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Edited Transcript of CTO earnings conference call or presentation 18-Apr-17 12:45pm GMT

Thomson Reuters StreetEvents

Q1 2017 Consolidated-Tomoka Land Co Earnings Call

Daytona Beach Apr 18, 2017 (Thomson StreetEvents) -- Edited Transcript of Consolidated-Tomoka Land Co earnings conference call or presentation Tuesday, April 18, 2017 at 12:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Albright

Consolidated-Tomoka Land Co. - President and CEO

* Mark Patten

Consolidated-Tomoka Land Co. - CFO and SVP

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Conference Call Participants

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* David Corak

FBR Capital Markets - Analyst

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Presentation

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Operator [1]

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Good day and welcome to Consolidated-Tomoka Land Company's first-quarter earnings conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to John Albright. Please go ahead.

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [2]

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Thank you. Good morning and welcome to today's Consolidated-Tomoka Land Company's conference call to review our operating results for the first quarter ended March 31, 2017. My name is John Albright, President and CEO of Consolidated-Tomoka Land Company. On the call with me this morning is Mark Patten, our CFO, and Dan Smith, our General Counsel and Corporate Secretary. Mark and I will review the details of our first-quarter financial results in a moment.

First I'll turn it over to Mark to provide you with customary disclosures regarding our comments on this call today and a few points regarding the format of our call.

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Mark Patten, Consolidated-Tomoka Land Co. - CFO and SVP [3]

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Thanks, John. Good morning, everyone. During our call today we will 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, and 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 from last night. In addition, let me note that we filed our first-quarter 2017 investor deck last night, which is now available on our website. Our investor deck provides additional information you may find useful.

Lastly, as most of you know, our 2017 annual shareholder meeting is next week, on Wednesday, April 26. As you all likely also know, we are in the midst of a proxy contest with Wintergreen Advisers in connection with the matters to be voted on at the 2017 Annual Meeting, including the election of the Company's Board of Directors. Because of these circumstances, we respectfully request and will require that during the Q&A, which we'll hold at the end of our prepared remarks, those of you wishing to ask a question need to ensure that your question pertains to solely to the results for the first quarter and as applicable to the transactions that have occurred during the quarter, or to the information contained in our investor deck. We want to ensure the call today is appropriately focused on our first-quarter results, which we believe is the primary interest of the attendees on the call. We very much appreciate your cooperation to this request.

With that, I'll turn it back over to John.

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [4]

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Thanks, Mark. While we look forward to reviewing our results for the first quarter of 2017 and highlighting a number of developments in our business, my opening remarks will address the state of our business and the progress we're making in executing our business plan. The first quarter of 2017 was truly a significant quarter for our Company in many ways beyond simply the strong financial results. As you know from our release, we finally closed the first Minto contract, a landmark transaction for CTO in which we sold 1,581 acres for approximately $27.2 million and achieved a tax-deferred gain of approximately $20 million, delivering $2.20 in earnings per share after tax.

While we were thrilled to close this transaction, the announcement that coincided with this deal will likely prove to be transformational for not just CTO but Daytona Beach, Volusia County, and quite possibly the state of Florida and, indeed, the retirement community industry. The announcement of Minto's partnership with Margaritaville Enterprises and the launch of Latitude Margaritaville brand for a new Minto age-restricted lifestyle community was unprecedented and clearly tapped into an underserved demand segment in the active adult residential space.

We have mentioned before that Minto indicated that they expect to deliver nearly 300 units per year, if not more, when they get fully ramped up for this 3,400-unit age-restricted development. With very little marketing to date, the Latitude Margaritaville project has generated more than 50,000 folks registering to learn more about this project. We firmly believe that this project will provide an economic engine for our area for years to come. We are particularly pleased because we believe this engine will serve to activate more of our available land for any number of real estate investment classes.

We are also pleased to have been able to deploy all the proceeds from the Minto transaction through the 1031 tax-deferred structure into four income property acquisitions, including all three properties acquired this year. After quarter end we completed the sale of 28 acres to an affiliate of VanTrust Real Estate, a developer out of Kansas City. VanTrust is developing the site into a 400,000-square-foot distribution center for the global medical device and pharmaceutical company B. Braun. B. Braun is bringing an incremental 175 jobs along with retaining the GAMBRO operations that they recently acquired.

