10-K 1 cto-20161231x10k.htm 10-K cto_Current_Folio_10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-K


 

☒           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

☐           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number 001-11350


 

CONSOLIDATED-TOMOKA LAND CO.

(Exact name of registrant as specified in its charter)

 


 

Florida

59-0483700

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1530 Cornerstone Boulevard,

Suite 100

Daytona Beach, Florida

32117

(Address of principal executive offices)

(Zip Code)

 

Registrant’s Telephone Number, including area code

(386) 274-2202


 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

 

Title of each class

Name of each exchange on which registered

COMMON STOCK, $1 PAR VALUE

NYSE MKT

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

(Title of Class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ☐    NO  ☒ 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ☐    NO  ☒ 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐ 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

(Do not check if smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ☐    NO  ☒ 

 

The aggregate market value of the shares of common stock held by non-affiliates of the registrant at June 30, 2016, was approximately $263,176,258.

 

The number of shares of the registrant’s Common Stock outstanding on February 15, 2017 was 5,718,489.

 

Portions of the registrant’s Proxy Statement for the 2017 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2016, are incorporated by reference in Part III of this report.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

    

 

    

Page #

 

 

PART I

 

 

Item 1. 

 

BUSINESS

 

Item 1A. 

 

RISK FACTORS

 

16 

Item 1B. 

 

UNRESOLVED STAFF COMMENTS

 

28 

Item 2. 

 

PROPERTIES

 

29 

Item 3. 

 

LEGAL PROCEEDINGS

 

29 

Item 4. 

 

MINE SAFETY DISCLOSURES

 

29 

 

 

 

 

 

 

 

PART II

 

 

Item 5. 

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER  MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

30 

Item 6. 

 

SELECTED FINANCIAL DATA

 

32 

Item 7. 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS OVERVIEW

 

33 

Item 7A. 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

56 

Item 8. 

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

56 

Item 9. 

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

56 

Item 9A. 

 

CONTROLS AND PROCEDURES

 

56 

Item 9B. 

 

OTHER INFORMATION

 

57 

 

 

 

 

 

 

 

PART III

 

 

Item 10. 

 

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

59 

Item 11. 

 

EXECUTIVE COMPENSATION

 

59 

Item 12. 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

59 

Item 13. 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

59 

Item 14. 

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

59 

 

 

 

 

 

 

 

PART IV

 

 

Item 15. 

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

60 

Item 16. 

 

FORM 10-K SUMMARY

 

60 

Signatures 

 

61 

 

 

 

 


 

PART I

When we refer to “we,” “us,” “our,” or “the Company,” we mean Consolidated-Tomoka Land Co. and its consolidated subsidiaries. References to “Notes to Financial Statements” refer to the Notes to the Consolidated Financial Statements of Consolidated-Tomoka Land Co. included in Item 8 of this Annual Report on Form 10-K. Also, when the Company uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, the Company is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K.

ITEM 1.              BUSINESS

We are a diversified real estate operating company. We own and manage thirty-one commercial real estate properties in ten states in the U.S. As of December 31, 2016, we owned twenty-one single-tenant and ten multi-tenant income-producing properties with approximately 1,700,000 square feet of gross leasable space. We also own and manage a land portfolio of approximately 9,800 acres. As of February 10, 2017, subsequent to the Minto Sale (hereinafter defined), the Company’s land holdings totaled approximately 8,200 acres. As of December 31, 2016, we had three commercial loan investments including one fixed-rate and one variable-rate mezzanine commercial mortgage loan, and a variable-rate B-Note representing a secondary tranche in a commercial mortgage loan. Our golf operations consist of the LPGA International Golf Club, which is managed by a third party. We also lease some of our land for nineteen billboards, have agricultural operations that are managed by a third party, which consists of leasing land for hay and sod production, timber harvesting, and hunting leases, and own and manage Subsurface Interests (hereinafter defined). The results of our agricultural and subsurface leasing operations are included in Agriculture and Other Income and Real Estate Operations, respectively, in our consolidated statements of operations.

1


 

The following is a summary of financial information regarding the Company’s business segments (amounts in thousands) for the years ended December 31: 

 

 

 

 

 

 

 

 

 

 

 

 

    

2016

    

2015

    

2014

 

Revenues of each segment are as follows:

 

 

 

 

 

 

 

 

 

 

Income Properties

 

$

25,093

 

$

19,041

 

$

14,970

 

Interest Income from Commercial Loan Investments

    

 

2,588

    

 

2,691

    

 

2,191

 

Real Estate Operations

 

 

38,144

 

 

15,943

 

 

13,493

 

Golf Operations

 

 

5,190

 

 

5,244

 

 

5,125

 

Agriculture and Other Income

 

 

60

 

 

79

 

 

278

 

Total Revenues

 

$

71,075

 

$

42,998

 

$

36,057

 

Operating income (loss) from Continuing Operations before income tax for each segment is as follows:

 

 

 

 

 

 

 

 

 

 

Income Properties

 

$

19,888

 

$

15,385

 

$

13,015

 

Commercial Loan Investments

 

 

2,588

 

 

2,691

 

 

2,191

 

Real Estate Operations

 

 

23,263

 

 

11,650

 

 

8,630

 

Golf Operations

 

 

(397)

 

 

(349)

 

 

(405)

 

Agriculture and Other Income

 

 

(107)

 

 

(148)

 

 

89

 

General and Administrative Expenses

 

 

(10,298)

 

 

(8,754)

 

 

(7,017)

 

Impairment Charges

 

 

(2,181)

 

 

(510)

 

 

(421)

 

Depreciation and Amortization

 

 

(8,195)

 

 

(5,213)

 

 

(3,490)

 

Gain on Disposition of Assets

 

 

12,759

 

 

5,517

 

 

1

 

Total Operating Income

 

$

37,320

 

$

20,269

 

$

12,593

 

Identifiable assets of each segment are as follows:

 

 

 

 

 

 

 

 

 

 

Income Properties

 

$

302,757

 

$

277,520

 

$

190,087

 

Commercial Loan Investments

 

 

24,033

 

 

38,487

 

 

30,274

 

Real Estate Operations

 

 

58,868

 

 

59,787

 

 

43,834

 

Golf Operations

 

 

3,676

 

 

3,608

 

 

3,640

 

Agriculture and Other (1)

 

 

19,289

 

 

24,952

 

 

7,396

 

Total Assets

 

$

408,623

 

$

404,354

 

$

275,231

 


(1)

Agriculture and Other assets includes all other corporate assets, including cash, restricted cash, and investment securities.

BUSINESS PLAN

Our business plan is primarily focused on investing in income-producing real estate and when possible, monetizing the value of our land holdings through land sales to redeploy the proceeds into our investments in income-producing real estate. Our investments in income-producing real estate are primarily through the acquisition of single-tenant and multi-tenant income properties, the self-development of multi-tenant income properties, or investing in commercial loans or similar financings secured by commercial real estate. Our investment in single-tenant, multi-tenant, and office income properties, when possible, utilizes proceeds from other real estate transactions which qualify for income tax deferral through the like-kind exchange provisions under Section 1031 of the Internal Revenue Code including land sales and the disposition of other income properties. We have held the significant majority of our portfolio of land holdings, which are used in our agricultural operations, for most of our over 100-year history, and, as a result, our book basis in the majority of these assets is very low. Because of the low basis in our land holdings, dispositions of our land typically would generate large taxable gains. Utilizing the like-kind exchange structure allows us to defer the related income taxes on these gains and reinvest nearly all of the net sales proceeds of the qualifying transaction into income-producing properties. Generally, in order to utilize the like-kind exchange structure we are prohibited from performing tasks that are typically indicative of the developer of the property, therefore we seek to complete land transactions with counterparties who will serve as the developer of the property. In limited circumstances we have reacquired land that we have previously sold either pursuant to the terms of the original sales agreement or through foreclosure. Land we have reacquired typically has a higher book basis. Our approach in investing in income-producing real estate is to use leverage, when appropriate or necessary, to fund our acquisitions and to help achieve our business plan objectives. Our use of leverage in acquiring income-producing real estate is intended to provide positive returns relative to our borrowing costs. We believe this enhances our Company’s income-generating real estate asset base while keeping us cash flow positive given that approximately half of our market capitalization is represented by lower-yielding land assets.

2


 

Our investment strategy seeks to acquire income properties which will continue to broaden the credit base of our lease tenants, diversify our income property portfolio geographically, with an emphasis on major markets and growth markets in the U.S., and diversify the type of income-producing property, which in the future may include hospitality or other retail. We have self-developed four of our existing multi-tenant income-producing properties, all of which are located in Daytona Beach, Florida. Our investments in commercial loans or similar structured finance investments have been, and will continue to be, secured by commercial real estate, residential real estate developments, land or a borrower’s pledge of its ownership interest in the entity that owns the real estate. We believe investment in each of these income-producing asset classes provide attractive opportunities for stable current cash flows and increased returns in the long run and the potential for capital appreciation.

Proceeds from closed land transactions provide us with investible capital. Our strategy is to utilize leverage, when appropriate and necessary, and proceeds from land transactions to acquire income properties, acquire or originate commercial loan investments, and invest in securities of real estate companies, or other shorter term investments. Our primary targeted investment classes include the following:

·

Single-tenant retail and office double-or-triple-net leased properties in major metropolitan areas or areas with high growth;

·

Multi-tenant office and retail properties primarily in major metropolitan areas or areas with high growth and typically stabilized;

·

Purchase or origination of ground lease;

·

Self-developed properties on Company owned land including select office, flex, industrial, and retail;

·

Joint venture development using Company owned land;

·

Origination or purchase of 1-10 year term loans with strong risk-adjusted yields with property types to include hotel, office, retail, land and industrial;

·

Real estate related investment securities, including commercial mortgage backed securities, preferred or common stock, and corporate bonds; and

·

Select regional area investments using Company market knowledge and expertise to earn good risk-adjusted yields.

Our investments in income-producing properties have single or multiple tenants typically subject to long-term leases, primarily in the form of triple or double net leases and ground leases. Triple-net leases generally require the tenant to pay property operating expenses such as real estate taxes, insurance, assessments and other governmental fees, utilities, repairs and maintenance and capital expenditures. For multi-tenant properties, each tenant typically pays its proportionate share of the aforementioned operating expenses of the property although we typically incur additional costs for property management services.

STRATEGIC ALTERNATIVES

In late 2015, the Company had received a shareholder proposal to be voted upon by the Company’s shareholders at the 2016 annual meeting, requesting that the Board engage an independent advisor to evaluate a sale of the Company or the orderly liquidation of its assets (the “Shareholder Proposal”).  In November 2015, the Board decided to initiate the process called for by the Shareholder Proposal in advance of the annual meeting scheduled for April 2016. In early 2016, a special committee (the “Special Committee”) comprised entirely of independent directors on the Company’s Board commenced an exploration of strategic alternatives for maximizing shareholder value, including the options of sale of the Company, sale of assets or continued pursuit of the Company’s business plan (the “Strategic Review”). After interviewing and considering the proposals of nine financial advisory firms, the Special Committee engaged Deutsche Bank Securities Inc. (“Deutsche Bank”) to serve as financial advisor to the Special Committee in connection with the Strategic Review. Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) acted as legal counsel to the Special Committee, the Board and the Company.

3


 

The Strategic Review was deliberate and comprehensive and included consideration of a wide range of potential alternatives, including the sale of the Company, the sale of all or a portion of the Company’s assets, and other options, including the continuation of the Company’s business plan. The Company notes the following with regard to the Strategic Review:

·

As part of the Strategic Review, solicitation materials with respect to a potential strategic transaction with the Company, prepared with the assistance of Deutsche Bank, were delivered to more than 200 parties.

·

Such parties included potential buyers of the Company, merger partners, land investors, high net worth individuals, REITs, and opportunity funds and private equity funds.

·

More than 20 parties executed non-disclosure agreements and received detailed financial and operating information from the Company.

·

No minimum or maximum price requirement was communicated to potential bidders.

·

Deutsche Bank’s fee was contingent on completion of a transaction. As no transaction was completed, Deutsche Bank received no payment other than expense reimbursements. There was no retainer paid to Deutsche Bank.

·

The Company did not place any restrictions on the form of transaction to be proposed, nor were there any requirements concerning the retention or compensation of any individuals or group of individuals within the Company’s current management team. 

The Company notes the following with regard to the potential strategic transactions that were considered by the Special Committee:

·

Two potential bidders visited the Company’s headquarters and met with the Company’s senior management to discuss a potential transaction, and executives of both potential bidders toured the Company’s Daytona Beach assets. No potential bidders were denied an opportunity for such a visit.

·

Ultimately, the Company received two offers from interested parties, both public real estate companies; one of comparable size to the Company, and the other a smaller company.

·

Both offers were to acquire 100% of the Company’s outstanding stock via an all-stock merger. In both offers, the consideration consisted of securities of the offeror, and in connection with one or both offers the leverage level of the potential bidder would have resulted in the combined Company having a leverage level unfavorable for a public real estate company. Due to the proposed form of consideration, both offers required the Company to undertake thorough valuations of the bidders’ businesses to understand the value of the securities being offered as consideration.

