As noted above it has been troubling that your own management team has at times gone out of their way to discredit the value of certain company assets. It was appalling to hear you at the Annual Meeting suggest that pretty much everywhere in Florida but Volusia was doing well)
- Disclose what the three highest indications of interest were during the strategic alternatives review
-Immediately initiate a Dutch Tender Offer for up to $50,000,000 at a price matching the highest indication of interest from the strategic review provided this number remains within 15% of the company's calculation of net asset value. If certain shareholders want out, buy them out. This will also return much of the money received from that awful convertible deal to shareholders, rather than leave it at the shaky discretion of this kingdom building management team. We would hate to believe that you derailed your equity's momentum for this ridiculous note, simply to arbitrage 6% properties at your 4.5% borrowing rate.
- Dispose of the loan portfolio
-Discontinue the current dividend. Allocate the savings towards share repurchases, in addition to the remaining authorization.
-Reduce the pay of all current senior executives by 12%; which matches the performance shareholders have experienced over the trailing 12 months' period ending last quarter. The resulting proceeds saved shall be added to the existing buyback authorization
-Going forward, executive compensation shall be directly related to two things. Previous year's share price performance, and EPS growth, with a blended 70/30 percentage weighting.
-Discontinuing the issuance of any stock options in the event the receiving officers of the company choose to discard CTO shares at prices lower than 5% of the internal calculations of net asset value. If your officers do not value the company the same way shareholders do then they should not be receiving "bonus" shares for nothing.
Subsequently, please discontinue the insincere overtures that do nothing but mislead the unsophisticated investor. Examples of this include but are not limited to, the petty dividend raise, the outreach regarding shareholder's rejection of executive compensation, the implementation of new "ownership requirements" for executives that effectively changed nothing relating to any of the existing Board or senior management group, and pretty much the entire strategic review process, as it was clear to anyone paying intention that both management and the Board was incredibly partial towards continuing the pursuit of the current strategy. While offering a tremendous amount of fluff material to jam into your investor presentations designed to create a façade of shareholder friendliness, if it does not materially benefit your shareholders, we find it unnecessary.
We also remain heavily troubled by a series of dots that continue to appear connecting in support of a theory brought about by quite a few shareholders earlier in the year; that management's true plan for dealing with Wintergreen is to attempt to force the fund into a liquidation. It was said that your current management team feels as if they have "all the time in the world" and feel if the stock underperformed enough on a short term basis they could likely rid themselves of a shareholder they do not view in a favorable context. Now, we know such a gut feeling and situation involving as much speculation as this is, will almost certainly be quickly dismissed by the Board(what else is new) simply because we have not presented any concrete smoking gun in support of this; yet. However, we think it imperative that the average shareholder see what may potentially be lurking behind the curtains. We like numbers. And statistics. They can be quite useful in getting to the truth sometimes. So we ask ourselves, what are the odds that between October of 2014 and October of 2015, there were in excess of a dozen insider purchases, including at least one from five out of the six independent directors, at prices as much as 15% higher than the current share price, and then suddenly coinciding almost exactly with when the issues with Wintergreen started, from October of 2015 through September of 2016, NOT A SINGLE INSIDER PURCHASE FROM THE CEO, CFO, OR ANY OF THE BOARD OF DIRECTORS? This despite the fact that the stock traded as much as 32% lower than the highest price an insider paid, just as, according to management, everything has started hitting its stride?
We think the odds are incredibly slim, and that this alone very strongly points towards collusion amongst CTO management and its Board. But wait, there's more. On top of these already slim odds, we ask ourselves why, on several different occasions, has CEO John Albright used any sudden uptrend (and as you might be aware, there have not been many) in your "undervalued" stock, to further unload shares? Surely John has to know that investors do not like to see insiders cashing out. Further botching of your embarrassingly lethargic share repurchase program earlier this year, unnecessary churning of income properties, complete refusal to initiate any large scale share repurchase, the plentiful delays surrounding some property sales, the willful withholding of announcements regarding important and material corporate events, and of course, the disgusting mishandling of the company's sale process, all heavy point to the distinct possibility that CTO management may purposely be attempting to suppress the prices at which the shares trade in order to free what they view as "their kingdom" from shareholders that they do not like.