In addition, our pipeline of land contracts remains strong. Even though we have closed a number of transactions in our pipeline, we have added deals that we put under contract, a couple in December, including a 35-acre site for Buc-ee's, which would be the first outside of Texas for this very popular large-scale convenience store; a 30-acre contract for the auto dealership and a nine-acre contract for possibly a specialty grocer.

Our pipeline now includes eight contracts with eight separate buyers for approximately 2,200 acres and potential proceeds of approximately $81 million, or an average price per acre of approximately $37,000. As we have stated on a number of occasions this past year, our Board and our Company remain committed to maximizing long-term value for all of our shareholders. As part of this commitment we were able to invest approximately $3.7 million in our buyback program from the beginning of the year through April 13, buying back more than 71,000 shares.

It's important to mention that this activity reflects the completion of the $10 million buyback program that we were able to launch after year-end earnings in February 2016 and the commencement of our new $10 million buyback program that we announced last month. Through April 13, we have already deployed over $1.1 million of our $10 million buyback program. In aggregate, including just the last two full years and the last four months of this year, we have repurchased more than 340,000 shares, deploying more than $17.7 million at an average price per share of $51.60.

Now I will turn it back over to Mark to review our operating results.

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Mark Patten, Consolidated-Tomoka Land Co. - CFO and SVP [5]

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Thanks, John. As John mentioned, we had a very strong quarter, driven by significantly increased revenues, of which the substantial majority was from our land sales. In addition, our earnings benefited from one element of the acquisition of the golf course land for LPGA International, which relates to the accounting treatment for the related land lease. I'll get to that in a moment.

Our total revenue for the quarter ended March 31, 2017, increased by more than $20 million to approximately $38.7 million, an increase of more than 110% from the same period in 2016. As I noted, the largest contributor was from our real estate operations segment, which includes land sales. That segment of the business represented the $20 million increase I mentioned, with the Minto sale generating the significant majority of that increase.

Net income for the first quarter totaled $12.7 million, an increase of approximately $11.3 million from the same period last year, which is an increase of nearly 800%. Our basic net income per share of $2.28 per share was an increase of $2.03 per share compared to the same period in 2016 or an increase of 812%. Our net income in the first quarter of 2017 reflected the increased revenues I mentioned earlier, offset by the associated increase in direct cost of revenues of approximately $7.2 million, which primarily reflects the cost basis for our increased land sales revenue as well as a few other elements of our operating results that I will highlight.

Our G&A expense was lower by approximately $1.6 million. A year ago in the first quarter we incurred approximately $1.6 million in accelerated non-cash stock compensation expense. So absent that item, you might consider our G&A as flat year-over-year, but we believe it's worth mentioning that a year ago in the first quarter, our G&A included approximately $1 million in costs that we had hoped would be nonrecurring, the costs for lawyers and accountants to investigate allegations and claims from our largest shareholder that were ultimately determined to be baseless and without merit.

Consequently, we had hoped our G&A for the first quarter of 2017 would reflect a year-over-year decrease. However, recent activities of our largest shareholder have again caused us to incur significant G&A costs that we hoped would be nonrecurring, including legal costs and costs associated with the proxy contest that I referred to earlier and other related expenses. As a result, our G&A was fairly flat year-over-year, as I mentioned.

As you would expect with the growth of our income property portfolio, our depreciation and amortization expense was up nearly $700,000 year-over-year. And finally, the final item impacting our net income pertains to the LPGA International transaction that I referred to earlier. In connection with buying out the lease we had with the city of Daytona Beach for the land that basically represented all of the golf course land and other areas of the club, we paid $1.5 million to acquire the property and terminate the lease. Had the lease not been terminated we would've had to pay the remaining lease payments through 2022, which totaled approximately $1.7 million.

Because of the structure of the original lease payments, we have been applying straight-line accounting for this lease since its inception, so when the lease was terminated we recognized the non-cash income item representing the elimination of the straight-line liability. Stated differently, per GAAP we reversed the liability we had built up since we won't have to pay the cash rent in the next five years. That non-cash income item, the amount of the deferred liability that we eliminated, was approximately $2.2 million, which equated to $0.24 per share in after-tax earnings in the first quarter's results.