·

The offers reflected a price-per-share offer for the Company’s common stock of no greater than a 5% premium to the then trading price of the Company’s stock.

·

Both offers were conditioned upon approval by the offerors’ shareholders. 

·

The Strategic Review process, from evaluation of financial advisory firms through the conclusion of discussions with the interested parties that submitted offers, occurred over approximately eight months.

In July 2016, the Special Committee, in consultation with Deutsche Bank, exercised its independent judgment and, consistent with its fiduciary duty to act in the interests of all the Company’s shareholders, determined that neither offer sufficiently reflected the Company’s value and therefore would not have maximized value for the Company’s shareholders. The Special Committee concluded that the best way to maximize shareholder value and ultimately monetize the Company’s land and other assets was to continue to pursue the Company’s business plan. The Company and its Board of Directors remain committed to maximizing shareholder value and remain open at all times to considering any potentially value-enhancing opportunities.

4


 

INCOME PROPERTIES

We have pursued a strategy of investing in income-producing properties, when possible, by utilizing the proceeds from real estate transactions, including land sales and the disposition of other income properties, qualifying for income tax deferral through like-kind exchange treatment for tax purposes. During the year ended December 31, 2016, we acquired ten income properties: seven single-tenant income properties and three multi-tenant income properties, at an aggregate purchase price of approximately $86.7 million:

·

On February 18, 2016, the Company acquired a 4,685 square-foot building situated on approximately 0.37 acres in Dallas, Texas which was 100% occupied and leased to two tenants, anchored by 7-Eleven, Inc. The purchase price was approximately $2.5 million, and as of the acquisition date, the weighted average remaining term of the leases was approximately 8.2 years.

·

On August 17, 2016, the Company acquired approximately 1.26 acres in Monterey, California, leased to Bank of America. The 1.26 acres contains a 32,692 square-foot building occupied by the tenant. The purchase price was approximately $8.4 million, and as of the acquisition date, the remaining term of the lease was approximately 4.3 years.

·

On September 15, 2016, the Company acquired four buildings in a sales-leaseback transaction with Bloomin’ Brands, Inc. (the “Bloomin’ Portfolio”) for a total purchase price of approximately $14.9 million as described below. As of the acquisition date, the remaining lease terms were each approximately 15.0 years:

o

6,528 square-foot building leased to Carrabba’s Italian Grill located in Austin, Texas;

o

6,176 square-foot building leased to Outback Steakhouse located in Austin, Texas;

o

7,216 square-foot building leased to Outback Steakhouse located in Charlottesville, Virginia; and

o

6,297 square-foot building leased to Outback Steakhouse located in Huntersville, North Carolina.

·

On September 22, 2016, the Company acquired approximately 0.91 acres in Dallas, Texas, leased to CVS Pharmacy (“CVS”). The 0.91 acres contains a 10,340 square-foot building occupied by the tenant. The purchase price was approximately $14.9 million, and as of the acquisition date, the remaining term of the lease was approximately 25.4 years.

·

On September 29, 2016, the Company acquired a 116,334 square-foot building situated on approximately 10.64 acres in Raleigh, North Carolina, leased to a subsidiary of At Home Group, Inc. The purchase price was approximately $9.2 million, and as of the acquisition date, the remaining term of the lease was approximately 13.0 years.

·

On October 14, 2016, the Company acquired a 75,841 square-foot building situated on approximately 5.24 acres in Santa Clara, California for a purchase price of approximately $30.0 million. The two-tenant office building is 100% leased to Centrify Corporation and Adesto Technologies, and as of the acquisition date, the remaining lease terms were approximately 4.0 and 7.0 years, respectively.

·

On November 30, 2016, the Company acquired a 52,474 square-foot building situated on approximately 1.39 acres in Reno, Nevada for a purchase price of approximately $6.9 million. The retail building is 95% leased to Century Theatres, an affiliate of Cinemark, and as of the acquisition date, the remaining term of the lease was approximately 3.0 years.

Nineteen income properties were disposed of during the year ended December 31, 2016 for an aggregate sales price of approximately $74.3 million as described below:

·

On April 5, 2016, the Company sold its income property leased to American Signature Furniture located in Daytona Beach, Florida, which had 3.8 years remaining on the lease, for a sales price of approximately $5.2 million. The Company’s gain on the sale was approximately $197,000, or $0.02 per share after tax.

·

On April 6, 2016, the Company sold its income property leased to an affiliate of CVS, located in Sebring, Florida, which was sub-leased to Advanced Auto Parts and had approximately 3.1 years remaining on the lease, for a sales price of approximately $2.4 million. The Company’s loss on the sale was approximately $210,000, or $0.02 per share after tax, which was charged to earnings as an impairment during the three months ended March 31, 2016.

5


 

·

On April 22, 2016, the Company sold its 15,360 square foot self-developed property leased to Teledyne ODI, located in Daytona Beach, Florida, which had approximately 9.3 years remaining on the lease, for a sales price of approximately $3.0 million. The Company’s gain on the sale was approximately $822,000, or $0.09 per share after tax.

·

On June 22, 2016, the Company sold its income property leased to Lowe’s located in Lexington, North Carolina, which had 9.6 years remaining on the lease, for a sales price of approximately $9.1 million. The Company’s gain on the sale was approximately $344,000, or $0.04 per share after tax.

·

On September 16, 2016, the Company sold its portfolio of fourteen single-tenant income properties (the “Portfolio Sale”). The properties include nine properties leased to Bank of America, located primarily in Orange County and also in Los Angeles County, California; two properties leased to Walgreens, located in Boulder, Colorado and Palm Bay, Florida; a property leased to a subsidiary of CVS located in Tallahassee, Florida; a ground lease for a property leased to Chase Bank located in Chicago, Illinois; and a ground lease for a property leased to Buffalo Wild Wings in Phoenix, Arizona. The sales price for the Portfolio Sale was approximately $51.6 million, which included the buyer’s assumption of the Company’s existing $23.1 million mortgage loan secured by the fourteen properties. The Portfolio Sale resulted in a net gain of approximately $11.1 million, or approximately $1.20 per share, after tax, during the third quarter of 2016, with a loss due to additional legal costs of approximately $82,000 recognized in the fourth quarter of 2016 for a final net gain of approximately $11.0 million. The Company’s net gain on the Portfolio Sale of approximately $11.1 million consists of approximately $11.4 million, which is included in gain on disposition of assets, offset by approximately $367,000 of unamortized loan costs on the $23.1 million mortgage loan which were written off and included in interest expense on the consolidated statement of operations.

·

On September 30, 2016, the Company sold its income property leased to PNC Bank, N.A. located in Altamonte Springs, Florida, which was vacant and had approximately 3.1 years remaining on the lease, for a sales price of approximately $3.0 million. The Company’s loss on the sale was approximately $922,000, or $0.10 per share after tax, of which approximately $942,000 was previously recognized as an impairment charge during the three months ended June 30, 2016, with the difference of approximately $20,000 included in gain on disposition of assets during the three months ended September 30, 2016. The impairment charge of approximately $942,000 is described in Note 8, “Impairment of Long-Lived Assets.”

On April 5, 2016, the Company entered into a 15-year lease with 24 Hour Fitness USA, Inc. (“24 Hour Fitness”) for the anchor space at The Grove property located in Winter Park, Florida. The lease is for approximately 40,000 square feet, or 36%, of the 112,000 square foot multi-tenant retail center. On July 6, 2016, the Company funded approximately $4.0 million into an escrow account for customary tenant improvements for the build out of the space to be occupied by 24 Hour Fitness. 24 Hour Fitness began drawing funds from escrow in September of 2016, and continued doing so in accordance with the lease as construction progressed. As of December 31, 2016, approximately $3.6 million of construction has been funded from the escrow account, leaving a remaining cash commitment of approximately $375,000. The balance was funded during January of 2017, 24 Hour Fitness completed construction, and the grand opening took place on February 4, 2017.

In addition, the Company has executed the following four separate leases at the Grove:

·

Wawa has executed a 20-year ground lease for an outparcel with expected completion in early 2018;

·

Quickly Boba, an Asian fusion café, executed a lease for 3,000 square feet;

·

Five Star Vision, a franchisee of Sprint Wireless executed a lease for approximately 1,200 square feet; and

·

Amazing Explorers Academy, a STEAM-based pre-school, executed a lease for approximately 12,000 square feet.

With these leases, The Grove, which is managed and being leased by a third party, is now approximately 50% leased. The Company expects the majority of the signed tenants to open for business late in the third quarter or early in the forth quarter of 2017.

6


 

Our current portfolio of twenty-one single-tenant income properties generates approximately $13.1 million of revenues from lease payments on an annualized basis and has a weighted average remaining lease term of 9.5 years as of December 31, 2016. Our current portfolio of ten multi-tenant properties generates approximately $8.8 million of revenue from lease payments on an annualized basis and has a weighted average remaining lease term of 5.6 years as of December 31, 2016.

We expect to continue to focus on acquiring income-producing properties during fiscal year 2017, and in the near term thereafter, maintaining our use of the aforementioned tax deferral structure whenever possible.

As part of our overall strategy for investing in income-producing investments, we have self-developed five of our multi-tenant properties which are located in Daytona Beach, Florida. The first self-developed property, located at the northeast corner of LPGA and Williamson Boulevards in Daytona Beach, Florida, is an approximately 22,000 square foot, two-story, building, known as the Concierge Office Building, which was 100% leased as of December 31, 2016. The second two properties, known as the Mason Commerce Center, consists of two buildings totaling approximately 31,000 square-feet (15,360 each), which was 100% leased as of December 31, 2016. During 2014, construction was completed on two additional properties, known as the Williamson Business Park, which are adjacent to the Mason Commerce Center. Williamson Business Park consists of two buildings totaling approximately 31,000 square-feet (15,360 each). One of the two buildings in the Williamson Business Park was sold on April 22, 2016 for a gain of approximately $822,000. The remaining Williamson Business Park building was approximately 50% leased as of December 31, 2016. Of the ten multi-tenant properties owned as of December 31, 2016, four were self-developed.

Our focus on acquiring income-producing investments includes a continual review of our existing income property portfolio to identify opportunities to recycle our capital through the sale of income properties based on, among other possible factors, the current or expected performance of the property and favorable market conditions. Pursuant to our on-going review, nineteen properties were sold during the year ended December 31, 2016, including Portfolio Sale.

7


 

As of December 31, 2016, the Company owned twenty-one single-tenant and ten multi-tenant income properties in ten states. Following is a summary of these properties:

 

 

 

 

 

 

 

 

 

 

Tenant

    

City

    

State

    

Area
(Square Feet)

    

Year Built

 

At Home

 

Raleigh

 

NC

 

116,334

 

1995

 

Bank of America

 

Monterey

 

CA

 

32,692

 

1982

 

Barnes & Noble

 

Daytona Beach

 

FL

 

28,000

 

1995

 

Best Buy

 

McDonough

 

GA

 

30,038

 

2005

 

Big Lots

 

Phoenix

 

AZ

 

34,512

 

2000

 

Big Lots

 

Germantown

 

MD

 

25,589

 

2000

 

Carrabba's Italian Grill

 

Austin

 

TX

 

6,528

 

1994

 

Container Store

 

Glendale

 

AZ

 

23,329

 

2015

 

CVS

 

Dallas

 

TX

 

10,340

 

2016

 

Dick’s Sporting Goods

 

McDonough

 

GA

 

46,315

 

2006

 

Harris Teeter

 

Charlotte

 

NC

 

45,089

 

1993

 

Hilton Grand Vacations

 

Orlando

 

FL

 

102,019

 

1988

 

Hilton Grand Vacations

 

Orlando

 

FL

 

31,895

 

2000

 

Lowe’s Corporation

 

Katy

 

TX

 

131,644

 

1997

 

Outback Steakhouse

 

Austin

 

TX

 

6,176

 

1994

 

Outback Steakhouse

 

Charlottesville

 

VA

 

7,216

 

1984

 

Outback Steakhouse

 

Huntersville

 

NC

 

6,297

 

1997

 

Rite Aid Corp.

