Consolidated Tomoka(CTO)- Hidden Value In Long Lived Assets

After years with a stagnant stock price Consolidated Tomoka (CTO) has gone from 10 to over 60(with a brief stop above 90) in the last 6 years. Despite this, its share price is still well supported by the value of its assets.

Consolidated Tomoka began as a timber company and was perhaps Florida’s largest landowner with over 2 Million acres in the early 20th century. In 1923, the company was purchased by Baker Fentress and Company, now known as BKF Capital(BKF) and the subject of a recent investment by Carl Icahn.

Baker Fentress listed CTO in 1969, and in 1999 distributed its remaining stake to BKF shareholders. After dropping initially do to increased liquidity, CTO began a steady march upward.

Today, CTO continues to own nearly 12,000 acres in Florida, including 10,600 in the City of Daytona Beach. In addition, the company owns the equivalent of 284,000 acres of oil, gas, and mineral subsurface interests. There are currently 2 producing oil wells on the company’s interests.

Management undertook a new strategy in 2000 to use the tax-deferred proceeds of land sales to purchase commercial property with long term triple-net leases dispersed over a larger area. As of June 30, 2006, the company carried 25 such properties carried at a value of $104 million. Given the increase in real estate values, particularly in those parts of the country where CTO is active, it seems reasonable to assume some amount of appreciation, particularly on earlier purchases. Current revenue run-rate on this is over $7.4 million a year, and with high margins, this can be expected to deliver over $6 million in net income.

The land which CTO owns in Daytona Beach is carried at a ridiculously low value as a result of its acquisition almost 100 years ago. Though the land is on the balance sheet with a value of just $2.3 million, it is clearly worth many times that. In 2005, the company sold 317 acres at an average of $114,000 per acre. That was an unusually high amount per acre and it would be unreasonable to assume that all of CTO’s land has that value, but even in 2004, when a large(1000+ acre) sale took place at a substantially lower average price, the average was $17,800 per acre. Using that value, we might value CTO’s land at $200 million. Obviously this must be discounted as it will not all sell today, but CTO has been carefully doing things to build value such as donating land for recreation, hospitals, schools and roads. CTO has also developed special purpose areas such as auto malls and office parks. By planning development effectively and selling land slowly, CTO has been able to maximize price per acre, and continued growth should continue this virtuous cycle.

Recently, due to the destruction of timber in forest fires, Consolidated-Tomoka has begun growing and harvesting hay. Though this only produces a small amount of revenue, it allows much of the company’s land to qualify for taxation as agricultural land which yields significant cost savings.

Consolidated Tomoka’s last major business is its ownership and management of the LPGA International Golf Course. Though this asset has substantial value, golf operations have consistenly lost money and show little sign of improvement.

In summary while there are a lot of moving parts here, the key piece is the conversion of cheaply valued land into income-producing real estate. While the company currently offers only a small dividend(.6% yield) and sports a high P/E, as this conversion continues, I would expect the dividend to continue to rise(it was just recently raised), and the P/E to continue to fall. That said, this is a company with a market cap of $360 million, no debt, and assets that I would value above $300 million. While I would be nervous about the U.S. real estate market in the short term and wouldn’t necessarily advocate buying today, I believe the company’s assets limit downside risk, and, in the long term ensure another major upward swing.

Disclosure: I own shares in CTO.