Consolidated Tomoka – 70% potential upside within 12 months
|June 9, 2015||Posted by Nat Stewart under Compounding Machines||
- Consolidated Tomoka is a growth and REIT conversion story, yet investors are still classifying it as a sleepy “land bank” stock.
- The recent convertible issuance has suppressed the share price in the face of major earnings ($58M in land sale agreements) catalysts.
- Updated land under contract data implies potential sales at over $400K/acre.
- The huge constituencies of growth and real estate/REIT investors have yet to find this stock – but they will. Buy before this occurs.
A sequence of events has created an exceptional risk-to-reward opportunity
I wanted to make an update on what is going on at Consolidated Tomoka (See my prior articles on the stock here and here), because in my opinion a sequence of events has created a very strong risk-to-reward opportunity in the company’s shares.
The basic idea is very simple: The convertible share issuance that was announced on March 4th has temporarily put a lid on stock price appreciation, just as events are lining up to create outstanding performance over the next 12 months.
The convertible issuance suppressed the share price because many investors in convertible securities offset their exposure by short-selling the underlying equity security. This increase in shares borrowed and sold short has (in my opinion) temporarily muffled the company’s share price – which had begun to accelerate upwards after the REIT conversion announcement on February 10, 2015.
Those looking for more detail on the logic of the convertible issuance (as well as the company’s plan to eventually redeem them with minimal dilution) should read the most recent investor presentation found here.
Meanwhile, all potential roadblocks to the closing of the very significant Minto Community and Tanger Outlet land sales seem to be disappearing. On June 3rd, the Daytona Beach City Commission met and provided a key approvals needed (7-0 votes in both instances) to proceed with both developments.
In related news, Minto closed on a beach-front property that will be used to create a club for the Minto Daytona Beach community. This provides substantial evidence that Minto is committed to closing on the 1600 acres under contract with Consolidated Tomoka. It appears that there is substantial support for the project in both the business community as well as within the zoning and planning leadership of Daytona Beach.
While the zoning and planning process takes time and delays are to a certain extent inevitable (as all who have worked with government approval processes know), I expect this transaction to close on schedule between late 2015 to mid- year 2016.
Pro-growth Daytona Beach and Volusia County councils take action on Tomoka Town Center
At the same June 3rd meeting, the city council also approved the creation of the Tomoka Town Center Community Development District (CDD). This will allow the city to raise the funds needed to build out the infrastructure for the Tomoka Town Center, a part of which will be the Tanger Outlet mall.
This is very important. To attract a development of this magnitude, it was determined that a $4.5 million dollar investment in infrastructure would be needed, funded half by the city of Daytona Beach, and half by Volusia county. It appears that Volusia County is fully committed to securing this massively positive development as well. An article published in the Daytona Beach News-Journal states that:
Council members unanimously agreed to create a special grant program that would fund infrastructure for development projects. The first project that could be awarded under the program is a proposed 400,000-square foot outlet mall that would be operated by Tanger Factory Outlet Centers, which has 43 locations in 26 states.
Land sales must be viewed within the larger context of total value maximization, not just on an individual basis
It is important to consider the land-sale strategy that makes the most sense, given that initial development by highly regarded national firms such as Minto Communities, Tanger Outlets and Trader Joes will have a profound impact on the value of Consolidated Tomoka’s remaining undeveloped land. It would make no sense for the company to attempt to hold out for absolute top dollar. To a certain extent they need to provide incentive for the initial development that will “get the ball rolling” in some of these areas, which will stimulate future demand.
For example, once the Tanger Outlet and Sam’s Club projects close and development starts, what will happen to the value of the remaining land within the Tomoka Town Center – and the rest of Consolidated Tomoka’s surrounding land? Please examine the following image:(click to enlarge):
As you can see, the Tanger Outlet Mall and Sam’s Club anchor the Tomoka Town Center development – yet there will still be a plentiful amount of land remaining for future sale. These lots should have strong appreciation potential due to the traffic and prestige that will be generated by the two anchor developments.
Most recent purchase and sale data implies agreements at over 400K/acre – the highest in the company’s history
Between the February 2015 investor presentation and the April 2015 investor presentation, land under contract increased by about 26 acres, while potential sale value increased by $11M ($58M – $47M).
This suggests that the additional 26 acres were valued at over $400K per acre. If this inference is accurate, I believe that it will be the highest value per/acre sale agreement(s) in Consolidated Tomoka’s history. As the area develops and becomes an increasingly active hub for commercial activity, the shrinking supply of remaining land should appreciate in value substantially – a classic case of increasing demand and decreasing supply.
The bottom line – Highly regarded developers such as Tanger and Minto will completely transform the value of the surrounding land, and Consolidated Tomoka shareholders are perfectly positioned to benefit.