 

Renton

 

WA

 

16,280

 

2006

 

Walgreens

 

Clermont

 

FL

 

13,650

 

2003

 

Walgreens

 

Alpharetta

 

GA

 

15,120

 

2000

 

Wells Fargo

 

Raleigh

 

NC

 

450,393

 

1996/1997

 

21 Single-Tenant Properties

 

 

 

 

 

1,179,456

 

 

 

7-Eleven

 

Dallas

 

TX

 

4,685

 

1973

 

3600 Peterson

 

Santa Clara

 

CA

 

75,841

 

1978/2015

 

Concierge Office Building

 

Daytona Beach

 

FL

 

22,012

 

2009

 

Mason Commerce Center-Building 1

 

Daytona Beach

 

FL

 

15,360

 

2009

 

Mason Commerce Center-Building 2

 

Daytona Beach

 

FL

 

15,360

 

2009

 

The Grove

 

Winter Park

 

FL

 

112,292

 

1985

 

Century Theatres

 

Reno

 

NV

 

52,474

 

2000

 

Riverside Avenue

 

Jacksonville

 

FL

 

136,856

 

2003

 

Whole Foods Market Centre

 

Sarasota

 

FL

 

59,341

 

2004

 

Williamson Business Park-Building 1

 

Daytona Beach

 

FL

 

15,360

 

2014

 

10 Multi-Tenant Properties

 

 

 

 

 

509,581

 

 

 

Total 31 Properties

 

 

 

 

 

1,689,037

 

 

 

 

The weighted average economical and physical occupancy rates of our income properties for each of the last three years on a portfolio basis are as follows:

 

 

 

 

 

 

Year

    

Single-Tenant Economic / Physical
Occupancy

    

Multi-Tenant Economic / Physical
Occupancy

 

2014

 

100% / 97%

 

75% / 75%

 

2015

 

100% / 99%

 

85% / 85%

 

2016

 

100% / 100%

 

85% / 85%

 

 

 

 

 

 

8


 

The information on lease expirations of our total income property portfolio for each of the ten years starting with 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

Year

    

# of Tenant Leases
Expiring

    

Total Square Feet of Leases Expiring

    

Annual Rents
Expiring

    

Percentage of
Gross
Annual Rents
Expiring

 

2017

 

9

 

35,657

 

$

715,450

 

3.4

%

2018

 

5

 

34,822

 

$

502,187

 

2.4

%

2019

 

4

 

23,280

 

$

521,656

 

2.5

%

2020

 

6

 

71,305

 

$

1,205,981

 

5.7

%

2021

 

14

 

234,275

 

$

4,068,692

 

19.1

%

2022

 

1

 

14,790

 

$

317,907

 

1.5

%

2023

 

1

 

34,512

 

$

365,400

 

1.7

%

2024

 

4

 

529,997

 

$

3,750,434

 

17.6

%

2025

 

3

 

52,683

 

$

1,177,640

 

5.5

%

2026

 

2

 

17,773

 

$

592,478

 

2.8

%

The majority of leases have additional option periods beyond the original term of the lease, which typically are exercisable at the tenant’s option.

Subsequent to December 31, 2016, and prior to the date of this report, the Company acquired a 18,120 square-foot building in Sarasota, Florida leased to an affiliate of Staples, Inc. The purchase price was approximately $4.1 million, and as of the acquisition date, the weighted average remaining term of the leases was approximately 5.0 years. The transaction is expected to be part of a 1031 like-kind exchange.

No tenant of a single income property or group of income properties with the same tenant had aggregate rent which accounted for more than 10% of our consolidated revenues in 2016 or 2015.

REAL ESTATE OPERATIONS

As of December 31, 2016, the Company owned approximately 9,800 acres of land in Daytona Beach, Florida, along six miles of the west and east side of Interstate 95. Presently, the majority of this land is used for agricultural purposes. Approximately 1,100 acres of our land holdings are located on the east side of Interstate 95 and are generally well suited for commercial development. Approximately 8,700 acres of our land holdings are located on the west side of Interstate 95 and the majority of this land is generally well suited for residential development. Included in the western land is approximately 1,100 acres which are located further west of Interstate 95 and a few miles north of Interstate 4 and this land is generally well suited for industrial purposes. As of February 10, 2017, subsequent to the Minto Sale (hereinafter defined), the Company’s land holdings totaled approximately 8,200 acres of which approximately 7,100 acres are located on the west side of Interstate 95.

Real estate operations revenue consisted of the following for the years ended December 31, 2016, 2015, and 2014, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

2014

 

Revenue Description

    

($000's)

    

($000's)

    

($000's)

 

Land Sales Revenue

 

$

11,871

 

$

4,276

 

$

8,744

 

Tomoka Town Center - Percentage of Completion Revenue

 

 

17,490

 

 

8,128

 

 

 —

 

Revenue from Reimbursement of Infrastructure Costs

 

 

4,500

 

 

 —

 

 

 —

 

Impact Fee and Mitigation Credit Sales

 

 

2,220

 

 

463

 

 

926

 

Subsurface Revenue

 

 

1,802

 

 

3,003

 

 

3,704

 

Fill Dirt and Other Revenue

 

 

261

 

 

73

 

 

119

 

Total Real Estate Operations Revenue

 

$

38,144

 

$

15,943

 

$

13,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


 

The Tomoka Town Center consists of approximately 235 acres of which approximately 180 acres are developable. Land sales with a gross sales price totaling approximately $21.4 million within the Tomoka Town Center consisted of sales of approximately 99 acres to Tanger, Sam’s Club, and North American Development Group “NADG”) in 2015 and 2016 (the “Tomoka Town Center Sales Agreements”). The remaining developable acreage of approximately 82 acres is currently under contract with NADG as described in the land pipeline in Note 20, “Commitment and Contingencies.” The Company performed certain infrastructure work, beginning in the fourth quarter of 2015 through its completion in the fourth quarter of 2016, which required the sales price on the Tomoka Town Center Sales Agreements to be recognized on the percentage-of-completion basis. All revenue related to the Tomoka Town Center Sales Agreements has been recognized as of December 31, 2016. The timing of the reimbursements of the remaining infrastructure worth approximately $3.8 million is more fully described in Note 9, “Other Assets.”

Land Sales. During the year ended December 31, 2016, a total of approximately 707.7 acres were sold for approximately $13.8 million as described below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Sales

 

 

 

Gain

 

 

 

 

 

 

Date of

 

No. of

 

Price (1)

 

Price

 

on Sale

 

    

Buyer (or Description)

    

Location

    

Sale

    

Acres

    

($000's)

    

per Acre

    

($000's)

1

 

Commercial / Retail

 

East of I-95

 

02/12/16

 

3.1

 

$

190

 

$

61,000

 

$

145

2

 

NADG - OutParcel

 

East of I-95

 

03/30/16

 

4.4

 

 

2,000

 

 

455,000

 

 

1,304

3

 

Minto Sales Center

 

West of I-95

 

09/27/16

 

4.5

 

 

205

 

 

46,000

 

 

126

4

 

Commercial / Retail

 

West of I-95

 

10/13/16

 

17.1

 

 

3,034

 

 

177,000

 

 

2,675

5

 

Commercial / Retail

 

East of I-95

 

12/22/16

 

74.6

 

 

830

 

 

11,000

 

 

751

6

 

ICI Homes

 

West of I-95

 

12/29/16

 

604.0

 

 

7,500

 

 

12,000

 

 

3,303

 

 

 

 

 

 

 

 

707.7

 

$

13,759

 

$

19,000

 

$

8,304

(1)

Land Sales Revenue for 2016 is equal to the Gross Sales Price of land sales during 2016 of $13,759, less the $2.0 million sales price for the NADG – OutParcel, plus approximately $112,000 of incentives earned and received during 2016 related to the Distribution Center sale which closed during 2014.

During the year ended December 31, 2015, a total of approximately 114.1 acres were sold for approximately $22.5 million as described below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Sales

 

 

 

Gain

 

 

 

 

 

 

Date of

 

No. of

 

Price (1)

 

Price

 

on Sale

 

    

Buyer (or Description)

    

Location

    

Sale

    

Acres

    

($000's)

    

per Acre

    

($000's)

1

 

Commercial / Retail

 

East of I-95

 

06/01/15

 

3.0

 

$

505

 

$

168,000

 

$

476

2

 

Commercial / Retail

 

Highlands County

 

06/17/15

 

0.9

 

 

250

 

 

278,000

 

 

223

3

 

Tanger

 

East of I-95

 

11/12/15

 

38.9

 

 

9,700

 

 

249,000

 

 

2,793

4

 

Integra Land Company

 

East of I-95

 

12/18/15

 

15.0

 

 

2,376

 

 

158,000

 

 

2,265

5

 

Sam's Club

 

East of I-95

 

12/23/15

 

18.1

 

 

4,500

 

 

249,000

 

 

1,279

6

 

NADG - First Parcel

 

East of I-95

 

12/29/15

 

37.3

 

 

5,168

 

 

139,000

 

 

1,421

7

 

Commercial / Retail

 

East of I-95

 

12/29/15

 

0.9

 

 

30

 

 

33,000

 

 

20

 

 

 

 

 

 

 

 

114.1

 

$

22,529

 

$

197,000

 

$

8,477

(1)

Land  Sales Revenue for 2015 is equal to the Gross Sales Price of land sales during 2015 of $22,529, less the aggregate $19.4 million sales price for the Tomoka Town Center Sales (Tanger, Sam’s Club, and NADG – First Parcel), plus approximately $1.03 million of incentives received and earned during 2015 related to the Distribution Center sale which closed during 2014, plus approximately $87,000 of percentage-of-completion revenue earned during 2015 for the Distribution Center Sale which closed during 2014.

10


 

During the year ended December 31, 2014, a total of approximately 99.7 acres were sold for approximately $8.8 million as described below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Sales

 

 

 

Gain

 

 

 

 

 

 

Date of

 

No. of

 

Price (1)

 

Price

 

on Sale

 

    

Buyer (or Description)

    

Location

    

Sale

    

Acres

    

($000's)

    

per Acre

    

($000's)

1

 

Halifax Humane Society, Inc.

 

West of I-95

 

02/18/14

 

3.1

 

$

392

 

$

126,000

 

$

347

2

 

Distribution Center

 

East of I-95

 

08/15/14

 

75.6

 

 

7,790

 

 

103,000

 

 

3,903

3

 

Victor Indigo Lakes, L.L.C.

 

East of I-95

 

10/30/14

 

21.0

 

 

625

 

 

30,000

 

 

552

 

 

 

 

 

 

 

 

99.7

 

$

8,807

 

$

88,000

 

$

4,802

(1)

Land Sales Revenue for 2014 is equal to the Gross Sales Price of land sales during 2014 of $8,807, less approximately $87,000 of percentage-of-completion revenue recognized during 2015 for the Distribution Center Sale which closed during 2014, plus approximately $25,000 for the sale of a ditch parcel.

On February 10, 2017, the Company completed the sale of approximately 1,581 acres of land, or approximately 16% of its land holdings, to Minto Communities, LLC (“Minto”) for approximately $27.2 million (the “Minto Sale”), or approximately $17,200 an acre, resulting in an estimated gain of approximately $20.0 million, or $2.19 per share, after tax. On February 16, 2017, Margaritaville Holdings (“Margaritaville”) and Minto announced a partnership that will develop new active adult communities in some of the nation’s most popular destinations and that the first location of the all-new residential concept will open in Daytona Beach, Florida on the approximately 1,581 acres sold to Minto by the Company, and another approximately 1,686 acres the Company currently has under contract with Minto. Margaritaville and Minto indicated that the community would be branded as LATITUDE MARGARITAVILLE, Daytona Beach.

Following the Minto Sale, as of February 10, 2017, the Company’s land holdings totaled approximately 8,200 acres and the pipeline of potential land sales transactions included the following ten definitive purchase and sale agreements with ten different buyers, representing approximately 27% of our land holdings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

 

 

 

 

 

 

 

No. of

 

Amount

 

Price

 

Estimated

 

    

Contract (or Buyer) / Parcel

    

Acres

    

($000's)

    

per Acre

 

Timing

1

 

Commercial/Retail (1)

 

35

 

$

14,000

 

$

400,000

 

'17 - '19

2

 

Commercial/Retail

 

4

 

 

1,175

 

 

294,000

 

'17 - '18

3

 

Commercial/Retail

 

6

 

 

1,556

 

 

259,000

 

'17 - '18

4

 

Mixed-Use Retail

 

22

 

 

5,574

 

 

253,000

 

'17 - '18

5

 

Mixed-Use Retail (NADG)

 

82

 

 

20,187

 

 

246,000

 

'17 - '18

6

 

Residential (SF)

 

7

 

 

1,140

 

 

163,000

 

'18 - '19

7

 

Commercial (1)

 

28

 

 

3,215

 

 

115,000

 

'17 - '18

8

 

AR Residential (Minto)

 

1,686

 

 

31,360

 

 

19,000

 

'18 - '19

9

 

SF Residential

 

194

 

 

3,324

 

 

17,000

 

'18 - '19

10

 

SF Residential (ICI)

 

146

 

 

1,400

 

 

10,000

 

'18 - '19

 

 

Total

 

2,210

 

$

82,931

 

$

38,000

 

 


(1)

Contract amount and price per acre may be reduced by potential costs incurred for wetlands mitigation, if any.

As noted above, all of these agreements contemplate closing dates ranging from the first quarter of 2017 through fiscal year 2019, and the Company expects some of the transactions to close in 2017, although the buyers are not contractually obligated to close until after 2017. Each of the transactions are in varying stages of due diligence by the various buyers including, in some instances, having made submissions to the planning and development departments of the City of Daytona Beach, and other permitting activities with other applicable governmental authorities. In addition to other customary closing conditions, the majority of these transactions are conditioned upon the receipt of approvals or permits from those various governmental authorities, as well as other matters that are beyond our control. If such approvals are not obtained, the prospective buyers may have the ability to terminate their respective agreements prior to closing. As a result, there can be no assurances regarding the likelihood or timing of any one of these potential land transactions being completed or the final terms thereof, including the sales price.