I have the utmost confidence that should these urgent and necessary changes be implemented the effects will be profoundly greater than what the current situation has produced. Not only will the markets regain confidence in Consolidated-Tomoka as an asset rich, shareholder friendly company, but investors will also embrace these changes and re-evaluate their thinking as to what the current Board of Directors stands for. What is self-evident, is that the current path is not favorable to anyone except perhaps the current management group, and that those in favor of the status quo are not acting in the best interest of the shareholders who rightfully own this company. The only thing more frustrating than the existing dreadful performance here is the fact that many at your company are so incredibly blind to it. While we are sure you can and quite possibly will retreat into your inner circle of fellow country club comrades and small group of apologist shareholders, please note that you have little to lose at this point in making strides to turn a new leaf. Consolidated-Tomoka Land Company shareholders just want the truth and it is not crazy of us to think we are entitle to it. It is crazy however that we have to ask for it. Please start giving it to us.
Since Our Letter
It should be noted, that in the weeks following this, we have spoken with a few shareholders who did indeed receive calls from the company towards the end of September regarding their "outreach program" on executive compensation.
We also just saw another instance of complete disrespect for shareholders as the company waited until about a month before their advertised Investor Day to alert investors that they will be moving it out another two weeks because they rather attend a "Real Estate Conference". Anyone who booked this trip in advance? Tough luck. Coutresy of John & Co.
Also troubling, is the continued lack of discipline shown by the company in acquiring new properties. It seems incentives from discretionary bonuses and the 6 month window for the 1031 transactions is perhaps causing the company to pay literally anything for new properties. While the company has misleadingly given investors acquisition guidance in the 6-8% range, management has gone fully rogue, now going after properties like this, a 25 year lease at a low 4% cap rate. And to think, on the last call, many investors openly voiced displeasure with managements insistence on pursuing a capital allocation strategy that involved targeting 6% properties. Once again, investors... Tough luck.
Additionally, John Albright has continued his regular dumping of CTO stock. Let's see if he still thinks it is opportunistic to repurchase shares on the conference call next week. Maybe the buyback is seen as opportunistic because it gives John something to sell into. At the current pace, John Albright, will eat up in excess of 10% of CTO's proposed buyback for himself. Some leader.
Interestingly enough, the company inadvertently caught itself in a major lie not more than two days after the last conference call. When asked why the company wouldn't see it opportunistic to deploy a large scale tender offer at the current prices, management falsely claimed that "If the market ever turns around as far as going in a favorable direction, that probably wouldn't have been a wise choice.". Not used to being transparent, the company a day later released it's investor presentation in which it proceeded to declare that at the current price of the equity, the company's remaining land, all 6,400+ acres(page 6), were effectively being valued at, ZERO. Thus, unless management can seemingly prove to us that they intend in the near term, to be able to acquire land for negative values, it is preposterous and an outright lie that under any other scenario it is not hugely beneficial to be buying back every single share they can get their hands on here. Although honestly, anyone actively following this has known for sometime the real reason they won't tender for stock. To keep dissident shareholders from having greater ownership. It is also funny and perhaps worth pointing out, that the current buyback was supported by managements claim that it is "opportunistic". Well, we are unsure of what they consider "opportunistic", but to us, passing up $47 to buy back at $51, or passing up $51 to pay $55, isn't what opportunistic is.
We would also like to see the company address the intended distributions from a special dividend, as the structuring of such could have major implications for shareholders, something they have not entirely been forthright about.
As always, time will tell. Thankfully, if shareholders elect to stand up for themselves, the time left for these guys is limited. Shareholders will only tolerate being trampled for so long. Whether it be the lack of transparency with all of John's side investments, the company misleading shareholders and then supposedly hiding buyout offers over $60 a share, John talking up the stock only to continue selling it, or bailing on investors to go hang out at a conference, there shouldn't be many shareholders left who are falling for what management is feeding them.
Disclosure: I am/we are long CTO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.