Volusia County planners have cleared the path for up to three new distribution centers
The Trader Joes distribution center deal put Daytona Beach on the map for other corporations looking to build similar facilities. It turns out that the Daytona Beach area is an ideal location for a distribution center within the state of Florida. It is strategically located between Miami, Tampa, Orlando, and Jacksonville, with easy access to both route 4 and I-95. This makes the location unique relative to others within the state. Combine the above with an extremely pro-growth planning board and county council, and the area becomes even more ideal.
To take advantage of this interest, Consolidated Tomoka has positioned an 865 acre segment of land as a potential distribution-center focused development. Volusia county counsel member Doug Daniels recently stated that,
He [Albright] has a line on 3 distribution companies that are larger than Trader Joe’s. He has been a real performer since he’s been in town. He’s somebody who has gotten things done.
Critical to this plan was the approval to truncate a portion of Old Deland road, so that a segment of the road could be used exclusively by the new (potential) distribution centers. On April 16th, the city council agreed that the road could be turned into a cul-de-sac if a distribution center business purchases land in the proposed area.
This is very important news. If council member Daniels is correct, it might not be all that long before Consolidated Tomoka is able to secure buyers for this land. For the city of Daytona Beach, it could mean hundreds, perhaps even 1000+ new jobs.
Consolidated Tomoka will soon be on the radar screens of both growth and REIT investors – a powerful combination
One misconception about this stock is that the story is only about the “hidden value” of the land on the company’s balance sheet. Folks, as I said in my last article, the reality has changed – Consolidated Tomoka is not a sleepy “land bank” stock, is a growth story that is leading up to a planned REIT conversion in early 2017. As results materialize over the next 12 months, the stock will fly “onto the radar” of both the growth and REIT investor communities.
This growth story has been spurred into existence by CEO John Albright, his team, and the forward-thinking city planners of Daytona Beach and Volusia County. It is this human side of the story that is most significant. The land is simply potential energy, it is the people involved who are unlocking the value for both shareholders and the residents of Daytona Beach.
Investor, Entrepreneur and CEO
Albright (a former Managing Director at Archon Capital, a Goldman Sachs company) first began following Consolidated Tomoka 15 years ago, 11 years before he became CEO of the company. He began purchasing the company’s shares in 2009 when he noticed a serious value disconnect between the company’s private market value and its publicly traded share price.
Not content to simply look at financial statements, he took a trip to the area and investigated the properties first-hand. As a result his investigations, he decided to make a substantial personal investment in the company’s shares.
A few years later when Consolidated Tomoka’s board began looking for a new CEO, Albright contacted the company. He told them that he was already a major individual shareholder (owning more shares than any of the board members at that time) and then outlined his strategic vision for the company. It was as a result of this process that he ended up as CEO of the company. The bottom line is that Albright is not just an employee-CEO, but an entrepreneur and investor with significant “skin in the game”.
Focused, yet sensitive to value
In a recent phone conversation, I asked Albright if Consolidated Tomoka would focus on investing in the triple net lease sector, or value-based real estate investments more broadly. His answer was nuanced. He stated that “pure play” REITs tend to trade at higher multiples, and as such he was taking this into account with each investment decision.
Albright’s goal is to build Consolidated Tomoka into a REIT that is capable of trading at a premium multiple – he made this very clear.
At the same time, he noted that cap rates in typical triple net lease properties are presently quite low. If Consolidated Tomoka blindly purchased triple net lease properties at this time (the way some large real estate companies might be doing) it would not generate a great return on invested capital for shareholders. As a result, he plans to stay triple net lease focused, yet also look for opportunities around the edges to find unique value investments – such as situations where the company’s own effort can rerate a properties value upwards (among other strategies).
An example of one of these value-focused investments is the company’s recent purchase of a 14 acre shopping plaza in Winter Park, Florida. The property was previously owned by a large national real estate company, where it was too small to garner much attention. Indeed, it seems the property had been completely ignored for years. After losing the anchor tenant over four years ago, the company completely failed to re-market the property – it has sat nearly vacant since that time. This, in spite of the fact that the Winter Park Florida area has continued to grow, has more growth on the horizon, and the property is in a desirable location.
Albright believes that by repositioning the property and securing a new anchor tenant, this investment will prove to be a “home run” for Consolidated Tomoka and its shareholders.
Catalysts over the next 12 months should spur increased recognition of the company’s shares
This company will not stay under the radar forever – investors will be waking up to the growth and REIT conversion potential. In my last article, I stated that my present net asset value for Consolidated Tomoka is $96 per share. Given the massive catalysts in place over the next twelve months, I have decided to put a time-based prediction on this assessment. My prediction is that Consolidated Tomoka’s share price will surpass my $96 dollar target within 12 months, for a 70% potential return. Note, this is not my final profit target – I expect that intrinsic value will grow substantially over the coming 3-5 year period.
A significant macro-economic dislocation or a failure to close on one of the large land sales anticipated in 2015/2016 would slow the realization of my $96 price target.