11


 

Historical revenues and income from our sale of land are not indicative of future results because of the unique nature of land transactions and variations in the cost basis of the owned land. A significant portion of the Company’s revenue and income in any given year may be generated through relatively few land transactions. The timing for these land transactions, from the time of preliminary discussions through contract negotiations, due diligence periods, and the closing, can last from several months to several years. Although we believe there have been recent indications of improvement in the overall economy and credit markets, we expect the overall real estate market, particularly home building, to remain inconsistent in the near term, and as a result we believe our ability to enter into land transactions will remain challenging.

Other Real Estate Assets. The Company owns impact fees of approximately $925,000 and mitigation credits of approximately $1.4 million for a combined total of approximately $2.3 million as of December 31, 2016. As of December 31, 2015, the Company owned impact fees of approximately $3.1 million and mitigation credits of approximately $1.4 million for a combined total of approximately $4.5 million. During the years ended December 31, 2016 and 2015, the Company received cash payments of approximately $2.2 million and $463,000, respectively, for impact fees with a cost basis that was generally of equal value.

Land Impairments. During the year ended December 31, 2016, impairment charges totaled approximately $1.0 million on our undeveloped land holdings. Two of the ten aforementioned executed purchase and sale agreements include approximately eight acres of land that have a higher cost basis than the remainder of the Company’s historic land holdings as these acres were repurchased by the Company in previous years from the prior purchasers thereof (the “Repurchased Land”). In connection with those two contracts, the Company recognized impairment charges of approximately $717,000 and $311,000, respectively, in the second quarter of 2016. The total impairment charges represent the anticipated losses on the sales plus estimated closing costs. As of December 31, 2016, the land upon which the impairments were charged is still under contract to be sold.  During the years ended December 31, 2015 and 2014, the Company did not recognize any impairments of its land holdings. 

Beachfront Venture. During the year ended December 31, 2015, the Company acquired, through a real estate venture with an unaffiliated third party institutional investor, an interest in approximately six acres of vacant beachfront property located in Daytona Beach, Florida. The property was acquired for approximately $11.3 million of which the Company contributed approximately $5.7 million. As of December 31, 2015, the real estate venture was fully consolidated as the Company determined that it was the primary beneficiary of the variable interest entity. On November 17, 2016, the Company acquired the unaffiliated third party’s interest for approximately $4.8 million, a discount of approximately $879,000. The discount was recorded through equity on the consolidated balance sheet during the quarter and year ended December 31, 2016. The Company evaluated its interest in the six-acre vacant beachfront property for impairment and determined that no impairment was necessary as of December 31, 2016. As the Company owns the entire real estate venture as of December 31, 2016, there is no longer a consolidated VIE. The six acre vacant beachfront property asset totaled approximately $11.7 million as of December 31, 2016 which includes the additional land basis related to entitlement costs. The beachfront property received approval of the rezoning and entitlement of the site for up to approximately 1.2 million square feet of density. The Company is in negotiations with two prospective tenants, Cocina 214 Mexican Restaurant & Bar and LandShark Bar & Grill, to lease the two restaurants the Company intends to develop on the parcel. The zoning and entitlements received allow for the restaurant development and a larger scale vertical development should market conditions permit.

Subsurface Interests. The Company owns full or fractional subsurface oil, gas, and mineral interests underlying approximately 500,000 “surface” acres of land owned by others in 20 counties in Florida (the “Subsurface Interests”). The Company leases the Subsurface Interests to mineral exploration firms for exploration. Our subsurface operations consist of revenue from the leasing of exploration rights and in some instances additional revenues from royalties applicable to production from the leased acreage.

During November 2015, the Company hired Lantana Advisors, a subsidiary of SunTrust, to evaluate the possible sale of the Subsurface Interests. On April 13, 2016, the Company entered into a purchase and sale agreement with an affiliate of Land Venture Partners, LLC (“LVP”) for the sale of the Subsurface Interests, including the royalty interests in two operating oil wells in Lee County, Florida and its interests in the oil exploration lease with Kerogen Florida Energy Company LP, for a sales price of approximately $24 million (the “Subsurface Sale”). The Subsurface Sale was terminated on November 8, 2016.  The Company and LVP, amongst other things, were unable to reach a resolution on issues pertaining to the acceptability of title for a portion of the total acres in the Subsurface Interests. 

12


 

During 2011, an eight-year oil exploration lease was executed. The lease calls for annual lease payments which are recognized as revenue ratably over the respective twelve-month lease periods. In addition, non-refundable drilling penalty payments are made as required by the drilling requirements in the lease which are recognized as revenue when received. Cash payments for both the annual lease payment and the drilling penalty, if applicable, are received in full on or before the first day of the respective lease year.

Lease payments on the respective acreages and drilling penalties received through lease year six are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acreage

 

 

 

 

 

 

 

 

 

Lease Year

    

(Approximate)

    

Florida County

    

Lease Payment (1)

    

Drilling Penalty (1)

 

Lease Year 1 - 9/23/2011 - 9/22/2012

 

136,000

 

Lee and Hendry

 

$

913,657

 

$

 —

 

Lease Year 2 - 9/23/2012 - 9/22/2013

 

136,000

 

Lee and Hendry

 

 

922,114

 

 

 —

 

Lease Year 3 - 9/23/2013 - 9/22/2014

 

82,000

 

Hendry

 

 

3,293,000

 

 

1,000,000

 

Lease Year 4 - 9/23/2014 - 9/22/2015

 

42,000

 

Hendry

 

 

1,866,146

 

 

600,000

 

Lease Year 5 - 9/23/2015 - 9/22/2016

 

25,000

 

Hendry

 

 

1,218,838

 

 

175,000

 

Lease Year 6 - 9/23/2016 - 9/22/2017

 

15,000

 

Hendry

 

 

806,683

 

 

150,000

 

Total Payments Received to Date

 

 

 

 

 

$

9,020,438

 

$

1,925,000

 


(1)

Cash payment for the Lease Payment and Drilling Penalty is received on or before the first day of the lease year. The Drilling Penalty is recorded as revenue when received, while the Lease Payment is recognized on a straight-line basis over the respective lease term. See separate disclosure of the revenue per year below.

The terms of the lease state the Company will receive royalty payments if production occurs, and may receive additional annual rental payments if the lease is continued in years seven and eight. The lease is effectively eight one-year terms as the lessee has the option to terminate the lease annually or modify the acres subject to the lease.

Lease income generated by the annual lease payments is recognized on a straight-line basis over the guaranteed lease term. For the years December 31, 2016, 2015, and 2014, lease income of approximately $1.1 million, $1.7 million, and $2.9 million was recognized, respectively. There can be no assurance that the oil exploration lease will be extended beyond the expiration of the current term of September 22, 2017 or, if renewed, on similar terms or conditions.

During the years ended December 31, 2016, 2015, and 2014, the Company also received oil royalties from operating oil wells on 800 acres under a separate lease with a separate operator. Production volume from these oil wells was 50,441 barrels in 2016, 62,745 barrels in 2015, and 64,835 barrels in 2014, resulting in revenues received from oil royalties of approximately $50,000, $68,000 and $198,000, respectively.

The Company is not prohibited from the disposition of any or all of the Subsurface Interests. Should the Company complete a transaction to sell all or a portion of the Subsurface Interests, the Company may utilize the like-kind exchange structure in acquiring one or more replacement investments such as income-producing properties. The Company may release surface entry rights or other rights upon request of a surface owner for a negotiated release fee based on a percentage of the surface value. Cash payments for the release of surface entry rights totaled approximately $493,000, $995,000, and $4,000 during the years ended December 31, 2016, 2015, and 2014, respectively, which is included in revenue from real estate operations. During the fourth quarter of 2015, in conjunction with the release of the Company’s surface entry rights related to approximately 1,400 acres in Lee County, Florida, for a cash payment of approximately $920,000, the Company also received the 50% interest in the subsurface rights of those acres, which the Company did not previously own, for a fair value of approximately $68,000, which is also included in revenue from real estate operations.

In addition, the Company generated revenue of approximately $250,000, $73,000, and $119,000 during the years ended December 31, 2016, 2015, and 2014, respectively, from fill dirt excavation agreements.

13


 

GOLF OPERATIONS

Golf operations consist a semi-private golf club consisting of the following: two 18-hole championship golf courses (an 18-hole course designed by Rees Jones, and an 18-hole course designed by Arthur Hills), with a three-hole practice facility also designed by Rees Jones; a clubhouse facility; food and beverage operations; and a fitness facility located within the LPGA International mixed-use residential community on the west side of Interstate 95 in Daytona Beach, Florida (collectively “LPGA International Golf Club”). In 2012 and 2013, we completed approximately $534,000 of capital expenditures to renovate the clubhouse facilities, including a significant upgrade of the food and beverage operations, addition of fitness facilities, and renovations to public areas.

The Company entered into a management agreement with an affiliate of ClubCorp America (“ClubCorp”), effective January 25, 2012, to manage the LPGA International golf and clubhouse facilities (the “LPGA Management Agreement”). We believe ClubCorp, which owns and operates clubs and golf courses worldwide, brings substantial golf and club management expertise and knowledge to the LPGA International golf operations, including the utilization of national marketing capabilities, aggregated purchasing programs, and implementation of an affiliate member program, and our affiliation with ClubCorp will also improve membership levels through the access to other member clubs in the affiliate program of ClubCorp. The LPGA Management Agreement includes, amongst other terms, the payment to ClubCorp of a base management fee and an incentive fee based on the improvement in the net operating results of the golf operations.

As of December 31, 2016, the Company leased approximately 690 acres of land and certain improvements attributable to the golf courses under a long-term lease with the City of Daytona Beach, Florida (the “City”), which was to have expired in 2022. In July 2012, the Company entered into an agreement with the City to, among other things, amend the lease payments under its golf course lease (the “Lease Amendment”) whereby the base rent payment, which was scheduled to increase from $250,000 to $500,000 as of September 1, 2012, would remain at $250,000 for the remainder of the lease term and any extensions would be subject to an annual rate increase of 1.75% beginning September 1, 2013. In addition, pursuant to the Lease Amendment, beginning September 1, 2012, and continuing throughout the initial lease term and any extension option, the Company was to have paid additional rent to the City equal to 5.0% of gross revenues exceeding $5,500,000 and 7.0% of gross revenues exceeding $6,500,000. Since the inception of the lease, the Company has recognized the rent expense on a straight-line basis resulting in an estimated accrual for deferred rent. Upon the effective date of the Lease Amendment, the Company’s straight-line rent was revised to reflect the lower rent levels through expiration of the lease. As a result, approximately $3.0 million of the rent previously deferred will not be due to the City, and will be recognized into income over the remaining lease term. As of December 31, 2016, the Company’s accrued total liability related to the straight-line rent on the lease between the Company and the City was approximately $2.2 million.

On January 24, 2017, the Company acquired the land and improvements comprising the golf courses, previously leased from the City for approximately $1.5 million (the “Golf Course Land Purchase”). As a part of the Golf Course Land Purchase, the Company donated to the City three land parcels totaling approximately 14.3 acres located on the west side of Interstate 95 that are adjacent to the City’s Municipal Stadium. The Company had a cost basis of $0 in the donated land and paid approximately $100,000 to satisfy the community development district bonds associated with the acreage. Other terms of the Golf Course Land Purchase include the following:

·

The Company is obligated to pay the City an annual surcharge of $1 per golf round played each year (the “Per-Round Surcharge”) with an annual minimum Per-Round Surcharge of $70,000 and a maximum aggregate amount of the Per-Round Surcharges paid equal to $700,000;

·

Within one year following the date of the closing of the Golf Course Land Purchase, unless extended due to weather related delays outside the Company’s control, the Company is obligated to renovate the greens on the Jones Course; and

·

If the Company sells the LPGA International Golf Club within six years of the closing of the Golf Course Land Purchase, the Company is obligated to pay the City an amount equal to 10% of the difference between the sales price, less closing costs and any other costs required to be incurred in connection with the sale, and $4.0 million.

In conjunction with the Golf Course Land Purchase, the lease between the Company and the City was terminated. As of December 31, 2016, the Company’s accrued liability related to the straight-line rent on the lease between the Company and the City was approximately $2.2 million. Effective as of the closing date, the accrued liability will be eliminated as there is no remaining commitment related to the lease. As a result of eliminating the accrued liability, the Company will recognize approximately $0.40 per share in non-cash earnings in the first quarter of 2017.

