Good day, and welcome to the Consolidated-Tomoka Q1 2020 Earnings Call. All participants will be in listen-only mode. Please note, today's event is being recorded. I would now like to turn the conference over to John Albright, President and CEO. Please go ahead, sir.

Thank you, operator. Good morning and welcome to today's conference call to review the operating results of Consolidated-Tomoka Land Company for the first quarter ended March 31. My name is John Albright, President and CEO of the company. On the call with me is Mark Patten, our CFO; and Dan Smith, our General Counsel. I'll turn it over to Mark to provide you with customary disclosures regarding our comments on this call today.

Thanks, John. Good morning, everyone. During our call today, we may make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements. We may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in our earnings release issued last night. Also, we filed our first quarter 2020 investor presentation last night, which is now available on our website. Our presentation provides additional information you may find useful and that we may reference during this call. With that, I'll turn it back over to John.

Thanks Mark. At this time, we'll open it up for questions. Operator?

[Operator Instructions] Our first question today will come from Craig Kucera of B. Riley FBR. Please proceed with your question.

Hi. Good morning, guys. Mark, can you – there was a fairly significant increase in real estate operational expenses this quarter. Can you talk about what drove that?

Real estate operational expenses. Well, I think, first and foremost – give me a second. The first piece would just be the fact that in adding Crossroads and Perimeter to large multi-tenant, that's one piece of the puzzle. Give me one second. If you got another question, I'll just look something up real quick.

Yes, that's fine. I just was curious because that makes sense. Time of those new acquisitions. I guess, certainly to the rent deferrals, were the categories fairly similar as far as where there was concentrated relative to what we saw with PINE, maybe a little heavy on entertainment, etc.? Any color there would be helpful.

Yes. So Craig, it's John. Obviously, it's basically the categories that you would assume, restaurants, fitness, that sort of thing. I mean, we did have some very large-cap companies that didn't pay, which we know we'll get payment from them one way or the other. So, it is some of the unexpected ones as well.

Got it. And just thinking about your liquidity, I know you improved things with the disposition of the CVS here early in the second quarter. Looking to dispose of assets, but with still little room left on the line of credit, is there any thought to maybe putting some fixed rate debt on some of the properties? Or do you feel pretty comfortable with sort of selling some additional assets to maintain your liquidity, to improve it?

Yes. So obviously, we stacked a bunch of cash on the balance sheet, and we have Perimeter, which, as you know, we paid $75 million for unlevered, so we could easily go get $30 million, $40 million at very low leverage there. And so we do have lots of opportunity within the balance sheet. And as you notice, as far as putting fixed rate debt, we did basically proactively swap out the LIBOR on the credit line, which effectively gives us that fixed rate exposure or mitigates our floating rate at a very favorable rate. So, actually, we're able to effectuate a fixed rate financing at better rates than certainly the CMBS market, because as you know, the CMBS market is closed right now. Life companies are maybe a little bit active, but we certainly were able to get better rates just through the credit line.

And Craig, by the way, let me come back to, if you don't mind, I'm sorry, I thought maybe you said income property. You meant real estate ops expense?

Yes, yes.

Yes. So basically, that's a unique item. We have acquired some mitigation credits from the mitigation bank. And in connection with one of the land transactions, we basically conveyed some of those credits to the tune of about $1.5 million to the buyer of the land parcel.

And so those were more or less expensed then for the quarter. Is that the case?

That's right. Yes. So it was really kind of a one-time unique thing related to a land deal. So it's not – in terms of real estate ops, we're probably not going to see much by way of expense there on a regular basis.

Okay. That makes sense because we weren't looking to that level of expense there. And then going to the potential for monetizing the loan portfolio, just can you give us some color there? I know that that was not really going to be a growth engine of CTO, but had been generating decent returns. Can you give us kind of some color on why you're thinking about maybe monetizing those today?

Sure. Yes. I mean, look, they're high yielding. We like them, and they're all paying but the duration is less than a year on them. And so it's really about being ready for opportunistic investments where we can buy something that – very cheap or comparatively versus a couple of months ago, that would be an investment that we'll have for five or 10 years. So, it's really stacking more capital, being ready for real good opportunities. I'll give you an example. There was a – when we were trying to, when we bought Perimeter, we were also pursuing another transaction of similar size, and that deal never sold for obvious reasons. And I think the institutional holder really wants to get out. So the price is probably going to be reduced fairly substantially. So, you're going to start seeing more and more of that. So, it's just really about being ready for those opportunities.