Because of this non-cash item relating to the LPGA International lease termination, we expect to exceed our EPS guidance for the full year. In addition, a recent land transaction that we put under contract for 30 acres on the west side of Interstate 95 we believe is likely to close in the near term. So the impact of that closing will also contribute to us exceeding our EPS guidance for the full year. Our liquidity position remains strong at quarter end. We finished the quarter with approximately $8.5 million in cash, which includes approximately $4.1 million of cash that's restricted related to our 1031 exchange transactions. And we had a borrowing capacity on our credit facility of more than $50 million, based on the level of borrowing base assets.

Our net debt, which represents the full face value of our outstanding debt at quarter end less our cash and restricted cash affiliated with the 1031 exchange transactions, stayed relatively flat to where we were at year end, approximately 32.9% relative to our total enterprise value, which compares favorably to our leverage guidance of less than 40% of total enterprise value. We feel it's also worth making note that our book value per share increased by $1.91 per share to approximately $27.88, which is an increase of 7.4% compared to year-end 2016. The growth we achieved in this key financial metric is reflective of the substantial impact that land sales transactions have on our book value, while the deployment of those proceeds through the tax deferred 1031 structure generates growth in our NOI that translates into continued growth in a measurable element of our valuation.

Finally, I would like to reiterate a few points I made in our year-end call regarding our purchase of the LPGA International golf course land and the related buyout of the Company's land lease with the city of Daytona Beach. In the simplest terms, there were five elements of consideration we provided to the city. First, we simply pre-paid the rent that we were going to pay over the next five years, as I mentioned, an obligation of $1.7 million. Second, we contributed approximately 14 acres of land that had a basis of zero on our books and limited value to us, as it was three odd-shaped parcels which surround the city's municipal football stadium. Third, we agreed to renovate the greens on the Jones Course that had not been renovated in any fashion since they were first planted nearly 20 years ago, which is a very long time for a golf course that intends to keep the LPGA qualifying school and hopefully have an LPGA tour event in the near future. Fourth, we agreed to provide additional consideration of up to $700,000 based on a charge of $1 per golf round, which, based on the annual rounds played, would take about 10 years to reach. Lastly, we committed to share with the city 10% of the upside of any potential sales transaction above $4 million.

In exchange for that, we consolidated the fee interest ownership of the land with a leasehold interest, which is essential for having optimal optionality and increased interest for this asset. Under the prior structure, with the ownership of the golf club effectively bifurcated between CTO and the city, committing to any significant level of capital improvements was unlikely and our ability to joint venture or monetize the operations would have been limited or less optimal from a valuation perspective. Also, the transaction resulted in an immediate reduction of the operating costs of the golf operations by nearly $300,000 a year by eliminating the lease payment to the city. That's approximately 70% of the reported loss for all of 2016 and more than 30% of the total cash loss in 2016.

In addition, we believe this transaction secured for our Company the upside in potential membership growth and related revenues that might come from the Latitude Margaritaville homeowners we all expect will be generally retirees who have a fair amount of free time to do things like play golf, who live in a community that does not have a golf course which is adjacent to our club, which has two golf courses. Consider this metric: every 30 homeowners that join our club would generate at least $100,000 in new membership revenue. As I noted at year end, we believe that combining the fee simple and leasehold ownership interests greatly enhances our ability to maximize the value potential of this asset.

In addition, as we mentioned in our 10-K, we are planning to move out of the more than 8,000 square foot of office space that we rent from a third party at a cost of approximately $200,000 a year, moving into a 7,500 square foot vacant space in our single-story flex project, Williamson Business Park, that has remained vacant since we completed the building in 2014. Approximately 30% to 35% of that estimated $800,000 in costs referenced in the 10-K reflects the costs to complete the buildout of the shell, costs that we would have incurred were we to have leased the space to a third-party tenant.

We are not moving from a trailer to a palace; we're actually downsizing and moving from a class A office building into a flex office space that we own. So the simple analysis should sound something like this: invest $800,000 in one of our own buildings to make $200,000 a year or, in our case, save $200,000 of overhead, which will be reflected directly and immediately to our bottom line. That's a 25% return on our capital and increases the value of the flex office building, should we decide to sell it.