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COMMERCIAL LOAN INVESTMENTS

Our investments in commercial loans or similar structured finance investments, such as mezzanine loans or other subordinated debt, have been and are expected to continue to be secured by commercial or residential real estate or the borrower’s pledge of its ownership interest in the entity that owns the real estate. The first mortgage loans we invest in or originate are for commercial real estate located in the United States and its territories, and are current or performing with either a fixed or floating rate. Some of these loans may be syndicated in either a pari-passu or senior/subordinated structure. Commercial first mortgage loans generally provide for a higher recovery rate due to their senior position in the underlying collateral. Commercial mezzanine loans are typically secured by a pledge of the borrower’s equity ownership in the underlying commercial real estate. Unlike a mortgage, a mezzanine loan is not secured by a lien on the property. An investor’s rights in a mezzanine loan are usually governed by an intercreditor agreement that provides holders with the rights to cure defaults and exercise control on certain decisions of any senior debt secured by the same commercial property.

On September 24, 2015, the Company originated a $14.5 million first mortgage loan secured by a hotel in San Juan, Puerto Rico. The loan was to have matured in September 2018 and bore a floating interest rate of 30-day London Interbank Offer Rate (“LIBOR”) plus 900 basis points, of which 700 basis points were payable currently and 200 basis points accrued over the term of the loan. At closing, a loan origination fee of approximately $181,000 was received by the Company and was being accreted ratably into income through the contractual maturity date. On May 26, 2016, this $14.5 million first mortgage loan was repaid at a discount of approximately $218,000. At payoff, the remaining loan origination fee of approximately $145,000, net of loan costs of approximately $32,000, was accreted into income.

During the year ended December 31, 2016, the approximately $9.0 million B-Note secured by property in Sarasota, Florida and the $10.0 million mezzanine loan secured by property in Dallas, Texas were extended by the borrowers, each borrower having exercised one-year extension options thereby extending the maturity dates to June 2017 and September 2017, respectively, with maximum maturity extensions to June 2018 and September 2019, respectively.

As of December 31, 2016, the Company owned three performing commercial loan investments which have an aggregate outstanding principal balance of approximately $24.0 million. These loans are secured by real estate, or the borrower’s equity interest in real estate, located in Dallas, Texas, Sarasota, Florida, and Atlanta, Georgia and have an average remaining maturity of approximately 0.9 years and a weighted average interest rate of 8.9%.

AGRICULTURE AND OTHER INCOME

Effectively all of our agriculture and other income consists of revenues generated by our agricultural operations which encompasses approximately 8,700 acres of our land holdings primarily on the west side of Interstate 95 in Daytona Beach, Florida. Our agricultural operations are managed by a third-party and consist of leasing land for hay production, timber harvesting, as well as hunting leases.

COMPETITION

The real estate business generally is highly competitive. Our business plan is focused on investing in commercial real estate that produces income primarily through the leasing of assets to tenants. To identify investment opportunities in income-producing real estate assets and to achieve our investment objectives, we compete with numerous companies and organizations, both public as well as private, of varying sizes, ranging from organizations with local operations to organizations with national scale and reach, and in some cases, we compete with individual real estate investors. In all the markets in which we compete to acquire income properties, price is the principal method of competition, with transaction structure and certainty of execution also being significant considerations for potential sellers. As of December 31, 2016, our total income property portfolio, including our single-tenant and multi-tenant properties, consists of thirty-one income properties located in the following states: (i) Arizona, (ii) California, (iii) Florida, (iv) Georgia, (v) Maryland, (vi) Nevada, (vii) North Carolina, (viii) Texas, (ix) Virginia and (x) Washington. Should we need to re-lease our single-tenant income properties or space in our multi-tenant properties, we would compete with many other property owners in the local market based on price, location of our property, potential tenant improvements, and possibly lease terms.

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Our real estate operations are comprised primarily of our land holdings, which are largely used for agricultural purposes today and are substantially located in the City of Daytona Beach, Florida, and the Subsurface Interests. The parties typically interested in acquiring our land holdings are both residential and commercial developers as well as commercial businesses. These interested parties typically base their decision to acquire land on, among other things, price, location, land use or optionality of land use, and may also consider other development activities in the surrounding area.

Our business plan is also focused on investing in commercial real estate through the performance of mortgage financings secured by commercial real estate. Competition for investing in commercial mortgage loans and similar financial instruments can include financial institutions such as banks, life insurance companies, institutional investors such as pension funds and other lenders including mortgage REITs, REITs, and high wealth investors. The organizations that we compete with are varying sizes, ranging from organizations with local operations to organizations with national scale and reach. Competition from these interested parties is based on, amongst other things, pricing or rate, financing structure, and other elements of the typical terms and conditions of a real estate financing.

Our golf operations consist of the LPGA International Golf Club. The operation of LPGA International Golf Club also includes private event sales for golf events and clubhouse events. The primary competition for our golf operations comes from other private and public golf operations in the local market. Competition for our golf operation is largely based on price, service level, and product quality. We attempt to differentiate our golf operations product on the basis of the condition and quality of the courses and practice facilities, our private event capabilities, service level, the quality and experience of the food and beverage amenities and other amenities.

EMPLOYEES

At December 31, 2016, the Company had fourteen full-time employees and considers its employee relations to be satisfactory.

AVAILABLE INFORMATION

The Company’s website is www.ctlc.com. The Company makes available on this website, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after the Company electronically files or furnishes such materials to the SEC. The Company will also provide paper copies of these filings free of charge upon a specific request in writing for such filing to the Company’s Corporate Secretary, P.O. Box 10809, Daytona Beach, Florida 32120-0809. All reports the Company files with or furnishes to the SEC are also available free of charge via the SEC’s electronic data gathering and retrieval (“EDGAR”) system available through the SEC’s website at http://www.sec.gov. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The Company currently leases space for its corporate offices subject to a lease that expires on September 30, 2017. The Company does not intend to renew the existing lease and plans to build-out the remaining approximately 7,700 square feet at the Company’s Williamson Business Park property to relocate its corporate offices. The Company currently estimates the build-out of the space at Williamson Business Park could total approximately $800,000. We expect the build-out to commence in the second quarter of 2017.

ITEM 1A.              RISK FACTORS

Our business is subject to a number of significant risks. The risks described below may not be the only risks which potentially could impact our business. These additional risks include those which are unknown at this time or that are currently considered immaterial. If any of the circumstances, events, or developments described below actually occur to a significant degree, our business, financial condition, results of operations, and/or cash flows could be materially adversely affected, and the trading price of our common stock could decline. You should carefully consider the following risks and all of the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and the notes thereto.

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A prolonged downturn in economic conditions, especially in Daytona Beach, Florida, could adversely impact our business. In recent years, the collapse of the housing market, together with the crisis in the credit markets, resulted in a recession in the local and national economy with significant levels of unemployment, shrinking gross domestic product, and drastically reduced consumer spending. During this period, potential consumers of residential real estate often deferred or avoided real estate purchases due to, among other factors, a lack of liquidity, the substantial costs involved, and overall uncertainty with the economy. The real estate industry is particularly vulnerable to shifts in local, regional, and national economic conditions which are outside of our control, such as short and long-term interest rates, housing demand, population growth, and unemployment levels and job growth. Our real estate operations segment is especially sensitive to economic conditions in Florida, particularly in Daytona Beach, where substantially all of our land portfolio is located. While Florida has experienced improving economic conditions, the recovery for Florida started later and has taken longer than the rest of the nation. A prolonged period of economic weakness or another downturn could have a material adverse effect on our business, financial condition, results of operations, and/or cash flows.

We may experience a decline in the fair value of our real estate assets or investments which could result in impairments and would impact our financial condition and results of operations. A decline in the fair market value of our long-lived assets may require us to recognize an “other-than-temporary” impairment against such assets (as defined by the Financial Accounting Standards Board (“FASB”) authoritative accounting guidance) if certain conditions or circumstances related to an asset were to change and we were to determine that, with respect to any such asset, there was an unrealized loss to the fair value of the asset. The fair value of our long-lived assets depends on market conditions, including estimates of future demand for these assets, and the revenues that can be generated from such applicable assets including land or an income property. If such a determination were to be made, we would recognize the estimated unrealized losses through earnings and write down the depreciated or amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sales price received and the adjusted depreciated or amortized cost of such assets at the time of sale.

The most recent downturn in the U.S. economy and real estate markets caused the fair value of certain of our properties to decrease. In 2011, we wrote down the carrying value of our golf operations assets and certain of our land assets with corresponding non-cash charges against our earnings to reflect the impaired value. In the last few years we have written down the carrying value of several small parcels of land reacquired through foreclosure in 2009 when portions of this reacquired land was under contract to be sold for a price that was less than the carrying value of the land. If the real estate market were to experience another decline, we may be required to take other impairment charges against our earnings for other than temporary impairments in the value of our real estate assets including our land, income properties, commercial loan investments and similar financings or other capitalized costs. Any such non-cash charges could have an adverse effect on our financial condition and results of operations.

Our quarterly results are subject to variability. We have historically derived a substantial portion of our income from transactions in our land holdings. The timing of such real estate transactions is not predictable and is generally subject to the purchaser’s ability to, among other things, obtain on a timely basis acceptable financing and approvals from local municipalities and regulatory agencies for the intended use of the land or the issuance of permits related to wetlands mitigation. As these approvals are subject to third party responses, it is not uncommon for delays to occur, which affect the timing of transaction closings and may also impact the terms and conditions of the transaction. These timing issues have caused, and may continue to cause, our operating results to vary significantly from quarter to quarter and year to year.

Our future success will depend upon, among other things, our ability to successfully execute our strategy to invest in income- producing assets.  There is no assurance that we will be able to continue to execute our strategy of investing in income-producing assets, including income properties and possibly commercial loans or similar financings secured by real estate. There is no assurance that the income property portfolio will expand at all, or if it expands, at any specified rate or to any specified size. If we continue to invest in diverse geographic markets other than the markets in which we currently own properties, we will be subject to risks associated with investing in new markets as those markets will be relatively unfamiliar to us. In addition, investments in new markets may introduce increased costs to us relating to factors including the regulatory environment and the local and state tax structure. Additionally, there is no assurance we will or can expand our investments in commercial loans or similar financings secured by real estate. Consequently, if we are unable to acquire additional income-producing assets or our investments in new markets introduce increased costs our financial condition, results of operations, and cash flows may be adversely affected.

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We operate in a highly competitive market for the acquisition of income properties and more established competitors may be able to compete more effectively for acquisition opportunities than we can. A number of entities and other investors compete with us to purchase income properties. We compete with REITs, public and private real estate focused companies, high wealth individual investors, and others. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several of our public company competitors have greater access to raising equity or debt financing, have significant amounts of capital available and investment objectives that overlap with ours, which may create competition for acquisition opportunities. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of income property acquisitions and establish more relationships than us. We cannot be assured that the competitive pressures we face will not have a material adverse effect on our business, financial condition, results of operations and therefore our cash flows. Also, as a result of this competition, we may not be able to take advantage of attractive acquisition opportunities from time to time, and we can offer no assurance that we will be able to identify and purchase assets that are consistent with our objectives.

If we are not successful in utilizing the like-kind exchange structure in deploying the proceeds from our land transactions or dispositions of income properties, or our like-kind exchange transactions are disqualified, our results of operations and cash flows could be adversely impacted. Our strategy of investing in income-producing properties includes the utilization, when possible, of proceeds obtained from the disposition of income properties or from land transactions, which qualify for deferral of the applicable income tax through the like-kind exchange provisions of the Internal Revenue Code. If we fail to complete a qualifying acquisition utilizing the aforementioned proceeds, or a transaction we deemed qualifying for like-kind exchange treatment is subsequently disqualified by the Internal Revenue Service, we may be subject to increased income taxes, which may adversely impact our results of operations and our cash flows.

If the provisions of section 1031 of the Internal Revenue Code regarding the like-kind exchange structure were altered substantially or eliminated, our financial position, results of operations and cash flows could be adversely impacted. A fundamental element of our strategy is investing in income-producing properties utilizing, when possible, the proceeds obtained from the disposition of our land holdings, Subsurface Interests and in some instances our income properties, which qualify for deferral of the applicable income tax through the like-kind exchange provisions of the Internal Revenue Code. If the provisions of section 1031 of the Internal Revenue Code regarding the like-kind exchange structure, including the deferral of taxes on gains related to the sale of real property such as our land holdings, Subsurface Interests and income properties, were to be altered substantially or eliminated, we may be subject to increased income taxes, which may have a material adverse effect on our results of operations and our cash flows.