I got it. And when you think about making acquisitions sort of past what we're all going through right now, are you thinking maybe pivoting a little bit more into office because that has been a little bit more defensive? Or kind of how are you thinking about from that perspective and asset allocation?

Yes. Certainly, we will definitely be more open to office than we have in the past. Not that office isn't going to come out of this unscathed, but certainly, having Wells Fargo as a very large tenant of ours and Fidelity. And just on a side note, it is in the press in New Mexico and Albuquerque that Fidelity is hiring additional people for their facility. And so yes, the General Dynamics property we have in Virginia. Those type of assets, we certainly will be a lot more open to those assets as retail is going to go through the grinder coming up, but there's still going to be opportunity on the retail side. So for instance, Perimeter, this actually pandemic, so unfortunate as it is, is probably going to turn out to be a little bit of cycling out some tenants that we wanted out a little earlier than the plan, which is going to actually be better for the property. So, not all of retail is the same, I guess.

Right. Right. No, absolutely. And when you think about the types of assets that you're looking to sell, I think you noted in your presentation that they're going to be sort of low cap rate, single tenant, but are those skewed to any type of category? Or have you sort of soft circled what you're looking to sell?

Yes, certainly. We're actively discussing on, for instance, our BofA in Monterey as ground lease. Certainly, with interest rates so low, those cap rates are going to be very accretive opportunities for us. Also, there's still some 1031 money out there. So, these are perfect 1031 sale candidates to buyers that have – need to place their capital. We have, as you know, two Wawas, and those are perfect examples of very low cap rate ground leases. We have the Chase Bank ground lease in Jacksonville and some other things that we'll take this opportunity to cycle through that and just be more prepared for opportunities.

Yes. Craig, you probably noticed that the – one of the Wawas is held for sale as of 3/31.

Great. Okay. I think that's it for me. Thank you, guys.

Thank you, Craig.

Our next question will come from Craig Gilbert of Linden Advisors. Please proceed with your question.

Thanks for taking my questions. The first one is just on the CARES Act. It doesn't seem like you've paid a lot of taxes in the past. Can you just talk about if there are any specific benefits that accrue to you from that?

Yes. So great question, and thanks for being on the call. There are a few elements of the CARES Act where we really kind of don't benefit either directly or at all. The payroll tax, as an example, probably is the $19,000, $20,000 kind of opportunity for us in terms of deferring those taxes. The bigger one, frankly, is the carryback of the NOLs. So, to the extent that for whatever reason, we have an opportunity in 2020, where we would have a loss that we could carry back, we could carry that back into 2018 or 2019 in terms of when we were a taxpayer. So that would be an opportunity.

Okay. And I think you paid a couple of million dollars of taxes in those years total maybe. So, is that kind of the opportunity?

Yes. That's actually a little bit above that, probably about $2.5 million.

Okay. Okay. And for your multi-tenanted properties, do you have any co-tenancy provisions there that could result in more percentage of rents versus kind of what you – the fixed rents that you have right now?

No, we don't. Not – we don't have that problem.

Okay. And then the disclosure about the bank line about how you can – if there's no – if you don't receive rent, they can pull out properties, but you don't think that is triggered by deferrals. Can you speak a little bit more to that? Have you been in discussions with the banks over that? And is that – I guess, it doesn't sound like it's something you're concerned with, but any more color would be helpful.

Absolutely. Great question. We definitely have been in discussions with the lenders to make sure we're on the same page with them, but we think that the intent of that provision is a property that's truly kind of in trouble as it relates to the tenant, where a deferral or any other kind of contractual adjustment where it's agreed upon by the two parties, basically doesn't create a past due circumstance. And I think that's consistent with what we both are interested in.

Okay. And for the folks that have deferred rents, are you seeing requests – is it more for deferrals? Or is it rent relief in general? I guess we've heard mixed – I think Burlington had a call, and I think they were talking about not just deferrals but also outright rent relief. And I didn't know that's one of your tenants.

Majority of it's been deferrals. I mean, there may be one or two that have asked for free rent. But I mean, that's just really a nonstarter. There is absolutely no reason for that. So yes, there could be some that have asked for it, but most of them, the realistic ones have been deferrals.

Okay. And the last question is just on capital allocation. It sounds like you're still going to be active trying to pick up properties, but what about share repurchases? Is that still something that you would opportunistically do?

