I’m a fan of the boardroom brawl. It makes for entertaining sport and for potential value creation.
A boardroom brawl brews between Wintergreen Advisors and Consolidated-Tomoka (NYSE: CTO), a diversified real estate company that owns and manages 31 commercial real estate properties, encompassing approximately 1.9 million square feet, in 10 states.
Wintergreen Advisors owns 27% of Consolidated-Tomoka’s outstanding shares. Wintergreen wants to wipe clean Consolidated-Tomoka’s board slate and pencil in its own directors.
Why? Wintergreen wants Consolidated-Tomoka to either liquidate or offer itself for sale. A Wintergreen rubber-stamped board would streamline the monetizing process.
Wintergreen swung a haymaker punch to Consolidated-Tomoka’s board a couple months ago, but the punch was blocked. Shareholders voted to retain the current board. Wintergreen continues to circle the ring. It recently added another 10,000 Consolidated-Tomoka shares to its portfolio.
Consolidated-Tomoka management continues to bob and weave to buy time. It wants to grow the company by monetizing land through sales when the opportunity arises and then to invest the proceeds in income-producing commercial properties.
When you vet the numbers, you can understand why many shareholders sided with the reigning champ. Consolidated-Tomoka is hitting its growth and profitability objectives.
Most everything you want to move in the right direction in Consolidated-Tomoka’s financial statements moves in the right direction. Return on equity (ROE) has quadrupled since 2013; return on assets (ROA) has tripled. Margins — gross, operating, and net — are all up two to three times the rate they were four years ago.
So, is Wintergreen’s pugnaciousness reasonable in light of recent financial performance?
Vast Real-Estate Assets Are Undervalued
Maybe. Considerable value fails to register in the market price of Consolidated-Tomoka’s shares. The value is locked in the real estate assets, which most everyone believes are undervalued.
Consolidated-Tomoka eschews reporting the net asset value (NAV) of its real estate holdings, but most estimates value the real estate at between $85 and $100 a share. Consolidated-Tomoka’s shares trade around $55.
Even Consolidated-Tomoka’s CEO, John Albright, has implicitly acknowledged the company is undervalued. Albright has stated publicly that he’ll consider proposals for strategic alternatives in order to realize the company’s asset value.
What’s more, the timing of Wintergreen’s proposal for a sale to calibrate NAV with the share price is reasonable when you consider the macro environment: Interest rates remain low and the real estate market has recovered strongly since the 2009 recession. In many markets, commercial real estate prices are at all-time highs.
That said, other options short of a liquidation or a sale exist that could calibrate NAV and market price.
One strategy to juice up the dividend was predicated on an idea management floated last year: Convert Consolidated-Tomoka into a real estate investment trust (REIT) from its current C-corporation business form. A conversion is sensible considering the large deferred-tax liabilities Consolidated-Tomoka has accrued over the years.
Huge Special Dividend
A REIT conversion would eliminate the deferred-tax liability because Consolidated-Tomoka would have to pay past earnings as a dividend. Upon REIT conversion, shareholders would receive a huge special dividend — one possibly in the range of $10 to $20 per share.
Investors would receive not only a one-time huge special dividend payment but would be assured of much higher dividends in the future. Because Consolidated-Tomoka would be a REIT, it would be required to pay 90% of all future earnings as dividends. Because most REITs have more reported cash flow than reported earnings, the dividend would likely exceed 90% of earnings.
Regardless who emerges the victor, investors should win.
By this time next year, Consolidated-Tomoka’s shares should be trading where they currently trade after paying a huge one-time dividend. Then it becomes a high-yield dividend REIT thereafter. Or it should have been sold or liquidated between $85 and $100 a share. In this case, investors realize a minimum 50% return on their investment.
What investor would be disappointed with either outcome?