We are subject to a number of risks inherent with the real estate industry and in the ownership of real estate assets or investment in financings secured by real estate which may adversely affect our returns from our investments, our financial condition, results of operations and cash flows. Factors beyond our control can affect the performance and value of our real estate assets including our land and Subsurface Interests, income properties, investments in commercial loans or similar financings secured by real estate or other investments. Real estate assets are subject to various risks, including but not limited to the following:

·

Adverse changes in national, regional, and local economic and market conditions where our properties are located;

·

Competition from other real estate companies similar to ours and competition for tenants, including competition based on rental rates, age and location of the property and the quality of maintenance, insurance, and management services;

·

Changes in tenant preferences that reduce the attractiveness of our properties to tenants or decreases in market rental rates;

·

Zoning or other local regulatory restrictions, or other factors pertaining to the local government institutions which inhibit interest in the markets in which our land holdings or income producing assets are located;

·

Costs associated with the need to periodically repair, renovate or re-lease our properties;

·

Increases in the cost of our operations, particularly maintenance, insurance, or real estate taxes which may occur even when circumstances such as market factors and competition cause a reduction in our revenues;

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·

Changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies, and ordinances;

·

Commodities prices;

·

Illiquidity of real estate investments which may limit our ability to modify our income producing asset portfolio promptly in response to changes in economic or other conditions;

·

Acts of God, including natural disasters, which may result in uninsured losses; and

·

Acts of war or terrorism, including consequences of terrorist attacks.

If any of these or similar events occurs, it may reduce our return from an affected real estate asset or investment which could adversely impact our financial condition, results of operations and cash flows.

The loss of revenues from our income property portfolio or certain tenants would adversely impact our results of operations and cash flows. While no single tenant represents more than 10% of our consolidated revenues as of December 31, 2016, we have tenants who lease a number of our income properties or a large amount of the square footage of our income property portfolio, such as Wells Fargo, Lowe’s Corporation, Hilton Grand Vacations, and At Home. The default, financial distress, or bankruptcy of one or all of these tenants could cause substantial vacancies in our income property portfolio and reduce our revenues from our income property operations significantly, thereby adversely impacting our results of operations and cash flows. Vacancies reduce our revenue until the affected properties can be re-leased and could decrease the value of each such vacant property. Upon the expiration of the leases that are currently in place, we may not be able to re-lease a vacant property at a comparable lease rate or without incurring additional expenditures in connection with such re-leasing. If, following the loss of an income property tenant, we are unable to re-lease the income property at comparable rental rates and in a timely manner, our financial condition, results of operations and cash flows could be adversely affected.

Certain provisions of the Company’s leases may be unenforceable. The Company’s rights and obligations with respect to its leases are governed by written agreements with its tenants. A court could determine that one or more provisions of such an agreement are unenforceable, such as a particular remedy, a termination provision, or a provision governing the Company’s remedies for default of the tenant. If we were unable to enforce provisions of a lease agreement or agreements, our results of operations, financial condition, and cash flows could be adversely impacted.

We may not be able to dispose of properties we target for sale to recycle our capital. While the Company’s strategy may include selectively selling non-core or other income-producing properties to recycle our capital, we may be unable to sell properties targeted for disposition due to adverse market or other conditions or not achieve the pricing or timing that is consistent with our expectations. This may adversely affect, among other things, the Company’s ability to deploy capital into the acquisition of other income-producing properties, the execution of our overall operating strategy and consequently our financial condition, results of operations, and cash flows.

Most of our land holdings are located in Daytona Beach, Florida and the competition in the local and regional market, the possible impact of government regulation or development limitations, and the criteria used by parties interested in acquiring land could adversely impact the interest in our land and thereby our results of operations and cash flows. The parties typically interested in our land holdings base their decision to acquire land on, among other things, price, location, ability to entitle the land, and land use or optionality of land use. In some instances, the aforementioned acquisition criteria or other factors may make an interested party consider other land instead of ours. In addition, parties interested in acquiring our land holdings would likely consider the impact of governmental regulations or ordinances on their ability to entitle and develop the land for their intended use and may seek incentives or similar economic considerations from one or more governmental authorities that they may not be able to obtain. These conditions may make it difficult for us to complete land transactions on acceptable terms or at all which could adversely impact our financial condition, results of operations, and cash flows.

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The Company’s real estate investments, including our land holdings and income-producing assets, are generally illiquid. Real estate investments are relatively illiquid, therefore, it may be difficult for us to sell such assets if the need or desire arises and otherwise the Company’s ability to make rapid adjustments in the size and content of our income property portfolio or other real estate assets in response to economic or other conditions is limited. Illiquid assets typically experience greater price volatility, as a ready market does not exist, and can be more difficult to value. In addition, validating third party pricing for illiquid assets may be more subjective than more liquid assets. As a result, if we are required to liquidate all or a portion of certain of our real estate assets or income producing asset portfolio quickly, we may realize significantly less than the value at which we have previously recorded our assets. Further, certain expenditures necessary to operate our income property operations, real estate operations and golf operations generally do not decrease and may in fact increase in response to weakening economic conditions or other market disruptions, which expenditures may include maintenance costs, insurance costs, and in some instances, interest expense. This relationship of revenue and expenditures may result, under certain market conditions, in reduced operating results and cash flows and thereby could have an adverse effect on the Company’s financial condition.

Continued or increased operating losses from the golf operations may adversely impact the Company’s results of operations and cash flows. The Company has golf operations consisting of the LPGA International Golf Club, a semi-private golf club in Daytona Beach, Florida, consisting of the following: two 18-hole golf courses, a food and beverage operation, a private event operation, and club memberships. A third party manages these operations, on behalf of the Company, and employs the personnel. Since its inception the golf operation has generated negative cash flows. In 2011, the Company recognized an impairment of approximately $4.0 million on the long-lived assets of the golf operations. In January 2017 the Company invested an additional $1.6 million of capital in the golf operations to buy-out of the long-term land lease with the City of Daytona Beach. The results of operations from the golf operations are subject to the typical execution risks inherent with many golf, retail and club operations including, but not limited to: maintenance, merchandising, pricing, customer service, competition, cost of food, beverage and retail products, consumer preferences and behavior, safety, compliance with various federal, state and local laws, ordinances and regulations, environmental contamination, weather conditions, or other trends in the local market. Although the negative cash flows generated by the golf operations decreased substantially or did not worsen in 2015 and 2016, any one of these execution risk factors could negatively impact the golf operations and thereby adversely impact the Company’s financial condition, results of operations and cash flows.

Competition, seasonality and market conditions relating to golf operations could adversely affect our operating results. Our golf operations face competition from similar golf operations in the surrounding areas, primarily Daytona Beach and other areas of Volusia County. Any new competition from golf operations that are developed close to our existing golf operations also may adversely impact the results of our golf operations. Our golf operations are also subject to changes in market conditions, such as population trends, consumer demand and changing demographics, any of which could adversely affect results of operations. In addition, our golf operations may suffer if the economy weakens, if the popularity of golf continues to decrease, or if unusual weather conditions or other factors cause a reduction in rounds played. Our golf operations are also seasonal, primarily due to the impact of the winter tourist season and Florida’s summer heat and rain. Should any of these factors impact our golf operations unfavorably our financial condition, results of operations and cash flows would be impacted adversely.

The revenues from our golf operations depend on a third-party operator that we do not control. We currently utilize a third-party to manage and operate our golf operations. As a result, we do not directly implement operating business decisions with respect to the operation and marketing of our golf operations, and personnel decisions. For our golf operations these decisions may concern course maintenance, membership programs, marketing programs, and employee matters. The amount of revenue that we generate from the golf operations is dependent on the ability of the third-party manager to maintain and seek to increase the gross receipts and manage and possibly decrease the expenses at LPGA International. If the revenues from our golf operations decline or the operating expenses increase at a rate that is inconsistent with revenues our results of operations and our cash flows would be adversely affected, and our financial condition may be adversely impacted should we be required to recognize additional impairments on the long-lived assets of the golf operations, including our recently invested capital.

Our investment strategy may involve credit risk. As part of our business strategy, we have invested in commercial loans secured by commercial real estate and may in the future invest in other commercial loans or similar financings secured by real estate. Investments in commercial loans or similar financings of real estate involve credit risk with regard to the borrower, the borrower’s operations and the real estate that secures the financing. The credit risks include, but are not limited to, the ability of the borrower to execute their business plan and strategy, the ability of the borrower to sustain and/or improve the operating results generated by the collateral property, the ability of the borrower to continue as a going concern, and the risk associated with the market or industry in which the collateral property is utilized. Our evaluation of

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the investment opportunity in a mortgage loan or similar financing includes these elements of credit risk as well as other underwriting criteria and factors. Further, we may rely on third party resources to assist us in our investment evaluation process and otherwise in conducting customary due diligence. Our underwriting of the investment or our estimates of credit risk may not prove to be accurate, as actual results may vary from our estimates. In the event we underestimate the performance of the borrower and/or the underlying real estate which secures our commercial loan or financing, we may experience losses or unanticipated costs regarding our investment and our financial condition, results of operations, and cash flows may be adversely impacted.

Because of competition, we may not be able to acquire commercial loans or similar financings at all or at favorable yields. We may not be able to execute our strategy of acquiring commercial loans or similar financings at favorable spreads over our borrowing costs. We compete with many other investment groups including REITs, public and private investment funds, life insurance companies, commercial and investment banks, and commercial finance companies, including some of the third parties with which we expect to have relationships. In most instances the competition has greater financial capacity, larger organizations and operating presence in the market. As a result, we may not be able to acquire commercial loans or similar financings in the future at all or at favorable spreads over our borrowing costs, which could adversely impact our results of operations and cash flows and would likely result in the need for any growth in our portfolio of income-producing assets to be achieved through the acquisition of income properties.

Debt and preferred equity investments could cause us to incur expenses, which could adversely affect our results of operations. We currently own, or may own in the future, investments in first mortgages, mezzanine loans, junior participations and preferred equity interests. Such investments may or may not be recourse obligations of the borrower and are not insured or guaranteed by governmental agencies or otherwise. In the event of a default under these obligations, we may have to take possession of the collateral securing these interests including through foreclosure proceedings. Borrowers may contest enforcement of foreclosure or our other remedies, and may seek bankruptcy protection to potentially block our actions to enforce their obligations to us. Relatively high loan-to-value ratios and declines in the value of the underlying collateral property may prevent us from realizing an amount equal to our investment upon foreclosure or realization even if we make substantial improvements or repairs to the underlying real estate in order to maximize such property’s investment potential. Although we maintain and regularly evaluate financial reserves to properly accrue for potential future losses, our reserves would reflect management’s judgment of the probability and severity of losses and the value of the underlying collateral. We cannot be certain that our judgment will prove to be correct and that our reserves, if any, will be adequate over time to protect against future losses due to unanticipated adverse changes in the economy or events adversely affecting specific properties, assets, tenants, borrowers, industries in which our tenants and borrowers operate or markets in which our tenants and borrowers, or their properties are located. If we are unable to enforce our contractual rights, including but not limited to, taking possession of the collateral property in a foreclosure circumstance, or our reserves for credit losses prove inadequate, we could suffer losses which would have a material adverse effect on our financial condition, results of operations, and cash flows.

The mezzanine loan assets that we expect to acquire will involve greater risks of loss than senior loans secured by income-producing properties. We may acquire mezzanine loans, which generally take the form of subordinated loans secured by the underlying property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. These types of assets involve a higher degree of risk than senior mortgage lending secured by income-producing real property, because the loan may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or the debt that is senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will only be satisfied after the senior debt has been satisfied. As a result, we may not recover some or all of our initial investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. Significant losses related to our mezzanine loans would result in operating losses for us and could adversely impact our financial condition and cash flows.

We may invest in fixed-rate loan investments, and an increase in interest rates may adversely affect the value of these investments, which could adversely impact our financial condition, results of operations and cash flows. Increases in interest rates may negatively affect the market value of our investments, particularly any fixed-rate commercial loans or other financings we have invested in. Generally, any fixed-rate commercial loans or other financings will be more negatively affected by rising interest rates than adjustable-rate assets. We are required to reduce the book value of our investments by the amount of any decrease in their fair value. Reductions in the fair value of our investments could decrease the amounts we may borrow to purchase additional commercial loan or similar financing investments, which could impact

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our ability to increase our operating results and cash flows. Furthermore, if our borrowing costs are rising while our interest income is fixed for the fixed-rate investments, the spread between our borrowing costs and the fixed-rate we earn on the commercial loans or similar financing investments will contract or could become negative which would adversely impact our financial condition, results of operations, and cash flows.

The commercial loans or similar financings we currently own or may acquire that are secured by commercial real estate typically depend on the ability of the property owner to generate income from operating the property. Failure to do so may result in delinquency and/or foreclosure. Commercial loans are secured by commercial property and are subject to risks of delinquency and foreclosure and therefore the risk of loss. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. In the event of any default under a commercial loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the commercial loan, which could have a material adverse effect on our financial condition, operating results and cash flows. In the event of the bankruptcy of a commercial loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed commercial loan. If the borrower is unable to repay a mortgage loan or similar financing our inability to foreclose on the asset in a timely manner, and/or our inability to obtain value from reselling or otherwise disposing of the asset for an amount equal to our investment basis, would adversely impact our financial condition, results of operations, and cash flows.

The activities or actions of a third party servicer engaged to service our investment in a commercial loan or similar debt financing could adversely impact the value of our investment or our results of operations and cash flows. Our investments in first mortgages, mezzanine loans or other debt financings secured by real estate may require a third party servicer to service the loan on our behalf and/or on behalf of third parties who have invested in some portion of the debt financing. An intended or unintended breach by the servicer with regard to their servicing of the debt financing or in their contractual obligations and fiduciary duties to us or the other holders of the debt financing could adversely impact the value of our investment or our results of operations and cash flows.

We may suffer losses when a borrower defaults on a loan and the value of the underlying collateral is less than the amount due. If a borrower defaults on a non-recourse loan, we will only have recourse to the real estate-related assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. Conversely, some of our commercial loans may be unsecured or are secured only by equity interests in the borrowing entities. These loans are subject to the risk that other lenders in the capital stack may be directly secured by the real estate assets of the borrower or may otherwise have a superior right to repayment. Upon a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying real estate. In such cases, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the borrower before a default and, as a result, the value of the collateral may be reduced by acts or omissions by owners or managers of the assets. In addition, the value of the underlying real estate may be adversely affected by some or all of the risks referenced above that pertain to the income-producing properties that we own.

Some of our commercial loans may be backed by individual or corporate guarantees from borrowers or their affiliates which guarantees are not secured. If the guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors which are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, we will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged as collateral for other lenders. There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer additional losses which could have a material adverse effect on our financial performance.

Upon a borrower bankruptcy, we may not have full recourse to the assets of the borrower to satisfy our loan. Additionally, in some instances, our loans may be subordinate to other debt of certain borrowers. If a borrower defaults on our loan or on debt senior to our loan, or a borrower files for bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of inter-creditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill”

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periods), and control decisions made in bankruptcy proceedings. Bankruptcy and borrower litigation can significantly increase collection costs and the time needed for us to acquire title to the underlying collateral (if applicable), during which time the collateral and/or a borrower’s financial condition may decline in value, causing us to suffer additional losses.

If the value of collateral underlying a loan declines, or interest rates increase during the term of a loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing because the underlying property revenue cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer additional loss which may adversely impact our financial performance.

As a result of any of the above factors or events, the losses we may suffer could adversely impact our financial condition, results of operations and cash flows.

Investments in securities of companies operating in the real estate industry, including debt and equity instruments such as corporate bonds, preferred or common stock, or convertible instruments could cause us to incur losses or other expenses which could adversely affect our financial position, results of operations, and cash flows. We have owned and may own in the future, investments in corporate securities of companies operating in the real estate industry including debt and equity instruments such as corporate bonds, preferred or common stock, or convertible instruments. Certain of these investments may be traded on an exchange or other active market whereby the price of the underlying instrument is quoted daily and those quoted prices and thus the market value of the instrument varies during a given trading day. Certain of these investments may be traded on an exchange or market that is not deemed an active market but where the price of the investment fluctuates daily or otherwise. Adverse fluctuations in the value of these investments, whether market-generated or not, are reflected as unrealized losses on our balance sheet. We may choose to or be required to liquidate these investments in whole or in part and at prices that result in realized losses on our investment. Should we incur realized losses on liquidating these investments, our financial position, results of operations and cash flows would be adversely impacted.

The Company may be unable to obtain debt or equity capital on favorable terms, if at all, or additional borrowings may impact our liquidity. In order to further our business objectives, we may seek to obtain additional debt financing or raise equity capital and may be unable to do so on favorable terms, if at all. We may obtain unsecured debt financing in addition to our revolving credit facility which could decrease our borrowing capacity on the credit facility. Other sources of available capital may be materially more expensive or available under terms that are materially more restrictive than the Company’s existing debt capital, which would have an adverse impact on the Company’s business, financial condition, results of operations, and cash flows.

An increase in our borrowing costs would adversely affect our financial condition and results of operations. While we have no short-term maturities in our long-term debt, should we seek to incur additional debt to help finance our acquisitions, increased interest rates would reduce the difference, or spread, that we may earn between the yield on the investments we make and the cost of the leverage we employ to finance such investments. It is possible that the spread on investments could be reduced to a point at which the profitability from investments would be significantly reduced or eliminated entirely. This would adversely affect our returns on our assets, our financial condition, our results of operations, and cash flows, and could require us to liquidate certain or all of these assets.

The Company’s revolving credit facility and secured financings include certain financial and/or other covenants that could restrict our operating activities, and the failure to comply with such covenants could result in a default that accelerates the required payment of such debt. As of December 31, 2016, the Company had approximately $34.3 million of outstanding indebtedness under the revolving credit facility and $62.3 million of secured debt. The revolving credit facility contains various restrictive covenants which include, among others, a maximum total indebtedness and limits on the repurchase of the Company’s stock and similar restrictions. In addition, the revolving credit facility contains certain financial covenants pertaining to debt service coverage ratios, maximum levels of investment in certain types of assets, the number and make-up of the properties in the borrowing base, and similar covenants typical for this type of indebtedness. The Company’s secured indebtedness generally contains covenants regarding debt service coverage ratios. The Company’s ability to meet or maintain compliance with these and other debt covenants may be dependent on the performance by the Company’s tenants under their leases. The Company’s failure to comply with certain of our debt covenants could result in a default that may, if not cured, accelerate the payment under such debt and limit the Company’s available cash flow for acquisitions, dividends, or operating costs, which would likely have a material adverse impact on the Company’s financial condition, results of operations, and cash flows. In addition, these defaults could impair the Company’s access to the debt and equity markets.

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Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt. Our ability to make scheduled payments of the principal of, to pay interest on, to pay any cash due upon conversion of, or to refinance our indebtedness, including the Notes, depends on our future operating and financial performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

 

Certain investors in the convertible debt issuance may also invest in our common stock utilizing trading strategies which may increase the volatility in or adversely affect the trading price and liquidity of our common stock. Investors in, and potential purchasers of, the Notes may employ, or seek to employ, a convertible arbitrage strategy with respect to the Notes. Investors that employ a convertible arbitrage strategy with respect to our convertible debt instruments typically implement that strategy by selling short the common stock underlying the Notes and dynamically adjusting their short position while they hold the Notes. Investors may also implement this strategy by entering into swaps on our common stock in lieu of or in addition to short selling our common stock. These strategies, particularly the effect short sales or equity swaps with respect to our common stock, could increase the volatility of our stock price or otherwise adversely affect the trading price of our common stock.

 

We continue to have the ability to incur debt; if we incur substantial additional debt, the higher levels of debt may affect our ability to pay the interest and principal of our debt. Despite our current consolidated debt levels, we and our subsidiaries may incur substantial additional debt in the future (subject to the restrictions contained in our debt instruments), some of which may be secured debt. The indenture governing our Notes does not restrict our ability to incur additional indebtedness, whether secured or unsecured, or require us to maintain financial ratios or specified levels of net worth or liquidity. If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of, and interest on, our outstanding debt and our creditworthiness generally.

We may not have the ability to raise the funds necessary to settle conversions of the Notes or purchase the Notes as required upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon a purchase or conversion of the Notes. Following certain potential events qualifying as a fundamental change under the indenture governing the Notes, including a change of control, holders of Notes will have the right to require us to purchase their Notes for cash. A fundamental change may also constitute an event of default or a prepayment event under, and result in the acceleration of the maturity of, our then-existing indebtedness. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. There is no assurance that we will have sufficient financial resources, or will be able to arrange financing, to pay the fundamental change purchase price or make cash payments upon conversion. In addition, restrictions in our then existing credit facilities or other indebtedness, if any, may not allow us to purchase the Notes upon a fundamental change or make cash payments upon conversion. Our failure to purchase the Notes upon a fundamental change or make cash payments upon conversion thereof when required would result in an event of default with respect to the Notes which could, in turn, constitute a default under the terms of our other indebtedness, if any. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Notes or make cash payments upon conversions thereof.

To the extent we issue shares of our common stock to satisfy all or a portion of the settlement of our Notes, conversions of the Notes will dilute the ownership interest of our existing shareholders, including holders who had previously converted their Notes into common stock. To the extent we issue shares of our common stock to satisfy all or a portion of our conversion obligation pursuant to the Notes, the conversion of some or all of the Notes into common stock will dilute the ownership interests of our existing shareholders. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress the price of our common stock. 

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The fundamental change purchase feature of our Notes may delay or prevent an otherwise beneficial attempt to take over our company. The terms of the Notes require us to offer to purchase the Notes for cash in the event of a fundamental change, as defined in the indenture agreement of the Notes. A non-stock takeover of the Company may trigger the requirement that we purchase the Notes. This feature may have the effect of delaying or preventing a takeover of the Company that would otherwise be beneficial to investors.

 

The conditional conversion feature of our Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert their Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The accounting method for our Notes, which may be settled in cash, may have a material effect on our reported financial results. Under Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of shareholders’ equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We will report lower net income (or greater net loss) in our financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock.

Convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method if we have the ability and intent to settle in cash, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that we will be able to continue to demonstrate the ability or intent to settle in cash or that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected.

Declines in value of the assets in which we invest will adversely affect our financial condition and results of operations, and make it costlier to finance these assets. Generally, we use our income property investments as collateral for our financings or as the borrowing base for our credit facility. Any decline in their value, or perceived market uncertainty about their value, could make it difficult for us to obtain or renew financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place.

Our operations could be negatively impacted by the loss of key management personnel. We believe our future success depends, to a significant extent, on the efforts of each member of the Company’s senior management and our ability to attract and retain key personnel. The loss of, or our inability to replace, any member of senior management could adversely affect our operations and our ability to execute our business strategies and thereby our financial condition, results of operations and cash flows. We maintain key man life insurance on our Chief Executive Officer, but we do not have key man life insurance policies on the other members of our senior management.

The Company has a single shareholder that beneficially owns approximately 27% of the Company’s outstanding common stock and exercises the related voting rights of those shares. The significance of its investment and its recent actions could have a material adverse impact on the Company’s results of operations, cash flows, the trading price of our stock, and business operations. Wintergreen Advisers, LLC, an institutional investment advisory firm (“Wintergreen”), manages Wintergreen Fund, a public mutual fund (the “Fund”) and other investment vehicles that, based on Wintergreen’s statements to the Company, collectively beneficially own approximately 27% of the outstanding

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common stock of the Company. Based on publically available information, the Fund’s ownership of our shares has become an increasingly more significant component of the Fund and may be the second largest holding of the Fund. With regard to the significance of the Fund’s investment in the Company as a percentage of its total investments, certain securities limitations imposed on the Fund regarding ownership levels in illiquid stocks may require the Fund to liquidate some amount of the shares it owns in the Company, which, depending upon the number of shares sold and the manner in which those shares are liquidated, could have a adversely impact our stock price. Beginning in the fourth quarter of 2015 and continuing to the present, the Company has received communications from Wintergreen, and Wintergreen has made public filings which have led and will likely lead to the Company having to incur costs for legal representation, accounting services, or other third party costs to address any claims, allegations or other matters contained in these communications or as a result of other actions taken by Wintergreen. Further, in February 2017 Wintergreen filed a complaint in the Circuit Court of the Seventh Judicial Circuit in Volusia County, Florida (the “Wintergreen Complaint”) against the Company and each of its directors. The Wintergreen Complaint will likely cause the Company to incur costs for legal representation and potentially accounting and other third party services. Such costs, while not reasonably estimable, may represent significant costs for the Company which would have an adverse impact on the Company’s results of operations and cash flows.  

Our operations and properties could be adversely affected in the event of a hurricane, earthquake, natural disaster, or other significant disruption. Our corporate headquarters and many of our properties are located in Florida, where major hurricanes have occurred. We have income properties in California where earthquakes have occurred. We have income properties in other states or regions that experience similar or other natural disasters. Depending on where any particular hurricane makes landfall, our properties in Florida could experience significant damage. Similarly, should an earthquake occur in California, our properties there could incur significant damage. In addition, the occurrence and frequency of hurricanes in Florida could also negatively impact demand for our real estate assets because of consumer perceptions of hurricane risks. In addition to hurricanes, the occurrence of other natural disasters and climate conditions in Florida and other states, such as tornadoes, floods, fires, unusually heavy or prolonged rain, droughts, and heat waves, could have an adverse effect on our ability to develop properties or realize income from our properties. If a hurricane, earthquake, natural disaster or other similar significant disruption occurs, we may experience disruptions to our operations and damage to our properties, which could have an adverse effect on our business, our financing condition, our results of operations, and our cash flows.

Uninsured losses may adversely affect the Company’s ability to pay outstanding indebtedness. The Company’s income-producing properties are generally covered by comprehensive liability, fire, and extended insurance coverage, typically paid by the tenant under the triple-net and double-net lease structure. The Company’s golf operations and assets are similarly covered by the aforementioned insurance coverages. The Company believes that the insurance carried on our properties and golf assets is adequate and in accordance with industry standards. There are, however, types of losses (such as from hurricanes, earthquakes, floods or other types of natural disasters, or wars, terrorism, or other acts of violence) which may be uninsurable or the cost of insuring against these losses may not be economically justifiable. If an uninsured loss occurs or a loss exceeds policy limits, the Company could lose both its invested capital and anticipated revenues from the property, thereby reducing the Company’s cash flow, impairing the value of the income property or golf assets and adversely impacting the Company’s financial condition and results of operations.