Now I will turn it back over to John to discuss some of the other activities from the first quarter.

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [6]

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Thanks, Mark. And with regard to our income property portfolio, we had a strong quarter, investing more than $19 million at a weighted average investment yield at acquisition of approximately 6.46%, above the low end of our guidance of 6%. Subsequent to quarter end, we acquired a 22,500 square foot single-tenant property just outside of Boston for $6.3 million, which represented a 7.1% investment cap rate at the acquisition date. The property is leased to Jo-Ann Stores under a triple-net lease with a remaining term of 12 years. We really like this asset for a number of reasons. But to mention a couple highlights, it is situated along a high-traffic corridor for metro Boston and it's in an area that has high barriers to entry for new supply and strong demographics.

In addition to our income property acquisitions, we have also executed both leases for the two restaurants we will be developing on the beach parcel site in Daytona Beach. We are pleased to have completed these two 15-year leases, one with the operator for LandShark Bar & Grill, which is a Margaritaville concept, and the other with Cocina 214 restaurant and bar. As we have mentioned in our earnings release, we are expecting to complete the development of these two restaurants, each a little over 6,000 square feet, in time for the tenants to commence operation in the first quarter of 2018.

That concludes our prepared remarks. At this time we will open it up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) David Corak, FBR Capital Markets.

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David Corak, FBR Capital Markets - Analyst [2]

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Can you walk us through just very broadly how you are feeling about the various retail sector exposures in your income producing portfolio at this point? And how we should think about that transforming going forward, if you are comfortable with the exposures now or if you are more favored -- you are favoring other sectors going forward?

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [3]

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Obviously, we have been very focused on investing in really good located real estate in strong markets, more infill locations, stronger demographics, as you will see from our investor presentation that we put up last night. There's a page there that has our demographics of our portfolio compared to some net lease REITs. And so, obviously we are always thinking about the down side. And so for instance when we buy retail pieces of property, for instance Jo-Ann's in Boston, we are looking at the rental rate that they are paying, the basis we are paying, and what could backfill that box if something happens. And given that location with 100,000 people a day of traffic, with the infill nature, very difficult to develop anything else in that corridor, feel very comfortable that there will be other retailers to backfill if something ever happened to that tenant.

Same thing with, for instance, Staples in Sarasota. Urban property. We put on our investor presentation an aerial showing that location, where it's again, an infill type location. We feel very good that if they ever left there would be plenty of tenants that would like that exposure on Fruitville Road and plenty of people that would fit into that kind of box. So we are always looking for real estate that's going to be more of a long-term position that will always have different users.

So when we bought a portfolio of restaurants, that's not going to have an effect on -- the Amazon effect, if you will. Those are really strong locations in Austin and Charlottesville and Charlotte, North Carolina. Obviously, with B of A in Monterey, California, with development potential. So we are always looking over our shoulder and always looking at the downside. So we feel very comfortable with our portfolio. And as we invest going forward, we are always looking for something that -- that particular tenant might not be there forever and we are not relying on that tenant to meet our returns.

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David Corak, FBR Capital Markets - Analyst [4]

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Okay, fair enough. And then turning over to the beach parcel and the rents you guys are lining up to get from those two restaurants, presumably in 1Q 2018 or a little bit after. Can you just talk about the economics or the yield on that deal? I guess another way to look at it is what's your basis in the land today? What do you have to put into it from here? And then maybe even what do you think a fair market value of the land is today? Obviously, I think your previous partner bought that for somewhere in the $30 million range a few years ago. But how should we think about valuing that parcel today?

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [5]

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Yes, sure. So yes, you are right. The way that transaction transpired before us was a developer bought it for $35 million. The lender or hard money lender made a loan for $25 million. They foreclosed on it. We bought into their position and totally bought 100% of their position after we were able to entitle it for 1 million square feet. So our basis is $12 million. And so we signed up these two leases, one LandShark, one Cocina 214. And the structure is that we'd invest up to roughly $16 million on those two restaurants. One restaurant is going to put in more capital, the other will put in all the capital. And the structure is -- what we've looked at on the beach side is the highly successful beach restaurants in Daytona. There's only a couple that are positioned beachfront, and the parking situations for those other tenants are very constrained and challenged. So this particular parcel, six acres, we have plenty of parking.

