My original write-up on Consolidated-Tomoka (CTO) was titled “No Downside, Unknown Upside.” The situation has improved dramatically since then, we have a better sense of what NAV may be (that unknown upside is becoming more known), and yet the stock is only up 5.3% since my first post (now trading at $56.08). I have been adding to my position as of late. If you’re not familiar with the CTO story, I recommend reading my initial write-up prior to the below update.
On November 7th, Albright (CEO) announced their intent to sell their subsurface mineral rights (490,000 surface acres of land located throughout Florida). I previously valued the mineral rights at $0 so anything they get is gravy in my eyes. In the linked article, Albright commented that “We might be able to raise enough to invest in two or three more income-producing properties.” 2-3 income-producing properties could be a wide range of value, but $10-20 million seems like a conservative guess. I use $10 million in my valuation below.
On November 12th the Tanger Outlet deal closed for $249,000 per acre. This was better than expected yet the market had zero reaction. A couple other smaller deals have been completed and there should be 1-2 more in the coming weeks, but they’re not terribly important to this update.
The biggest news of the past four months came on November 20th when David Winters (of Wintergreen Advisers, owner of 26% of shares) issued a proxy for the 2016 shareholder meeting for management to sell or liquidate the company. This is a total guess, but I suspect this proxy is mostly fueled by pent-up frustration on Winters’ end. CTO has been one of his fund’s largest holdings for almost ten years and it’s up a total of 12.6% based on his average reported price on Dataroma. I don’t blame him. He also knows that, even if unsuccessful, issuing this proxy will bring attention to CTO’s undervaluation. Either way, as the title of this post suggests, I think this has created a unique win-win scenario for investors. If Winters convinces another 25% of shares to vote alongside his 26%, the company will be put up for sale and a transaction could occur in the next 12 months. Based on my updated NAV calculation below, I think a sell price should be over $90 (60%+ premium over today’s price). If Winters is unsuccessful in his proxy, Albright will continue growing the company as he’s done since coming onboard in 2011. A few more years of performing and a $120+ share price is not unrealistic.
On December 11th they listed 14 of their income-producing properties on LoopNet at a cap rate of 4%. In my previous valuation I was overly conservative with a cap rate of 7%. Even if we assume 4% is a lowball listing and their entire income-producing portfolio is worth a 6% cap rate, just this increases the NAV of the company by over $30 million.
Many shareholders (led by Winters) are very frustrated by CTO’s stock performance and are blaming Albright and management for not putting more effort into communicating how undervalued their stock is. If I owned this stock since 2006 I’m sure I’d be more frustrated, but I just don’t see this as a major issue. In my eyes it’s pretty obvious Mr. Market is way wrong on this one, but he’ll get it right eventually. Quite frankly, I prefer management that focuses on running the company and not stock promotion. With that being said, I was as shocked as any other investor by the lack of market reaction to the Tanger announcement, but the silver lining is I’ve been able to add more shares in recent weeks around the same price. The most efficient way to signal to the market of their undervaluation is probably a large stock buyback. At these prices, buybacks will be accretive to shareholder value and will most likely get a lot more investors looking at the company.
With several deals announced since the latest 10-Q (dated 9/30/15), I have to make some estimates in calculating NAV. I’ve basically assumed that sales were additive to cash and purchases were additive to debt. In the latest investor presentation (dated 11/23/15) management stated pro forma net operating income (NOI) is $18.8 million. For the sake of comparison, the left column is my unchanged NAV estimate from my original write-up (dated 8/31/15) vs the right column which is updated as of today.