Acts of violence, terrorist attacks or war may affect the markets in which the Company operates and adversely affect the Company’s results of operations and cash flows. Terrorist attacks or other acts of violence may negatively affect the Company’s operations. There can be no assurance that there will not be terrorist attacks against businesses within the United States. These attacks may directly impact the Company’s physical assets or business operations or the financial condition of its tenants, lenders or other institutions with which the Company has a relationship. The United States may be engaged in armed conflict, which could have an impact on these parties. The consequences of armed conflict are unpredictable, and the Company may not be able to foresee events that could have an adverse effect on its business. More generally, the occurrence of any of these events or the threat of these events, could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economies. They also could result in, or cause an economic recession in the United States or abroad. Any of these occurrences could have an adverse impact on the Company’s financial condition, results of operations or cash flows.

We are highly dependent on information systems and certain third-party technology service providers, and systems failures not related to cyber-attacks or similar external attacks could significantly disrupt our business, which may, in turn, negatively affect the market price of our securities and adversely impact our results of operations and cash flows. Our business is highly dependent on communications and information systems. Any failure or interruption of our systems or our networks could cause delays or other problems in our operations and communications. We rely heavily

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on our financial, accounting and other data processing systems. In addition, much of our information technology infrastructure is or may be managed by third parties and as such we also face the risk of operational failure, termination, or capacity constraints by any of these third parties with which we do business or that facilitate our business activities. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or disruption of our networks or systems or any failure to maintain performance, reliability and security of our technological infrastructure, but significant events impacting our systems or networks could have a material adverse effect on our operating results and cash flows and negatively affect the market price of our securities.

Cybersecurity risks and cyber incidents could adversely affect the Company’s business and disrupt operations. Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cybersecurity protection costs, litigation, and reputational damage adversely affecting customer or investor confidence. Should any such cyber incidents or similar events occur, the Company’s assets, particularly cash, could be lost and, as a result, the Company’s ability to execute its business and strategy could be impaired, thereby adversely affecting its financial condition, results of operations, and cash flows.

Land use and environmental regulations could restrict, make costlier, or otherwise adversely impact our business. We are subject to a wide variety of federal, state, and local laws and regulations relating to land use, and development and permitting, and environmental compliance obligations. Any failure to comply with these laws or regulations could result in capital or operating expenditures or the imposition of significant financial penalties or restrictions on our operations that could adversely affect present and future operations or our ability to sell land, and thereby, our financial condition, results of operations, and cash flows. Municipalities may restrict or place moratoriums on the availability of utilities, such as water and sewer. Additionally, development moratoriums may be imposed due to, among other possibilities, inadequate traffic capacity provided by existing roadways. In some areas, municipalities may enact growth control initiatives, which will restrict the number of building permits available in a given year. If municipalities in which we own land take these or similar actions, acquirers of our land assets may experience delays, increasing costs, or limitations in the ability to operate in those municipalities, which may have an adverse impact on our financial condition, results of operations, and cash flows.

We may encounter environmental problems which require remediation or the incurrence of significant costs to resolve which could adversely impact our financial condition, results of operations, and cash flows. Under various federal, state and local laws, ordinances and regulations, we may be required to investigate and clean up certain hazardous or toxic substances released on or in properties we own or operate or that we previously owned or operated, and also may be required to pay other costs relating to hazardous or toxic substances or incur costs or obligations associated with wetland areas on our land holdings. Any such liability may be imposed without regard to whether the Company’s management had knowledge or were otherwise aware of the origination of the environmental or wetland issues or were responsible for their occurrence. The presence of environmental issues or the failure to remediate properly any such losses at any of our properties or on our land holdings may adversely affect our ability to sell or lease those properties, or to borrow using those properties as collateral. The costs or liabilities could exceed the value of the affected real estate. The costs or liabilities associated with resolving environmental or wetland issues could be significant.

The uses of any of our income properties prior to our acquisition, and the building materials used in the construction of the property are among the property-specific factors that will affect how the environmental laws are applied to our properties. In general, before we acquire our income properties, independent environmental consultants are engaged to conduct Phase I environmental assessments, which generally do not involve invasive techniques such as soil or groundwater sampling.  Depending on the Phase I results, we may elect to obtain Phase II environmental assessments which do involve this type of sampling. There can be no assurance that environmental liabilities have not developed since these environmental assessments were performed or that future uses or conditions (including changes in applicable environmental laws and regulations) or new information about previously unidentified historical conditions will not result in the imposition of environmental liabilities.

If we are subject to any material costs or liabilities associated with environmental or wetland issues, our financial condition, results of operations and our cash flows could be adversely affected.

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Under the Americans with Disabilities Act of 1990, all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons, compliance with which may be costly. Compliance with the ADA requirements could involve modifications to our income properties or golf operations. Other federal, state and local laws may require modifications to or restrict further renovations of our income properties or golf operations. Although we believe that our income properties and golf operation facilities are sufficiently in compliance with current requirements, noncompliance with the ADA or related laws or regulations could result in the imposition of governmental fines or in the award to private litigants of damages against us. Costs such as these, as well as the general costs of compliance with these laws or regulations, may adversely affect our financial condition, results of operations, and cash flows.

Compliance with proposed and recently enacted changes in securities laws and regulations increases our costs. The Dodd-Frank Act contains many regulatory changes and calls for future rulemaking that may affect our business. The final and complete set of regulations promulgating the Dodd-Frank Act has not yet been published. We are evaluating, and will continue to evaluate, the potential impact of regulatory change under the Dodd-Frank Act and other changes in securities laws and regulations.

The market value of the Company’s securities is subject to various factors that may cause significant fluctuations or volatility. As with other publicly-traded securities, the market price of the Company’s common stock and convertible notes depends on various factors, which may change from time-to-time and/or may be unrelated to the Company’s financial condition, results of operations, or cash flows and such factors may cause significant fluctuations or volatility in the market price of the Company’s securities. These factors include, but are likely not limited to, the following:

·

General economic and financial market conditions including a weak economic environment;

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Level and trend of interest rates;

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The Company’s ability to access the capital markets to raise additional debt or equity capital;

·

Changes in the Company’s cash flows or results of operations;

·

The Company’s financial condition and performance;

·

Market perception of the Company compared to other real estate companies;

·

Market perception of the real estate sector compared to other investment sectors; and

·

Volume of average daily trading and the amount of the Company’s shares available to be traded.

The Company’s failure to maintain effective internal control over financial reporting could have a material adverse effect on its business, operating results, and price of our securities. Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) as amended or modified from time to time, requires annual management assessments of the effectiveness of the Company’s internal control over financial reporting. If the Company fails to maintain the adequacy of its internal control over financial reporting, the Company may not be able to ensure that it can conclude on an ongoing basis that it has effective internal control over financial reporting and therefore would likely not be in compliance with SOX. An effective system of internal controls over financial reporting, particularly those related to revenue recognition, are necessary for the Company to prepare and produce reliable financial reports and to maintain its qualification as a public company and are important in reducing the risk of financial fraud. If the Company cannot provide reliable financial reports or prevent fraud, its business and operating results could be harmed, qualification as a public company listed on the New York Stock Exchange MKT, or the NYSE MKT, could be jeopardized, investors could lose confidence in the Company’s reported financial information, and the market price of the Company’s securities could drop significantly.

The Company’s ability to pay dividends in the future is subject to many factors. The Company has consistently paid a dividend since 1976. The Company’s ability to continue to pay dividends may be adversely impacted if any of the events or conditions associated with the risks described in this section were to occur. Payment of the Company’s dividend depends upon the Company’s financial condition, results of operations, and cash flows. 

ITEM 1B.            UNRESOLVED STAFF COMMENTS  

NONE

28


 

ITEM 2.              PROPERTIES

As of December 31, 2016, the Company owns the following properties: i) land holdings of approximately 9,800 acres in the Daytona Beach area of Volusia County; ii) twenty-one single-tenant retail buildings located in Arizona, California, Florida, Georgia, Maryland, North Carolina, Texas, Virginia, and Washington; iii) ten multi-tenant properties located in California, Florida, Nevada, and Texas four of which were self-developed and are located in Daytona Beach, Florida; and iv) full or fractional subsurface oil, gas, and mineral interests of approximately 500,000 “surface acres” in 20 counties in Florida. As of February 10, 2017, subsequent to the Minto Sale, the Company’s land holdings totaled approximately 8,200 acres.

ITEM 3.              LEGAL PROCEEDINGS

From time to time, the Company may be a party to certain legal proceedings, incidental to the normal course of our business. While the outcome of the legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon our financial condition or results of operations.

On November 21, 2011, the Company, Indigo Mallard Creek LLC and Indigo Development LLC, as owners of the property leased to Harris Teeter, Inc. (“Harris Teeter”) in Charlotte, North Carolina, were served with pleadings filed in the General Court of Justice, Superior Court Division for Mecklenburg County, North Carolina, for a highway condemnation action involving this property. The proposed road modifications would impact access to the property. The Company does not believe the road modifications provided a basis for Harris Teeter to terminate the Lease. Regardless, in January 2013, the North Carolina Department of Transportation (“NCDOT”) proposed to redesign the road modifications to keep the all access intersection open for ingress with no change to the planned limitation on egress to the right-in/right-out only. Additionally, NCDOT and the City of Charlotte proposed to build and maintain a new access road/point into the property. Construction has begun and is not expected to be completed before the second quarter of 2017.  Harris Teeter has expressed satisfaction with the redesigned project and indicated that it will not attempt to terminate its lease if this project is built as currently redesigned. Because the redesigned project will not be completed until late 2017 to mid-2018, the condemnation case has been placed in administrative closure. As a result, the trial and mediation will not likely be scheduled until requested by the parties, most likely in late 2018.

On February 15, 2017, Wintergreen Advisers, LLC (“Wintergreen”) filed a complaint in the Circuit Court of the Seventh Judicial Circuit in Volusia County, Florida (the “Wintergreen Complaint”) against the Company and each of its directors. The Wintergreen Complaint seeks an order compelling the Company to either include Wintergreen’s four director nominees, all of whom are employees or hired consultants of Wintergreen, in the Company’s proxy statement as nominees to be voted on at the Company’s 2017 Annual Meeting of Shareholders (the “2017 Annual Meeting”) or permit Wintergreen to bring their proposed nominees before the Company’s shareholders at the 2017 Annual Meeting. The Company believes that the Wintergreen Complaint has no legal merit and the Company intends to defend the interests of all CTO shareholders by vigorously resisting the remedies sought in the Wintergreen Complaint. The Wintergreen Complaint does not seek monetary remedies or compensation for damages or similar contingencies. However, defending against the Wintergreen Complaint will likely require cash outlays, for legal and other expenses, as well as, commitment of management resources. As of the date of this report the Company is not able to estimate the amount of such costs.

ITEM 4.              MINE SAFETY DISCLOSURES

Not applicable

29


 

PART II

ITEM 5.              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER REPURCHASES OF EQUITY SECURITIES

COMMON STOCK PRICES AND DIVIDENDS

The Company’s common stock trades on the NYSE MKT under the symbol CTO. The Company has paid dividends on a continuous basis since 1976, the year in which its initial dividends were paid. The following table summarizes aggregate annual dividends, which were paid semi-annually prior to June 30, 2016 and quarterly thereafter, per share over the two years ended December 31, 2016:

 

 

 

 

2016

 

$

0.12

2015

    

$

0.08

The level of future dividends will be subject to an ongoing review of the Company’s operating results and financial position and, among other factors, the overall economy, with an emphasis on our local real estate market and our capital needs.

Indicated below are high and low sales prices of our stock for each full quarter within the last two fiscal years. All quotations represent actual transactions.  

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

 

    

High

    

Low

    

High

    

Low

 

 

 

$

 

$

 

$

 

$

 

First Quarter

 

53.00

 

42.53

 

64.37

 

51.96

 

Second Quarter

 

50.41

 

44.48

 

60.00

 

53.03

 

Third Quarter

 

53.00

 

46.24

 

60.04

 

48.11

 

Fourth Quarter

 

55.80

 

48.65

 

60.09

 

48.49

 

The number of shareholders of record as of February 15, 2017 (without regard to shares held in nominee or street name) was 351.

Recent Sales of Unregistered Securities

There were no unregistered sales of equity securities during the year ended December 31, 2016, which were not previously reported.

The following share repurchases were made during the year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total Number
of Shares
Purchased

    

Average Price
Paid per Share

    

Total Number of

Shares Purchased as a Part of Publicly

Announced Plans

or Programs

    

Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet be Purchased
Under the Plans or
Programs

 

1/1/2016 - 1/31/2016

 

 —

 

$

 —

 

 —

 

$

10,028,941

 

2/1/2016 - 2/29/2016

 

24,024

 

 

46.21

 

24,024

 

 

8,918,687

 

3/1/2016 - 3/31/2016