And we feel that with these new restaurant concepts, that if they just did the sales of these other restaurants with older facilities and limited parking, we are going to hit potentially double-digit equity yields, unlevered equity yields. So the way we look at it is obviously two restaurants, single-story restaurants on a six-acre parcel on the beach that we just entitled for 1 million square is going to be really a covered land play. So, on its own we feel like the returns are going to be very inspiring but with the long-term potential of a redevelopment play. And so you may remember that we structured in these leases that we can buy out the tenants after five years and tear down the restaurants if the market is robust enough to build a 20-, 30-story type of condo, hotel or mixture.

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Mark Patten, Consolidated-Tomoka Land Co. - CFO and SVP [6]

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David, just to be clear, what John was saying is our total basis, once we build the restaurants, should be about $16.8 million.

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David Corak, FBR Capital Markets - Analyst [7]

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Okay, thank you for clearing that up. That's helpful, guys. It's just when we look at valuing that asset it's certainly one that could be plus or minus $5 million or $10 million to the upside, so just trying to get a sense of that. But thank you for the color there.

And then moving over to Minto, can you just -- I appreciate the comments earlier. But can you just talk about the traction that Minto is getting with this Margaritaville concept? For all intents and purposes it's literally been all over the news. But in one of the press releases, one of the lines that someone from Minto said was that they are conceivably looking for more land than just one and two, conceivably more than the 6,000 to 7,000 homes that I think they have specifically mentioned you guys as a potential seller. How should we think about that going forward? You obviously have that parcel of land that is adjacent to Minto 2, I believe, that you dubbed proposed residential. So how should we think about that going forward?

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [8]

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Yes, no, thanks. So you are right. Just to back up, so the first phase that they purchased is going to basically handle 3,400 units. So when they talk about in their press releases that this community is 6,900 acres, they are obviously incorporating a Phase 2 that they have under contract with us. And right now they are doing a lot of their engineering work, site planning work and so forth. And they have also made public remarks that has been picked up in the press that they may look at acquiring additional land from us. And so that would mean our last parcel available would be that 1,000 acres, we call it Tract F, along SR 40.

So they are certainly pleased with the unbelievable response. Right now they are 100% focused on their project getting underway. That you can see one of the aerials in our presentation that they have done a tremendous amount of earthwork already. So they are doing a lot of trade work with the different trades out there as far as making sure they can get the labor and the subcontractors necessary to deliver 300 homes plus per year. But yes, they see that with the traction they've gotten here and the popularity of this that they are going to need more land. So we hope that that strength follows through and we can accommodate them. But that's definitely something that could be in the cards.

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David Corak, FBR Capital Markets - Analyst [9]

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Okay. And it's definitely 55 and older in those communities?

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [10]

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Definitely. So it would be a little bit of a while before you could be there, David.

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David Corak, FBR Capital Markets - Analyst [11]

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There goes that. Okay, appreciate that. All right, and then one last one from me (multiple speakers) -- any update on the timing or economics at The Grove?

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John Albright, Consolidated-Tomoka Land Co. - President and CEO [12]

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Yes. So The Grove is going very well. We've heard a very positive response from 24 Hour that this opening for them has been very strong. And so we are around 56% leased now with lots of other tenants touring as we basically finish up the renovation. But these tenants that have been signed up, we are starting to build that work now. So these tenants will basically all come online or start coming online in the third and fourth quarter. So right now it's a lot of coordination with regards to build outs. So we have to demo the old space and do build out. But it's all going very well, and so it's getting more and more traction. Wawa is still on tap for 2018 to start construction on their store there.

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David Corak, FBR Capital Markets - Analyst [13]

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Okay, great. That's helpful, guys. I appreciate the time.

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Operator [14]

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(Operator Instructions) There are no more questions at this time, so this concludes our question and answer session. I would now like to turn the conference back over to Mark Patten for any closing remarks.

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Mark Patten, Consolidated-Tomoka Land Co. - CFO and SVP [15]

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Thanks, Stephen. Thank you again, everyone, for attending our call this morning. We appreciate your interest in Consolidated-Tomoka Land Company. Have a great day.

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Operator [16]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.