As you know, we do have still a buyback program in place, and it's something the board will – does consider each quarter. So, it's something that certainly is on the agenda to discuss.

Okay. Thanks very much.

[Operator instructions] Our next question will come from Matt Werner of Chilton Capital. Please proceed with your question.

Morning, guys. Just looking at the presentation, Page 7, specifically, appreciate the update on the guidance on recurring cash flow and NOI, but I was wondering what specifically was driving the lower cash outflow guidance? Number one. And number two, given the disclosures on rent collection, I'm guessing that NOI number is a GAAP number. I guess, what can we expect from a cash NOI number?

Well, I think from a cash outflow side of things, probably, to a degree, it's going to be some interest. I'd say that actually, when you look at it, other than that, maybe the income taxes, but generally, it's been pretty in line with – it lines up with where we thought we would be in terms of just keeping that relatively flat, fixing the rate at 73 basis points on our half of our credit facility is certainly helpful in that regard. Dropping the convertible interest down to 3.875% versus 4.5% is really helpful in that regard. Buying back $5 million worth of that convertible is helpful in that regard. So, that's some of the pieces and parts. And NOI, I mean, we really try to drive this off of cash flow. So, on the NOI side, that's basically a pre-COVID. So basically, there's obviously adjustments, but I wanted to give you full flavor of the cash flow basically composition and then basically depending on these deferrals and how they all work out, whether it comes down off of that.

Okay. That's helpful. I mean, I guess, how and when are you going to provide updates to what that actual cash ends up being? Is this going to be a – just a quarterly deal? Or when do some of these deferrals that potentially turn into rent relief start to flow through to that number?

Yes. I think basically, we're in negotiations with these tenants almost every day. And so just to let you know, I mean, if we agree to a deferral, there's really something we're getting out of it. For instance, whether we're re-spreading that rent over the back half of the year or we're spreading it over 2020 – part of 2021, we're getting some sort of carry charge, some sort of interest rate on that. So, we're making a margin, if you will, or we're basically getting a lease extension. It could be and/or lease extension. And the lease extension, obviously, adds net present value to the portfolio. So as we get kind of closer to wrapping this up, it's probably more of a next quarter kind of update. But if it – obviously, if we need to, we would give kind of an update before the quarter, but that's kind of where the posture is right now.

Okay. And then just thinking – this is more of a general question for all retailers. I mean, if it is a deferral that has to be paid back in the next year or so, when these guys are starting to reopen varying times over the next few months, I guess, what do you think gives them the confidence that not only can they pay their current rent at the time, but also have the extra cash flow to be able to pay back rent plus some sort of fee on it?

Yes. I mean, well, a lot of our tenants are, let's take on the restaurant side or something, Outback Chuy's. I mean, these are corporations that have liquidity. And so I don't really – like, for instance, Landshark, that I talked to the Margaritaville folks yesterday, and they basically did more business on takeout this last weekend than they do when the whole restaurant is open. So, we're pretty confident that basically, people are going to be able to pay and get back there. Now look, there's going to be some that are losers and aren't going to perhaps reopen. But they're all very much something you can deal with. It's not – A, is not a huge rent payer and it's a good locations where other people would want to take it. It's really – it would be something where the concept is older and dated. I mean, one example would be Macaroni Grill. I mean, there have been-after we bought that, we had so many brokers calling us because their clients wanted that location. If they don't make it, and assuming – we're fairly confident that somebody else is going to take that location. So they're – so it's all very case by case, but they're all very manageable and can be dealt with.

Okay. That's helpful. And I appreciate the slides in the presentation as usual. Just thinking about liquidity of the company and you guys have given guidance on your debt targets as a percent of total enterprise value, which is obviously above the target, probably could argue that should be temporary, given the pullback in the stock price, but thinking about liquidity and going after acquisitions, how much is that factoring into your desire to go and grow the company despite having higher than normal debt levels?

Yes, we're not going to grow by levering up, and we never really have done a lot of that. And so, it would really be driven by recycling proceeds, whether it's selling some loans or loans payoff or we're selling some of these 1031 assets that would need to be replaced. So, it's not an opportunity set where we think we are to lever up to take advantage of opportunities. So, the leverage will come down. We hope it will come down from the stock price getting close to even book value, but we won't count on that. So, we'll just be mindful of the leverage component.

Okay. Great. That's all I had.

Thanks, Matt.

This concludes our question-and-answer session. The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect.